UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2022
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From To
Commission File Number: 000-30421
HANMI FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware
95-4788120
(State or Other Jurisdiction of
(I.R.S. Employer
Incorporation or Organization)
Identification No.)
900 Wilshire Boulevard, Suite 1250
Los Angeles, California
90017
(Address of Principal Executive Offices)
(Zip Code)
(213) 382-2200
(Registrant’s Telephone Number, Including Area Code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class
Trading
Symbol(s)
Name of each exchange on which registered
Common Stock, $0.001 par value
HAFC
Nasdaq Global Select Market
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of August 2, 2022, there were 30,484,719 outstanding shares of the Registrant’s Common Stock.
Hanmi Financial Corporation and Subsidiaries Quarterly Report on Form 10-Q
Three Months Ended June 30, 2022
Table of Contents
Part I – Financial Information
Item 1.
Financial Statements
3
Consolidated Balance Sheets at June 30, 2022 (unaudited) and December 31, 2021
Consolidated Statements of Income for the three and six months ended June 30, 2022 and 2021 (unaudited)
4
Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2022 and 2021 (unaudited)
5
Consolidated Statements of Changes in Stockholders’ Equity for the three and six months ended June 30, 2022 and 2021 (unaudited)
6
Consolidated Statements of Cash Flows for the six months ended June 30, 2022 and 2021 (unaudited)
8
Notes to Consolidated Financial Statements (unaudited)
9
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
40
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
59
Item 4.
Controls and Procedures
Part II – Other Information
Legal Proceedings
60
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
61
Signatures
62
2
Part I — Financial Information
Item 1. Financial Statements
Hanmi Financial Corporation and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share data)
June 30,
December 31,
2022
2021
(Unaudited)
Assets
Cash and due from banks
$
217,237
608,965
Securities available for sale, at fair value (amortized cost of $955,318 and $922,654 as of June 30, 2022 and December 31, 2021, respectively)
860,221
910,790
Loans held for sale, at the lower of cost or fair value
18,528
13,342
Loans receivable, net of allowance for credit losses of $73,067 and $72,557 as of June 30, 2022 and December 31, 2021, respectively
5,582,335
5,078,984
Accrued interest receivable
14,044
11,976
Premises and equipment, net
24,207
24,788
Customers' liability on acceptances
616
—
Servicing assets
7,353
7,080
Goodwill and other intangible assets, net
11,310
11,395
Federal Home Loan Bank ("FHLB") stock, at cost
16,385
Income tax assets
61,871
44,060
Bank-owned life insurance
55,395
54,905
Prepaid expenses and other assets
86,466
75,917
Total assets
6,955,968
6,858,587
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing
2,782,737
2,574,517
Interest-bearing
3,196,653
3,211,752
Total deposits
5,979,390
5,786,269
Accrued interest payable
986
1,161
Bank's liability on acceptances
Borrowings
145,000
137,500
Subordinated debentures ($136,800 and $224,100 face amount less unamortized discount and debt issuance costs of $7,687 and $9,094 as of June 30, 2022 and December 31, 2021, respectively)
129,113
215,006
Accrued expenses and other liabilities
82,567
75,234
Total liabilities
6,337,672
6,215,170
Stockholders' equity:
Preferred stock, $0.001 par value; authorized 10,000,000 shares; no shares issued as of June 30, 2022 and December 31, 2021
Common stock, $0.001 par value; authorized 62,500,000 shares; issued 33,701,784 shares (30,482,990 shares outstanding) and 33,603,839 shares (30,407,261 shares outstanding) as of June 30, 2022 and December 31, 2021, respectively
33
Additional paid-in capital
582,018
580,796
Accumulated other comprehensive income (loss), net of tax benefit of $28,529 and $3,421 as of June 30, 2022 and December 31, 2021, respectively
(66,568
)
(8,443
Retained earnings
229,135
196,784
Less treasury stock; 3,218,794 shares and 3,196,578 shares as of June 30, 2022 and December 31, 2021, respectively
(126,322
(125,753
Total stockholders' equity
618,296
643,417
Total liabilities and stockholders' equity
See Accompanying Notes to Consolidated Financial Statements (Unaudited)
Consolidated Statements of Income (Unaudited)
(in thousands, except share and per share data)
Three Months Ended June 30,
Six Months Ended June 30,
Interest and dividend income:
Interest and fees on loans receivable
59,855
52,785
113,779
103,400
Interest on securities
2,930
1,404
5,447
2,544
Dividends on FHLB stock
242
490
448
Interest on deposits in other banks
193
176
408
272
Total interest and dividend income
63,220
54,607
120,124
106,664
Interest expense:
Interest on deposits
2,457
3,003
4,470
6,953
Interest on borrowings
370
447
707
933
Interest on subordinated debentures
1,349
1,585
4,947
3,204
Total interest expense
4,176
5,035
10,124
11,090
Net interest income before credit loss expense
59,044
49,572
110,000
95,574
Credit loss expense (recovery)
1,596
(3,327
220
(1,217
Net interest income after credit loss expense (recovery)
57,448
52,899
109,780
96,791
Noninterest income:
Service charges on deposit accounts
2,875
2,344
5,750
4,599
Trade finance and other service charges and fees
1,416
1,259
2,558
2,280
Gain on sale of Small Business Administration ("SBA") loans
2,774
3,508
5,295
7,633
Net gain on sales of securities
99
Other operating income
2,245
1,775
4,226
4,081
Total noninterest income
9,310
8,886
17,829
18,692
Noninterest expense:
Salaries and employee benefits
18,779
18,302
36,496
35,122
Occupancy and equipment
4,597
4,602
9,243
9,198
Data processing
3,114
2,915
6,351
5,841
Professional fees
1,231
1,413
2,661
2,860
Supplies and communications
581
733
1,245
1,489
Advertising and promotion
660
374
1,477
732
Other operating expenses
2,513
2,444
5,694
5,074
Total noninterest expense
31,475
30,783
63,167
60,316
Income before tax
35,283
31,002
64,442
55,167
Income tax expense
10,233
8,880
18,697
16,386
Net income
25,050
22,122
45,745
38,781
Basic earnings per share
0.82
0.72
1.50
1.26
Diluted earnings per share
Weighted-average shares outstanding:
Basic
30,296,897
30,442,993
30,271,761
30,452,320
Diluted
30,412,348
30,520,456
30,391,273
30,526,120
Consolidated Statements of Comprehensive Income (Unaudited)
(in thousands)
Three Months Ended
Six Months Ended
Other comprehensive income (loss), net of tax:
Unrealized gain on securities:
Unrealized holding (loss) gain arising during period
(31,070
3,476
(83,233
(8,309
Less: reclassification adjustment for net gain included in net income
(99
Income tax benefit (expense) related to items of other comprehensive income
9,321
(1,042
25,108
2,473
Other comprehensive income (loss), net of tax
(21,749
2,434
(58,125
(5,935
Comprehensive income (loss)
3,301
24,556
(12,380
32,846
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
For the Three Months Ended June 30, 2022 and 2021
Common Stock - Number of Shares
Stockholders' Equity
Accumulated
Additional
Other
Treasury
Total
Shares
Common
Paid-in
Comprehensive
Retained
Stock,
Stockholders'
Issued
Outstanding
Stock
Capital
Income (Loss)
Earnings
at Cost
Equity
Balance at April 1, 2021
33,585,181
(2,902,648
30,682,533
578,958
(5,293
128,211
(120,087
581,822
Restricted stock awards, net of forfeitures
32,130
Share-based compensation expense
637
Restricted stock surrendered due to employee tax liability
(17,011
(356
Cash dividends paid (common stock, $0.12/share)
(3,682
Change in unrealized gain (loss) on securities available for sale, net of income taxes
Balance at June 30, 2021
33,617,311
(2,919,659
30,697,652
579,595
(2,859
146,651
(120,443
602,977
Balance at April 1, 2022
33,670,197
(3,201,739
30,468,458
581,337
(44,819
210,788
(125,887
621,452
31,587
681
(17,055
(435
Cash dividends paid (common stock, $0.22/share)
(6,703
Balance at June 30, 2022
33,701,784
(3,218,794
30,482,990
For the Six Months Ended June 30, 2022 and 2021
Balance at January 1, 2021
33,560,801
(2,842,966
30,717,835
578,360
3,076
114,621
(119,046
577,044
56,510
1,235
(21,693
(451
Repurchase of common stock
(55,000
(946
(6,751
Balance at January 1, 2022
33,603,839
(3,196,578
30,407,261
97,945
1,222
(22,216
(569
Cash dividends paid (common stock, $0.44/share)
(13,394
7
Consolidated Statements of Cash Flows (Unaudited)
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
9,581
7,728
Gain on sales of securities
Gain on sales of SBA loans
(5,295
(7,633
Origination of SBA loans held for sale
(76,704
(81,302
Proceeds from sales of SBA loans
76,808
165,958
Change in bank-owned life insurance
(490
(508
Change in prepaid expenses and other assets
(17,382
4,945
Change in income tax assets
7,297
3,969
Change in accrued expenses and other liabilities
9,682
(1,188
Net cash provided by (used in) operating activities
50,684
130,669
Cash flows from investing activities:
Purchases of securities available for sale
(95,378
(291,416
Proceeds from matured, called and repayment of securities
60,167
162,622
Proceeds from sales of securities available for sale
8,035
Purchases of loans receivable
(11,030
(1,532
Purchases of premises and equipment
(1,401
(1,966
Proceeds from sales of other real estate owned ("OREO")
1,425
Change in loans receivable, excluding purchases
(494,128
(48,571
Net cash provided by (used in) investing activities
(541,770
(171,403
Cash flows from financing activities:
Change in deposits
193,121
354,822
Proceeds from borrowings
224,820
33,250
Repayment of borrowings
(217,320
(33,250
Proceeds from redeemed subordinated debentures
12,700
Redemption of subordinated debentures
(100,000
Cash paid for surrender of vested shares due to employee tax liability
Cash dividends paid
Net cash provided by (used in) financing activities
99,358
346,674
Net increase (decrease) in cash and due from banks
(391,728
305,940
Cash and due from banks at beginning of year
391,849
Cash and due from banks at end of period
697,789
Supplemental disclosures of cash flow information:
Interest paid
10,299
13,799
Income taxes paid
10,500
11,511
Non-cash activities:
Income tax benefit related to items of other comprehensive income
Change in right-of-use asset obtained in exchange for lease liability
130
Notes to Consolidated Financial Statements (Unaudited)
Note 1 — Organization and Basis of Presentation
Hanmi Financial Corporation (“Hanmi Financial,” the “Company,” “we,” “us” or “our”) is a bank holding company whose primary subsidiary is Hanmi Bank (the “Bank”). Our primary operations are related to traditional banking activities, including the acceptance of deposits and the lending and investing of money by the Bank.
In management’s opinion, the accompanying unaudited consolidated financial statements of Hanmi Financial and its subsidiaries reflect all adjustments of a normal and recurring nature that are necessary for a fair presentation of the results for the interim periods ended June 30, 2022, but are not necessarily indicative of the results that will be reported for the entire year or any other interim period. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted. The unaudited consolidated financial statements are prepared in conformity with GAAP and in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission. The interim information should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Annual Report on Form 10-K”).
The preparation of interim unaudited consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions affect the amounts reported in the unaudited financial statements and disclosures provided, and actual results could differ.
The extent to which the COVID-19 pandemic may impact business activity or financial results will depend on future developments, including new information which may emerge concerning the severity of the coronavirus and the actions required to contain the coronavirus or treat its impact, among others, which are highly uncertain and cannot be predicted. This uncertainty may impact the accuracy of our significant estimates, which includes the allowance for credit losses, the allowance for credit losses related to off-balance sheet items, and the valuation of intangible assets including deferred tax assets, goodwill, and servicing assets.
Descriptions of our significant accounting policies are included in Note 1 - Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements in the 2021 Annual Report on Form 10-K.
Note 2 — Securities
The following is a summary of securities available for sale as of the dates indicated:
Gross
Estimated
Amortized
Unrealized
Fair
Cost
Gain
Loss
Value
June 30, 2022
U.S. Treasury securities
23,948
(1,009
22,939
U.S. government agency and sponsored agency obligations:
Mortgage-backed securities
617,020
66
(63,330
553,756
Collateralized mortgage obligations
99,314
(8,584
90,730
Debt securities
136,387
(8,553
127,834
Total U.S. government agency and sponsored agency obligations
852,721
(80,467
772,320
Municipal bonds-tax exempt
78,649
(13,687
64,962
Total securities available for sale
955,318
(95,163
December 31, 2021
15,457
1
(61
15,397
615,393
18
(7,906
607,505
95,153
41
(1,590
93,604
117,499
(1,603
115,896
828,045
(11,099
817,005
79,152
117
(881
78,388
922,654
177
(12,041
The amortized cost and estimated fair value of securities as of June 30, 2022 and December 31, 2021, by contractual or expected maturity, are shown below. Collateralized mortgage obligations are included in the table shown below based on their expected maturities. All other securities are included based on their contractual maturities.
Available for Sale
Fair Value
Within one year
6,663
6,532
1,103
1,108
Over one year through five years
159,129
149,461
126,483
125,069
Over five years through ten years
38,830
36,105
51,338
50,770
Over ten years
750,696
668,123
743,730
733,843
10
The following table summarizes debt securities available-for-sale in an unrealized loss position for which an allowance for credit losses has not been recorded at June 30, 2022 and December 31, 2021, aggregated by major security type and length of time in a continuous unrealized loss position:
Holding Period
Less than 12 Months
12 Months or More
Number
of
Securities
(in thousands, except number of securities)
22,940
(40,268
381,684
89
(23,062
166,953
39
548,637
128
(5,762
71,244
22
(2,822
19,485
90,729
28
(6,276
98,611
20
(2,277
29,223
26
(52,306
551,539
131
(28,161
215,661
51
767,200
182
(7,417
36,941
11
(6,270
28,021
19
(60,732
611,420
150
(34,431
243,682
855,102
209
8,391
(6,252
535,610
102
(1,654
59,457
595,067
113
(1,256
76,894
16
(334
12,548
89,442
(1,503
110,996
21
(100
4,900
(9,011
723,500
139
(2,088
76,905
15
800,405
154
68,548
17
(9,953
800,439
158
877,344
173
The Company evaluates its available-for-sale securities portfolio for impairment on a quarterly basis. This assessment takes into account the changes in the credit quality of these debt securities since acquisition and the likelihood of a credit loss occurring over the life of the securities. In the event that a credit loss is expected to occur in the future, an allowance is established and a corresponding credit loss is recognized. Based on this analysis, as of June 30, 2022, the Company determined that no credit losses are expected to be realized on the tax-exempt municipal bond portfolio. The remainder of the portfolio consists of U.S. Treasury obligations, U.S. government agency securities, and U.S. government sponsored agency securities, all of which have the backing of the U.S. government, and are therefore not expected to incur credit losses.
Realized gains and losses on sales of securities and proceeds from sales of securities were as follows for the periods indicated:
Gross realized gains on sales of securities
Gross realized losses on sales of securities
Net realized gains on sales of securities
Proceeds from sales of securities
There were no sales of securities during the three months ended June 30, 2022 and 2021.
During the six months ended June 30, 2022, there were no sale of securities. During the six months ended June 30, 2021, there were $0.1 million in net gains in earnings resulting from the sale of $8.0 million of securities previously recorded with $0.1 million unrealized gains in accumulated other comprehensive income.
Securities available for sale with market values of $27.3 million and $34.7 million as of June 30, 2022 and December 31, 2021, respectively, were pledged to secure borrowings from the Federal Reserve Bank (“FRB”) Discount Window.
At June 30, 2022, there were no holdings of securities of any one issuer, other than the U.S. government and its agencies in an amount greater than 10 percent of shareholders’ equity.
Note 3 — Loans
Loans Receivable
Loans consisted of the following as of the dates indicated:
Real estate loans:
Commercial property
Retail
1,071,379
970,134
Hospitality
651,586
717,692
Other (1)
2,011,727
1,919,033
Total commercial property loans
3,734,692
3,606,859
Construction
94,882
95,006
Residential (2)
521,576
400,546
Total real estate loans
4,351,150
4,102,411
Commercial and industrial loans
766,894
561,831
Equipment financing agreements
537,358
487,299
Loans receivable
5,655,402
5,151,541
Allowance for credit losses
(73,067
(72,557
Loans receivable, net
(1)
Includes mixed-use, multifamily, office, industrial, gas stations, faith-based facilities, medical and warehouse; all other property types represent less than one percent of total loans receivable.
(2)
Includes $2.7 million of home equity loans and lines, and $5.9 million of personal loans.
At June 30, 2022 and December 31, 2021, PPP loans of $1.1 million and $3.0 million, respectively, were included in commercial and industrial loans in the table above.
Accrued interest on loans was $12.0 million and $10.1 million at June 30, 2022 and December 31, 2021, respectively.
At June 30, 2022 and December 31, 2021, loans of $2.45 billion and $2.30 billion, respectively, were pledged to secure advances from the FHLB.
12
Loans Held for Sale
The following is the activity for loans held for sale for the three months ended June 30, 2022 and 2021:
Real Estate
Commercial and
Industrial
Balance at beginning of period
11,825
3,792
15,617
Originations and transfers
29,531
15,320
44,851
Sales
(30,380
(11,557
(41,937
Principal paydowns and amortization
(3
Balance at end of period
10,976
7,552
June 30, 2021
10,930
21,744
32,674
26,185
12,938
39,123
(24,022
(11,738
(35,760
(1
(6
(7
13,092
22,938
36,030
Loans held for sale was comprised of $18.5 million and $13.3 million of the guaranteed portion of SBA 7(a) loans at June 30, 2022 and December 31, 2021, respectively. All second draw PPP loans were sold by the third quarter of 2021. For the three and six months ended June 30, 2021, the Company recognized $0.2 million and $2.7 million, respectively, of gains on the sale of $9.5 million and $118.1 million, respectively, of second draw PPP loans.
The following is the activity for loans held for sale for the six months ended June 30, 2022 and 2021:
6,954
6,388
49,695
27,009
76,704
(45,673
(25,841
(71,514
Principal payoffs and amortization
(4
8,042
526
8,568
42,468
38,834
81,302
(37,417
(16,416
(53,833
13
Allowance for Credit Losses
The following table details the information on the allowance for credit losses by portfolio segment as of and for the three months ended June 30, 2022 and 2021:
Equipment Financing Agreements
46,355
12,944
12,213
71,512
Less loans charged off
585
606
Recoveries on loans receivable previously charged off
(64
(133
(325
(522
Provision (recovery) for credit losses
(307
1,219
727
1,639
Ending balance
46,112
14,275
12,680
73,067
57,762
16,387
14,243
88,392
271
1,200
1,471
(180
(174
(209
(563
5,087
(8,231
(968
(4,112
63,029
8,059
12,284
83,372
The following table details the information on the allowance for credit losses by portfolio segment as of and for the six months ended June 30, 2022 and 2021:
48,890
12,418
11,249
72,557
530
79
832
1,441
(259
(747
(1,457
(2,507
1,485
1,516
494
51,876
21,410
17,140
90,426
1,509
365
3,102
4,976
(453
(273
(344
(1,070
12,209
(13,259
(2,098
(3,148
14
The table below illustrates the allowance for credit losses by loan portfolio segment and each loan portfolio segment as a percentage of total loans.
Allowance Amount
Percentage
of Total
Allowance
Total Loans
Percentage of Total Loans
(dollars in thousands)
7,889
10.8
%
18.9
6,579
9.1
18.8
16,935
23.2
11.5
22,670
31.2
13.9
16,832
23.0
35.6
15,065
20.8
37.3
41,656
57.0
66.0
44,314
61.1
70.0
3,915
5.4
1.7
4,078
5.6
1.8
Residential
541
0.7
9.2
498
7.8
63.1
76.9
67.4
79.6
19.5
13.6
17.1
10.9
17.4
9.5
15.5
100.0
The following table represents the amortized cost basis of collateral-dependent loans by class of loans as of June 30, 2022 and December 31, 2021, for which repayment is expected to be obtained through the sale of the underlying collateral.
Amortized Cost
1,647
1,917
1,409
499
3,056
2,416
1,300
982
4,356
3,398
Loan Quality Indicators
As part of the on-going monitoring of the quality of our loans portfolio, we utilize an internal loan grading system to identify credit risk and assign an appropriate grade (from 0 to 8) for each loan in our portfolio. A third-party loan review is performed at least on an annual basis. Additional adjustments are made when determined to be necessary. The loan grade definitions are as follows:
Pass and Pass-Watch: Pass and Pass-Watch loans, grades (0-4), are in compliance with the Bank’s credit policy and regulatory requirements, and do not exhibit any potential or defined weaknesses as defined under “Special Mention,” “Substandard” or “Doubtful.” This category is the strongest level of the Bank’s loan grading system. It consists of all performing loans with no identified credit weaknesses. It includes cash and stock/security secured loans or other investment grade loans.
Special Mention: A Special Mention loan, grade (5), has potential weaknesses that deserve management’s close attention. If not corrected, these potential weaknesses may result in deterioration of the repayment of the debt and result in a Substandard classification. Loans that have significant actual, not potential, weaknesses are considered more severely classified.
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)
2020
2019
2018
Prior
Revolving
Loans
Cost Basis
Risk Rating
Pass / Pass-Watch
879,948
946,844
647,528
435,041
335,270
340,079
40,419
3,625,129
Special Mention
18,260
9,665
21,604
15,029
1,702
66,260
Classified
855
5,846
15,406
21,196
43,303
Total commercial property
880,803
665,788
450,552
372,280
376,304
42,121
27,800
67,082
Total construction
171,190
181,418
13,869
239
15,061
131,140
7,315
520,232
351
44
395
949
Total residential
14,220
132,133
1,078,938
1,195,344
661,397
435,280
350,331
471,219
47,734
4,240,243
18,611
15,073
66,655
22,145
44,252
1,079,793
680,008
450,791
387,341
508,437
49,436
Commercial and industrial loans:
293,422
146,800
48,760
31,896
12,953
15,109
201,245
750,185
13,687
112
13,798
36
94
726
1,942
2,911
Total commercial and industrial loans
146,836
45,677
13,066
15,947
203,186
Equipment financing agreements:
158,217
202,589
61,068
74,023
30,769
4,848
531,514
1,682
480
2,646
903
133
5,844
Total equipment financing agreements
204,271
61,548
76,669
31,672
4,981
Total loans receivable:
1,530,577
1,544,733
771,225
541,199
394,053
491,176
248,979
5,521,942
23,352
15,185
1,701
80,453
1,718
8,586
16,422
23,004
53,007
Total loans receivable
1,531,432
1,546,451
790,316
573,137
432,079
529,365
252,622
Includes extensions, renewals, or modifications of credit contracts, which consist of a new credit decision.
2017
1,203,197
706,470
488,250
406,288
277,680
384,064
41,413
3,507,362
18,869
7,593
6,999
16,879
1,703
52,043
5,450
17,247
2,965
21,792
47,454
725,339
501,293
423,535
287,644
422,735
43,116
73,808
631
74,439
20,567
194,948
16,975
247
19,813
73,567
82,076
8,381
396,007
930
406
2,221
3,557
965
20,743
74,938
84,314
1,471,953
724,076
488,497
426,101
351,247
466,140
49,794
3,977,808
7,405
39,667
76,167
3,930
21,809
48,436
742,945
501,540
444,278
362,582
527,616
51,497
264,762
55,135
36,937
15,780
10,874
6,016
148,148
537,652
274
13,989
67
4,802
(5
19,127
708
145
886
3,291
5,052
55,412
51,634
15,925
10,960
11,704
151,434
239,738
79,400
101,460
47,485
10,683
1,388
480,154
716
981
3,575
1,328
347
198
7,145
240,454
80,381
105,035
48,813
11,030
1,586
1,976,453
858,611
626,894
489,366
372,804
473,544
197,942
4,995,614
19,143
21,582
7,472
44,469
1,698
95,294
984
9,733
18,720
4,296
22,893
60,633
1,977,169
878,738
658,209
509,016
384,572
540,906
202,931
Loans by Vintage Year and Payment Performance
Payment performance
Performing
372,661
3,731,049
Nonperforming
3,643
131,184
520,276
679,657
503,845
4,346,207
4,592
4,943
45,669
15,733
766,636
214
258
789,485
570,483
431,176
524,426
5,644,357
831
2,654
4,939
11,045
423,515
286,935
419,464
3,602,859
709
3,271
4,000
73,973
84,052
399,319
262
1,227
444,258
360,908
524,083
4,097,184
1,674
3,533
5,227
55,409
50,926
10,956
11,431
560,843
273
988
47,484
10,684
1,329
346
877,754
653,926
507,667
382,548
536,902
5,138,181
4,283
2,024
4,004
13,360
The following is an aging analysis of loans, disaggregated by loan class, as of the dates indicated:
30-59
Days
Past Due
60-89
90 Days
or More
Current
Accruing
269
1,062
1,331
2,010,396
3,733,361
1,078
539
1,617
519,959
1,347
1,601
2,948
4,348,202
63
71
766,823
3,286
587
1,616
5,489
531,869
4,696
595
3,217
8,508
5,646,894
556
717,136
92
691
1,282
1,917,751
648
1,838
3,605,021
570
750
1,876
398,670
1,218
1,055
3,714
4,098,697
56
65
561,766
3,764
1,992
1,181
6,937
480,362
5,038
3,442
2,236
10,716
5,140,825
Individually Evaluated Loans
The Company reviews all loans on an individual basis when they do not share similar risk characteristics with loan pools.
Nonaccrual Loans and Nonperforming Assets
The following table represents the amortized cost basis of loans on nonaccrual status and loans past due 90 days and still accruing as of June 30, 2022 and December 31, 2021.
Nonaccrual Loans
With
No Allowance for
Credit Losses
Allowance for
90 Days Still
1,737
259
1,996
3,384
4,684
718
5,126
5,402
5,643
1,918
1,745
337
2,082
3,663
245
4,645
582
980
1,172
5,973
5,825
7,535
The Company recognized $9,000 and $136,000 of interest income on nonaccrual loans for the three months ended June 30, 2022 and 2021, respectively. Interest income recognized on nonaccrual loans for the six months ended June 30, 2022 and 2021 was $36,000 and $287,000, respectively.
The following table details nonperforming assets as of the dates indicated:
Nonaccrual loans
Loans receivable 90 days or more past due and still accruing
Total nonperforming loans receivable
Other real estate owned ("OREO")
675
Total nonperforming assets
11,720
14,035
OREO is included in prepaid expenses and other assets in the accompanying Consolidated Balance Sheets as of June 30, 2022 and December 31, 2021.
Troubled Debt Restructurings
As of June 30, 2022 and December 31, 2021, TDRs were $2.3 million and $2.9 million, respectively. A debt restructuring is considered a TDR if we grant a concession that we would not have otherwise considered to a borrower for economic or legal reasons related to the borrower’s financial difficulties.
The following table details TDRs as of June 30, 2022 and December 31, 2021:
Nonaccrual TDRs
Accrual TDRs
Deferral of
Principal
and Interest
Reduction
of Principal
Extension
of Maturity
Real estate loans
299
1,764
91
2,154
115
1,879
2,269
2,046
372
2,764
124
2,170
2,888
The following table presents the number of loans by class modified as TDRs that occurred during the periods indicated, with their pre- and post-modification recorded amounts.
Three Months ended
Twelve Months ended
Number of
Pre-
Modification
Recorded
Investment
Post-
(in thousands except for number of loans)
Six Months ended
All TDRs are individually analyzed using one of three criteria: (1) the present value of expected future cash flows discounted at the loan’s effective interest rate; (2) the loan’s observable market price; or (3) the fair value of the collateral if the loan is collateral dependent. At June 30, 2022 and December 31, 2021, the allowance resulting from the individual evaluation of TDRs was immaterial.
A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms. No loans defaulted during the three months ended June 30, 2022 following modification. One SBA business property loan for $91,000 defaulted during the six months ended June 30, 2022 following modification. No loss was incurred in connection with this default. During the year ended December 31, 2021, no loans defaulted within the twelve-month period following modification.
23
Note 4 — Servicing Assets
The changes in servicing assets for the three and six months ended June 30, 2022 and 2021 were as follows:
7,202
6,150
Addition related to sale of SBA loans
882
Amortization
(731
(658
6,199
6,212
1,549
1,157
(1,276
(1,170
At June 30, 2022 and December 31, 2021, we serviced loans sold to unaffiliated parties of $495.3 million and $473.5 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 $1.2 million and $1.1 million for the three months ended June 30, 2022 and 2021, respectively, and $2.4 million and $2.3 million for the six months ended June 30, 2022 and 2021, respectively. Servicing fee income, net of the amortization of servicing assets, is included in other operating income in the consolidated statements of income. Amortization expense was $731,000 and $658,000 for the three months ended June 30, 2022 and 2021, respectively, and $1.3 million and $1.2 million for the six months ended June 30, 2022 and 2021, respectively.
The fair value of servicing rights was $7.6 million at June 30, 2022. The fair value at June 30, 2022 was determined using discount rates ranging from 13.4 percent to 16.1 percent and prepayment speeds ranging from 11.1 percent to 17.0 percent, depending on the stratification of the specific right. The fair value of servicing rights was $8.1 million at December 31, 2021. The fair value at December 31, 2021 was determined using discount rates ranging from 10.4 percent to 16.7 percent and prepayment speeds ranging from 10.2 percent to 12.8 percent, depending on the stratification of the specific right.
Note 5 — Income Taxes
The Company’s income tax expense was $10.2 million and $8.9 million, representing an effective income tax rate of 29.0 percent and 28.6 percent for the three months ended June 30, 2022 and 2021, respectively. The Company’s income tax expense was $18.7 million and $16.4 million, representing an effective income tax rate of 29.0 percent and 29.7 percent for the six months ended June 30, 2022 and 2021, respectively.
Management concluded that as of June 30, 2022 and December 31, 2021, a valuation allowance of $1.6 million was appropriate against certain state net operating loss carry forwards and certain tax credits. For all other deferred tax assets, management believes it was more likely than not these deferred tax assets will be realized principally through future taxable income and reversal of existing taxable temporary differences. Net income tax assets were $61.9 million and $44.1 million as of June 30, 2022 and December 31, 2021, respectively.
As of June 30, 2022, the Company was subject to examination by various taxing authorities for its federal tax returns for the periods ending on or after December 31, 2018 and state tax returns for the periods ending on or after December 31, 2017. During the quarter ended June 30, 2022, there was no material change to the Company’s uncertain tax positions. The Company does not expect its unrecognized tax positions to change significantly over the next twelve months.
24
Note 6 — Goodwill and other Intangibles
The third-party originators intangible of $483,000 and goodwill of $11.0 million were recorded as a result of the acquisition of 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:
Period
Carrying
Amount
Net
Core deposit intangible
10 years
2,213
(1,965
248
(1,900
313
Third-party originators intangible
7 years
483
(452
31
(432
Goodwill
N/A
11,031
Total intangible assets
13,727
(2,417
(2,332
The Company performed an impairment analysis on its goodwill and other intangible assets as of December 31, 2021 and determined there was no impairment. No triggering event has occurred subsequent to December 31, 2021 that would require a reassessment of goodwill and other intangible assets.
Note 7 — Deposits
Time deposits exceeding the FDIC insurance limit of $250,000 as of June 30, 2022 and December 31, 2021 were $180.5 million and $173.5 million, respectively.
The scheduled maturities of time deposits are as follows for the periods indicated:
At June 30, 2022
Time
Deposits of
$250,000
Other Time
Deposits
137,469
321,573
459,042
2023
84,205
357,305
441,510
2024
64,516
2025
265
2,681
2026 and thereafter
2,867
3,129
222,201
748,677
970,878
At December 31, 2021
206,478
672,821
879,299
1,522
40,564
42,086
60,854
1,919
2,184
2,503
2,765
208,527
778,661
987,188
Accrued interest payable on deposits was $1.0 million and $1.2 million at June 30, 2022 and December 31, 2021, respectively. Total deposits reclassified to loans due to overdrafts at June 30, 2022 and December 31, 2021 were $397,000 and $277,000, respectively.
25
Note 8 — Borrowings and Subordinated Debentures
At June 30, 2022, the Bank had $20.0 million of overnight advances with the FHLB with a weighted average interest rate of 1.67 percent. In addition, the Bank had $125.0 million of term advances outstanding with the FHLB with a weighted average interest rate of 1.04 percent. At December 31, 2021, the Bank had no overnight advances and $137.5 million of term advances with the FHLB with a weighted average rate of 1.05 percent. Interest expense on borrowings for the three months ended June 30, 2022 and 2021 was $370,000 and $447,000, respectively. Interest expense on borrowings for the six months ended June 30, 2022 and 2021 was $0.7 million and $0.9 million, respectively.
Balance
Weighted
Average Rate
Overnight advances
20,000
1.67
0.00
Advances due within 12 months
50,000
1.63
1.62
Advances due over 12 months through 24 months
0.37
0.97
Advances due over 24 months through 36 months
25,000
1.22
37,500
0.40
Outstanding advances
1.13
1.05
The following is financial data pertaining to FHLB advances:
Weighted-average interest rate at end of period
Weighted-average interest rate during the period
1.17
Average balance of FHLB advances
135,387
145,277
Maximum amount outstanding at any month-end
215,000
162,500
The Bank maintains a secured credit facility with the FHLB, allowing the Bank to borrow on an overnight and term basis. The Bank had $2.45 billion and $2.30 billion of loans pledged as collateral with the FHLB as of June 30, 2022 and December 31, 2021, respectively. Remaining available borrowing capacity was $1.47 billion, subject to the FHLB statutory lending limit of $1.78 billion, and $1.61 billion at June 30, 2022 and December 31, 2021, respectively.
The Bank also had securities with market values of $27.3 million and $34.7 million at June 30, 2022 and December 31, 2021, respectively, pledged with the FRB, which provided $25.4 million and $32.8 million in available borrowing capacity through the Fed Discount Window as of June 30, 2022 and December 31, 2021, respectively.
On August 20, 2021, the Company issued $110.0 million of Fixed-to-Floating Subordinated Notes (“2021 Notes”) with a maturity date of September 1, 2031. The 2021 Notes have an initial fixed interest rate of 3.75 percent per annum, payable semiannually in arrears on March 1 and September 1 of each year, up to but excluding September 1, 2026. From and including September 1, 2026 and thereafter, the 2021 Notes will bear interest at a floating rate per annum equal to the Benchmark rate (which is expected to be the Three-Month Term SOFR) plus 310 basis points, payable quarterly in arrears on March 1, June 1, September 1 and December 1 of each year. If the then current three-month term SOFR rate is less than zero, the three-month SOFR will be deemed to be zero. Debt issuance cost was $2.1 million, which is being amortized through the 2021 Notes’ maturity date. At June 30, 2022 and December 31, 2021, the balance of the 2021 Notes included in the Company’s Consolidated Balance Sheet, net of issuance cost, was $108.1 million and $108.0 million, respectively.
The Company issued $100.0 million of Fixed-to-Floating Subordinated Notes (“2017 Notes”) on March 21, 2017, with a maturity on March 30, 2027. The 2017 Notes had an initial fixed interest rate of 5.45 percent per annum. From and including March 30, 2022 and thereafter, the 2017 Notes bore interest at a floating rate equal to the then current three-month LIBOR, as calculated on each applicable date of determination, plus 3.315 percent payable quarterly.
On March 30, 2022, the Company redeemed its 2017 Notes. A portion of the redemption was funded with the proceeds from the Company’s August 20, 2021 subordinated debt offering. The redemption price for each of the 2017 Notes equaled 100 percent of the outstanding principal amount redeemed, plus any accrued and unpaid interest thereon. All interest accrued on the 2017 Notes ceased to accrue on and after March 30, 2022. Upon the redemption, the Company recognized a pre-tax charge of $1.1 million for the remaining unamortized debt issuance costs associated with the 2017 Notes.
At June 30, 2022 and December 31, 2021, the balance of the 2017 Notes included in the Company’s Consolidated Balance Sheet, net of debt issuance cost, was $0 and $86.2 million, respectively.
The Company assumed Junior Subordinated Deferrable Interest Debentures (“Subordinated Debentures”) as a result of an acquisition in 2014 with an unpaid principal balance of $26.8 million and an estimated fair value of $18.5 million. The $8.3 million discount is being amortized to interest expense through the debentures’ maturity date of March 15, 2036. A trust was formed in 2005 which issued $26.0 million of Trust Preferred Securities (“TPS”) at a 6.26 percent fixed rate for the first five years and a variable rate of three-month LIBOR plus 140 basis points thereafter. The TPS will be subject to mandatory redemption if the Subordinated Debentures are repaid by the Company. Interest is payable quarterly, and the Company has the option to defer interest payments on the Subordinated Debentures from time to time for a period not to exceed five consecutive years. At June 30, 2022 and December 31, 2021, the balance of Subordinated Debentures included in the Company’s Consolidated Balance Sheets, net of discount of $5.8 million and $6.0 million, was $21.0 million and $20.8 million, respectively. The amortization of discount was $102,000 and $99,000 for the three months ended June 30, 2022 and 2021, respectively, and $204,000 and $198,000 for the six months ended June 30, 2022 and 2021, respectively.
Note 9 — Earnings Per Share
Earnings per share (“EPS”) is calculated on both a basic and a diluted basis. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted from the issuance of common stock that then shared in earnings, excluding common shares in treasury. For diluted EPS, the weighted-average number of common shares includes the impact of unvested performance-based restricted stock under the treasury method.
Unvested restricted stock containing rights to non-forfeitable dividends are considered participating securities prior to vesting and have been included in the earnings allocation in computing basic and diluted EPS under the two-class method.
The following table is a reconciliation of the components used to derive basic and diluted EPS for the periods indicated:
(dollars in thousands, except per share amounts)
Basic EPS
Less: income allocated to unvested restricted stock
175
261
295
Income allocated to common shares
24,900
21,947
45,484
38,486
Weighted-average shares for basic EPS
Basic EPS (1)
Effect of dilutive stock options and unvested performance stock units
115,451
77,463
119,512
73,800
Diluted EPS
Weighted-average shares for diluted EPS
Diluted EPS (1)
Per share amounts may not be able to be recalculated using net income and weighted-average shares presented above due to rounding.
There were no anti-dilutive stock options outstanding for the three months ended June 30, 2022 or 2021.
During the six months ended June 30, 2022, the Company issued 38,036 performance stock units to executive officers from the 2021 Equity Compensation plan fair valued at $954,700 on the grant date of March 23, 2022. During the six months ended June 30, 2021, the Company issued 42,626 performance stock units to executive officers from the 2013 Equity Compensation Plan fair valued at $784,000 on the grant date of March 24, 2021. These units have a three-year cliff vesting period and include dividend equivalent rights. Total performance stock units outstanding as of June 30, 2022 were 104,599 with an aggregate grant fair value of $2.0 million. As of June 30, 2022 and 2021, there were 104,599 and 66,563 performance stock units outstanding, respectively. In accordance with the treasury method, unvested performance stock units were included in the weighted average number of common shares for the diluted EPS calculation in the table above.
27
Note 10 — Regulatory Matters
Federal bank regulatory agencies require bank holding companies and banks to maintain a minimum ratio of qualifying total capital to risk-weighted assets of 8.0 percent and a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0 percent. In addition to the risk-based guidelines, federal bank regulatory agencies require bank holding companies and banks to maintain a minimum ratio of Tier 1 capital to average assets, referred to as the leverage ratio, of 4.0 percent.
In order for banks to be considered “well capitalized,” federal bank regulatory agencies require a minimum ratio of qualifying total capital to risk-weighted assets of 10.0 percent and a minimum ratio of Tier 1 capital to risk-weighted assets of 8.0 percent. In addition to the risk-based guidelines, federal bank regulatory agencies require depository institutions to maintain a minimum ratio of Tier 1 capital to average assets, referred to as the leverage ratio, of 5.0 percent.
At June 30, 2022, the Bank’s capital ratios exceeded the minimum requirements for the Bank to be considered “well capitalized” and the Company exceeded all of its applicable minimum regulatory capital ratio requirements.
A capital conservation buffer of 2.5 percent must be met to avoid limitations on the ability of the Bank and the Company to pay dividends, repurchase shares or pay discretionary bonuses. The Bank's capital conservation buffer was 5.70 percent and 6.70 percent and the Company's capital conservation buffer was 5.42 percent and 5.93 percent as of June 30, 2022 and December 31, 2021, respectively.
In March 2020, federal banking agencies announced an interim final rule to delay the impact on regulatory capital arising from the implementation of CECL. The interim final rule maintains the three-year transition option in the previous rule and provides banks the option to delay for two years an estimate of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period (five-year transition option). The Company and the Bank adopted the capital transition relief over the permissible five-year period.
The capital ratios of Hanmi Financial and the Bank as of June 30, 2022 and December 31, 2021 were as follows:
Minimum
Minimum to Be
Regulatory
Categorized as
Actual
Requirement
“Well Capitalized”
Ratio
Total capital (to risk-weighted assets):
Hanmi Financial
859,204
14.31
480,181
8.00
Hanmi Bank
820,787
13.70
479,396
599,245
10.00
Tier 1 capital (to risk-weighted assets):
685,566
11.42
360,136
6.00
757,149
12.64
359,547
Common equity Tier 1 capital (to risk-weighted assets)
664,531
11.07
270,102
4.50
269,660
389,510
6.50
Tier 1 capital (to average assets):
9.94
275,975
4.00
11.00
275,237
344,046
5.00
912,527
16.57
440,639
809,279
14.70
440,493
550,616
657,250
11.93
330,479
748,177
13.59
330,369
636,419
11.55
247,859
247,777
357,900
9.63
273,133
10.96
273,101
341,376
Note 11 — Fair Value Measurements
Fair Value Measurements
ASC 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value including a three-level valuation hierarchy, and expands disclosures about fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The three-level fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value are defined as follows:
•
Level 1 - Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2 - Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.
Level 3 - Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
Fair value is used on a recurring basis for certain assets and liabilities in which fair value is the primary basis of accounting. Additionally, fair value is used on a non-recurring basis to evaluate assets or liabilities for impairment or for disclosure purposes.
We record securities available for sale at fair value on a recurring basis. Certain other assets, such as loans held for sale, impaired loans, OREO, and core deposit intangible, are recorded at fair value on a non-recurring basis. Non-recurring fair value measurements typically involve assets that are periodically evaluated for impairment and for which any impairment is recorded in the period in which the re-measurement is performed.
The following methods and assumptions were used to estimate the fair value of each class of financial instrument below:
Securities available for sale - The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges. If quoted prices are not available, fair values are measured using matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities, or other model-based valuation techniques requiring observable inputs other than quoted prices such as yield curve, prepayment speeds, and default rates. Level 1 securities include U.S. Treasury securities that are traded on an active exchange or by dealers or brokers in active over-the-counter markets. The fair value of these securities is determined by quoted prices on an active exchange or over-the-counter market. Level 2 securities primarily include U.S. government agency and sponsored agency mortgage-backed securities, collateralized mortgage obligations and debt securities as well as municipal bonds in markets that are active. In determining the fair value of the securities categorized as Level 2, we obtain reports from nationally recognized broker-dealers detailing the fair value of each investment security held as of each reporting date. The broker-dealers use prices obtained from nationally recognized pricing services to value our fixed income securities. The fair value of the municipal securities is determined based on pricing data provided by nationally recognized pricing services. We review the prices obtained for reasonableness based on our understanding of the marketplace, and also consider any credit issues related to the bonds. As we have not made any adjustments to the market quotes provided to us and as they are based on observable market data, they have been categorized as Level 2 within the fair value hierarchy. Level 3 securities are instruments that are not traded in the market. As such, no observable market data for the instrument is available, which necessitates the use of significant unobservable inputs.
Derivatives – The fair values of derivatives are based on valuation models using observable market data as of the measurement date (Level 2). Our derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rates, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services.
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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 June 30, 2022 and December 31, 2021, the entire balance of loans held for sale was recorded at its cost. We record loans held for sale on a nonrecurring basis with Level 2 inputs.
Nonperforming loans – Nonaccrual loans receivable and loans 90-days past due and still accruing interest are considered nonperforming for reporting purposes and are measured and recorded at fair value on a non-recurring basis. All nonperforming loans with a carrying balance over $250,000 are individually evaluated for the amount of impairment, if any. Nonperforming loans with a carrying balance of $250,000 or less are evaluated collectively. However, from time to time, nonrecurring fair value adjustments to collateral dependent nonperforming loans are recorded based on either the current appraised value of the collateral, a Level 2 measurement, or management’s judgment and estimation of value reported on older appraisals that are then adjusted based on recent market trends, a Level 3 measurement.
OREO - Fair value of OREO is based primarily on third party appraisals, less costs to sell and result in a Level 3 classification of the inputs for determining fair value. Appraisals are required annually and may be updated more frequently as circumstances require and the fair value adjustments are made to OREO based on the updated appraised value of the property.
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. 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 contracts is based primarily on a third party valuation service, less costs to sell and result in a Level 3 classification of the inputs for determining fair value. Valuations are required at the time the asset is repossessed and may be subsequently updated periodically due to the Company’s short-term possession of the asset prior to sale or as circumstances require and the fair value adjustments are made to the asset based on its value prior to sale.
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Assets and Liabilities Measured at Fair Value on a Recurring Basis
As of June 30, 2022 and December 31, 2021, assets and liabilities measured at fair value on a recurring basis are as follows:
Level 1
Level 2
Level 3
Significant
Observable
Quoted Prices in
Inputs with No
Active Markets
Active Market
for Identical
with Identical
Unobservable
Characteristics
Inputs
Total Fair Value
Assets:
Securities available for sale:
837,282
Derivative financial instruments
5,759
5,627
895,393
1,379
1,360
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
As of June 30, 2022 and December 31, 2021, assets and liabilities measured at fair value on a non-recurring basis are as follows:
Inputs With No
With Identical
Collateral dependent loans (1)
Other real estate owned
Repossessed personal property
146
Collateral dependent loans (2)
Consisted of real estate loans of $4.4 million.
Consisted of real estate loans of $3.4 million.
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The following table represents quantitative information about Level 3 fair value assumptions for assets measured at fair value on a non-recurring basis at June 30, 2022 and December 31, 2021:
Valuation
Techniques
Input(s)
Range (Weighted
Average)
Collateral dependent loans:
Market approach
Market data comparison
(25)% to 27% / (2)%
(20)% to 20% / 0%
(19)% to 10% / 1%
(10)% to 10% / (3)%
(28)% to 23% / (6)%
(19)% to 8% / 3%
(20)% to (5)% / (12)%
Appraisal reports utilize a combination of valuation techniques including a market approach, where prices and other relevant information generated by market transactions involving similar or comparable properties are used to determine the appraised value. Appraisals may include an ‘as is’ and ‘upon completion’ valuation scenarios. Adjustments are routinely made in the appraisal process by third-party appraisers to adjust for differences between the comparable sales and income data. Adjustments also result from the consideration of relevant economic and demographic factors with the potential to affect property values. Also, prospective values are based on the market conditions which exist at the date of inspection combined with informed forecasts based on current trends in supply and demand for the property types under appraisal. Positive adjustments disclosed in this table represent increases to the sales comparison and negative adjustment represent decreases.
The equipment is usually too low in value to use a professional appraisal service. The values are determined internally using a combination of auction values, vendor recommendations and sales comparisons depending on the equipment type. Some highly commoditized equipment, such as commercial trucks have services that provide industry values.
ASC 825, Financial Instruments, requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured on a recurring basis or non-recurring basis are discussed above.
The estimated fair value of financial instruments has been determined by using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data in order to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that we could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
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 June 30, 2022, 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 fair values of off-balance sheet items were based upon the difference between the current value of similar loans and the price at which the Bank has committed to make the loans.
The estimated fair values of financial instruments were as follows:
Financial assets:
Securities available for sale
Loans held for sale
19,753
Loans receivable, net of allowance for credit losses
5,475,280
Financial liabilities:
Noninterest-bearing deposits
Interest-bearing deposits
3,193,498
Borrowings and subordinated debentures
274,113
141,704
117,150
14,723
5,072,282
3,211,708
352,506
137,198
213,179
Note 12 — Off-Balance Sheet Commitments
The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk similar to the risk involved with on-balance sheet items.
The Bank’s exposure to losses in the event of non-performance by the other party to commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for extending loan facilities to customers. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, was based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, premises and equipment, and income-producing or borrower-occupied properties.
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The following table shows the distribution of total loan commitments as of the dates indicated:
Unused commitments to extend credit
613,804
626,474
Standby letters of credit
59,480
49,287
Commercial letters of credit
47,371
39,261
Total commitments
720,655
715,022
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:
2,358
2,342
2,586
2,792
Provision expense (recovery) for credit losses
(45
1,301
851
2,313
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 to thirteen years, some of which include renewal or termination options to extend the lease for up to five years.
The Company includes lease extension and termination options in the lease term if, after considering relevant economic factors, it is reasonably certain the Company will exercise the option. In addition, the Company has elected to account for any non-lease components in its real estate leases as part of the associated lease component. The Company has also elected not to recognize leases with original lease terms of 12 months or less (short-term leases) on the Company’s balance sheet.
Leases are classified as operating or finance leases at the lease commencement date. Lease expense for operating leases and short-term leases is recognized on a straight-line basis over the term of the lease. Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of the lease payments over the lease term.
As of June 30, 2022, the outstanding balances for our right-of-use asset and lease liability were $43.8 million and $47.4 million, respectively. The outstanding balances of the right-of-use asset and lease liability were $46.3 million and $49.7 million, respectively, as of December 31, 2021.
In determining the discount rates, since most of our leases do not provide an implicit rate, we used our incremental borrowing rate provided by the FHLB of San Francisco based on the information available at the commencement date to calculate the present value of lease payments.
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At June 30, 2022, future minimum rental commitments under these non-cancelable operating leases, with initial or remaining terms of one year or more, were as follows:
8,007
7,571
7,207
6,239
2026
5,231
Thereafter
17,602
Remaining lease commitments
51,857
Interest
(4,467
Present value of lease liability
47,390
Weighted average remaining lease terms for the Company's operating leases were 7.42 years and 7.85 years as of June 30, 2022 and December 31, 2021, respectively. Weighted average discount rates used for the Company's operating leases were 2.38 percent as of June 30, 2022 and December 31, 2021, respectively. Net lease expense recognized for each of the three months and six months ended June 30, 2022 and 2021 was $2.0 million and $4.1 million, respectively. This included operating lease costs of $2.0 million and $1.9 million for the three months ended June 30, 2022 and 2021, respectively. For the six months ended June 30, 2022 and 2021, operating lease costs were $4.0 million and $3.9 million, respectively. Sublease income for operating leases was immaterial for the three and six months ended June 30, 2022 and 2021.
Cash paid and included in cash flows from operating activities for amounts used in the measurement of the lease liability of the Company's operating leases was $2.0 million and $1.9 million for the three months ended June 30, 2022 and 2021, respectively, and $4.0 million and $3.9 million for the six months ended June 30, 2022 and 2021, respectively.
Note 14 — Liquidity
As of June 30, 2022, Hanmi Financial had $22.4 million in cash on deposit with its bank subsidiary and $5.0 million of U.S. Treasury securities at fair value. As of December 31, 2021, the Company had $94.9 million in cash on deposit with its bank subsidiary. Management believes that Hanmi Financial, on a stand-alone basis, had adequate liquid assets to meet its current debt obligations.
The principal objective of our liquidity management program is to maintain the Bank’s ability to meet the day-to-day cash flow requirements of our customers who wish either to withdraw funds or to draw upon credit facilities to meet their cash needs. Management believes that the Bank, on a stand-alone basis, has adequate liquid assets to meet its current obligations. The Bank’s primary funding source will continue to be deposits originating from its branch platform. The Bank’s wholesale funds historically consisted of FHLB advances and brokered deposits. As of June 30, 2022 and December 31, 2021, the Bank had $145.0 million and $137.5 million, respectively, of FHLB advances, and $110.0 million and $141.8 million, respectively, of brokered deposits.
We monitor the sources and uses of funds on a regular basis to maintain an acceptable liquidity position. The Bank’s primary source of borrowings is the FHLB, from which the Bank is eligible to borrow up to 30.0 percent of its assets. As of June 30, 2022, the total borrowing capacity available based on pledged collateral and the remaining available borrowing capacity were $1.71 billion and $1.47 billion, respectively, compared to $1.84 billion and $1.61 billion, respectively, as of December 31, 2021.
The amount that the FHLB is willing to advance differs based on the quality and character of qualifying collateral pledged by the Bank, and the FHLB may adjust the advance rates for qualifying collateral upwards or downwards from time to time. To the extent deposit renewals and deposit growth are not sufficient to fund maturing and withdrawable deposits, repay maturing borrowings, fund existing and future loans, 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 $25.4 million from the Federal Reserve Discount Window, to which the Bank pledged securities with a carrying value of $30.2 million, and had no borrowings as of June 30, 2022. The Bank also maintains a line of credit for repurchase agreements up to $100.0 million. The Bank also had three unsecured federal funds lines of credit totaling $115.0 million with no outstanding balances as of June 30, 2022.
Note 15 — Derivatives and Hedging Activities
The Company’s derivative financial instruments consist entirely of interest rate swap agreements between the Company and its customers and other third party counterparties. The Company enters into “back-to-back swap” arrangements whereby the Company executes interest rate swap agreements with its customers and acquires an offsetting swap position from a third party counterparty. These derivative financial statements are accounted for at fair value, with changes in fair value recognized in the Company’s Consolidated Statements of Income.
The table below presents the fair value of the Company’s derivative financial instruments as well as their location on the Balance Sheet as of June 30, 2022 and December 31, 2021.
As of June 30, 2022
Derivative Assets
Derivative Liabilities
Notional Amount
Balance Sheet Location
Derivatives not designated as hedging instruments
Interest rate products
61,718
Other Assets
Other Liabilities
Total derivatives not designated as hedging instruments
As of December 31, 2021
61,968
The table below presents the effect of the Company’s derivative financial instruments that are not designated as hedging instruments on the Income Statement for the three and six months ended June 30, 2022 and 2021.
Derivatives Not Designated as Hedging
Instruments under Subtopic 815-20
Location of Gain or (Loss) Recognized in Income on Derivative
Amount of Gain or (Loss)
Recognized in Income on Derivative
Other income
58
85
The Company did not recognize any fee income from its derivative financial instruments for the three and six months ended June 30, 2022 and 2021.
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The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives as of June 30, 2022 and December 31, 2021. The net amounts of derivative assets or liabilities can be reconciled to the tabular disclosure of fair value. The derivative assets are located within the prepaid and other assets line item on the Consolidated Balance Sheets and the derivative liabilities are located within the accrued expenses and other liabilities line item on the Consolidated Balance Sheets.
Offsetting of Derivative Assets
Gross Amounts Not Offset in the Consolidated Balance Sheets
Gross Amounts of Recognized Assets
Gross Amounts Offset in the Consolidated Balance Sheets
Net Amounts of Assets presented in the Consolidated Balance Sheets
Financial Instruments
Cash Collateral Received
Net Amount
Derivatives
132
Offsetting of Derivative Liabilities
Gross Amounts of Recognized Liabilities
Net Amounts of Liabilities presented in the Consolidated Balance Sheets
Cash Collateral Provided
38
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 June 30, 2022 and December 31, 2021, the fair value of derivatives in a net asset position for counterparty transactions, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $5.8 million and $1.4 million, respectively. As of June 30, 2022, the Company had not posted any collateral with its counterparties related to these agreements and is adequately collateralized since its net asset position was $132,000 ($5.8 million of fair value of assets less $5.6 million of fair value of liabilities) as of June 30, 2022. As of December 31, 2021, the Company had posted no collateral related to these agreements and was adequately collateralized since its net asset position was $19,000 ($1.4 million of fair value of assets less $1.4 million of fair value of liabilities).
Note 16 — Subsequent Events
As of the date of issuance of these financial statements, no subsequent events were identified.
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 and six months ended June 30, 2022. This analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Annual Report on Form 10-K”) and with the unaudited consolidated financial statements and notes thereto set forth in this Quarterly Report on Form 10-Q for the period ended June 30, 2022 (this “Report”).
Forward-Looking Statements
Some of the statements contained in this Report are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements in this Report other than statements of historical fact are “forward–looking statements” for purposes of federal and state securities laws, including, but not limited to, statements about anticipated future operating and financial performance, financial position and liquidity, business strategies, regulatory and competitive outlook, investment and expenditure plans, capital and financing needs and availability, plans and objectives of management for future operations, developments regarding our capital and strategic plans and other similar forecasts and statements of expectation and statements of assumptions underlying any of the foregoing. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue,” or the negative of such terms and other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.
Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ from those expressed or implied by the forward-looking statements. These factors include the following: failure to maintain adequate levels of capital and liquidity to support our operations; the effect of potential future supervisory action against us or Hanmi Bank; the effect of our rating under the Community Reinvestment Act and our ability to address any issues raised in our regulatory exams; general economic and business conditions internationally, nationally and in those areas in which we operate; volatility and deterioration in the credit and equity markets; changes in consumer spending, borrowing and savings habits; availability of capital from private and government sources; demographic changes; competition for loans and deposits and failure to attract or retain loans and deposits; fluctuations in interest rates and a decline in the level of our interest rate spread; inflation; risks of natural disasters; the current or anticipated impact of military conflict, terrorism or other geopolitical events; a failure in or breach of our operational or security systems or infrastructure, including cyber-attacks; the failure to maintain current technologies; the inability to successfully implement future information technology enhancements; difficult business and economic conditions that can adversely affect our industry and business, including competition, fraudulent activity and negative publicity; risks associated with Small Business Administration loans; failure to attract or retain key employees; our ability to access cost-effective funding; fluctuations in real estate values; changes in accounting policies and practices; the continuing impact of the COVID-19 pandemic on our business and results of operation; changes in governmental regulation, including, but not limited to, any increase in Federal Deposit Insurance Corporation insurance premiums; the ability of Hanmi Bank to make distributions to Hanmi Financial Corporation, which is restricted by certain factors, including Hanmi Bank’s retained earnings, net income, prior distributions made, and certain other financial tests; the ability to identify a suitable strategic partner or to consummate a strategic transaction; the adequacy of our allowance for credit losses; our credit quality and the effect of credit quality on our credit losses expense and allowance for credit losses; changes in the financial performance and/or condition of our borrowers and the ability of our borrowers to perform under the terms of their loans and other terms of credit agreements; our ability to control expenses; changes in securities markets; and risks as it relates to cyber security against our information technology infrastructure and those of our third party providers and vendors.
For additional information concerning risks we face, see “Part II, Item 1A. Risk Factors” in this Report and “Item 1A. Risk Factors” in Part I of the 2021 Annual Report on Form 10-K. We undertake no obligation to update these forward-looking statements to reflect events or circumstances that occur after the date on which such statements were made, except as required by law.
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 2021 Annual Report on Form 10-K. We had no significant changes in our accounting policies since the filing of our 2021 Annual Report on Form 10-K.
Certain accounting policies require us to make significant estimates and assumptions that have a material impact on the carrying value of certain assets and liabilities, and we consider these critical accounting policies. For a description of these critical accounting policies, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies” in our 2021 Annual Report on Form 10-K. Actual results could differ significantly from these
estimates and assumptions, which could have a material impact on the carrying value of assets and liabilities at the balance sheet dates and our results of operations for the reporting periods. Management has discussed the development and selection of these critical accounting policies with the Audit Committee of the Company’s Board of Directors.
Executive Overview
Net income was $25.1 million, or $0.82 per diluted share, for the three months ended June 30, 2022 compared with $22.1 million, or $0.72 per diluted share, for the same period a year ago. Net interest income and noninterest income increased $9.5 million and $0.4 million, respectively. These effects were offset by an increase in credit loss expense of $4.9 million to $1.6 million for the three months ended June 30, 2022 compared with a credit loss expense recovery of $3.3 million for the same period a year ago. Noninterest expense and income taxes increased $0.7 million and $1.4 million, respectively.
For the six months ended June 30, 2022, net income was $45.7 million, or $1.50 per diluted share, compared with $38.8 million, or $1.26 per diluted share, for the same period a year ago. The increase in net income for the six months ended June 30, 2022 reflected an increase in net interest income of $14.4 million, offset by increases in credit loss expense of $1.4 million and $2.9 million in other noninterest expense and a $0.9 million decrease in noninterest income.
Other financial highlights include the following:
Cash and due from banks decreased $391.7 million to $217.2 million as of June 30, 2022 from $609.0 million at December 31, 2021, primarily as excess liquidity was used to fund strong loan production and the redemption of subordinated debentures.
Securities decreased $50.6 million to $860.2 million at June 30, 2022 from $910.8 million at December 31, 2021, attributable to the impact of unrealized losses from rising interest rates.
Loans receivable, before the allowance for credit losses, were $5.66 billion at June 30, 2022 compared with $5.15 billion at December 31, 2021.
Deposits were $5.98 billion at June 30, 2022 compared with $5.79 billion at December 31, 2021.
Subordinated debentures and borrowings decreased $78.4 million to $274.1 million at June 30, 2022 from $352.5 million at December 31, 2021, primarily due to the redemption of the 2017 Notes.
Results of Operations
Net Interest Income
Our primary source of revenue is net interest income, which is the difference between interest derived from earning assets, and interest paid on liabilities obtained to fund those assets. Our net interest income is affected by changes in the level and mix of interest-earning assets and interest-bearing liabilities, referred to as volume changes. Net interest income is also affected by changes in the yields earned on assets and rates paid on liabilities, referred to as rate changes. Interest rates charged on loans receivable are affected principally by changes to interest rates, the demand for loans receivable, the supply of money available for lending purposes, and other competitive factors. Those factors are, in turn, affected by general economic conditions and other factors beyond our control, such as federal economic policies, the general supply of money in the economy, legislative tax policies, governmental budgetary matters, and the actions of the Federal Reserve.
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.
Average
Income /
Yield /
Expense
Rate
Interest-earning assets:
Loans receivable (1)
5,572,504
4.31
4,753,297
52,787
4.45
Securities (2)
945,291
1.27
812,805
0.69
FHLB stock
5.93
Interest-bearing deposits in other banks
136,473
0.57
659,934
0.11
Total interest-earning assets
6,670,653
3.80
6,242,421
54,609
3.51
Noninterest-earning assets:
67,859
61,560
(73,896
(88,049
Other assets
255,095
220,779
6,919,711
6,436,711
Interest-bearing liabilities:
Demand: interest-bearing
122,771
0.06
112,252
0.08
Money market and savings
2,139,488
1,570
0.29
2,032,102
1,298
0.26
Time deposits
894,345
869
0.39
1,136,903
0.59
Total interest-bearing deposits
3,156,604
0.31
3,281,257
140,245
384
1.10
150,091
1.19
Subordinated debentures
129,029
1,335
4.14
119,170
5.32
Total interest-bearing liabilities
3,425,878
0.49
3,550,518
Noninterest-bearing liabilities and equity:
Demand deposits: noninterest-bearing
2,716,297
2,223,172
Other liabilities
104,084
67,771
Stockholders' equity
673,452
595,250
Net interest income
49,574
Cost of deposits (3)
0.17
0.22
Net interest spread (taxable equivalent basis) (4)
3.31
2.94
Net interest margin (taxable equivalent basis) (5)
3.55
3.19
42
Loans receivable include loans held for sale and exclude the allowance for credit losses. Nonaccrual loans receivable are included in the average loans receivable balance.
Amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate.
(3)
Represents interest expense on deposits as a percentage of all interest-bearing and noninterest-bearing deposits.
(4)
Represents the average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities.
(5)
Represents net interest income as a percentage of average interest-earning assets.
The table below shows changes in interest income and interest expense and the amounts attributable to variations in interest rates and volumes for the periods indicated. The variances attributable to simultaneous volume and rate changes have been allocated to the change due to volume and the change due to rate categories in proportion to the relationship of the absolute dollar amount attributable solely to the change in volume and to the change in rate.
June 30, 2022 vs June 30, 2021
Increases (Decreases) Due to Change In
Volume
8,783
(1,715
7,068
1,278
1,526
(239
256
8,792
(181
8,611
78
194
(314
(499
(813
(28
(35
(63
123
(373
(250
(139
(720
(859
Change in net interest income
8,931
9,470
For the three months ended June 30, 2022 and 2021, net interest income was $59.0 million and $49.6 million, respectively. The net interest spread and net interest margin, on a taxable equivalent basis, for the quarter ended June 30, 2022, were 3.31 percent and 3.55 percent, respectively, compared with 2.94 percent and 3.19 percent, respectively, for the same period in 2021. Interest and dividend income increased $8.6 million, or 15.8 percent, to $63.2 million for the three months ended June 30, 2022 from $54.6 million for the same period in 2021 due to higher average interest-earning asset balances and yields. Interest expense decreased $0.9 million, or 17.1 percent, to $4.2 million for the three months ended June 30, 2022 from $5.0 million for the same period in 2021 primarily due to a shift from time deposits into lower-yielding deposit accounts, lower cost of time deposits and lower interest cost associated with the 2021 Notes.
The average balance of interest earning assets increased $428.2 million, or 6.9 percent, to $6.67 billion for the three months ended June 30, 2022 from $6.24 billion for the three months ended June 30, 2021. The average balance of loans increased $819.2 million, or 17.2 percent, to $5.57 billion for the three months ended June 30, 2022 from $4.75 billion for the three months ended June 30, 2021 due mainly to strong loan production. The average balance of securities increased $132.5 million, or 16.3 percent, to $945.3 million for the three months ended June 30, 2022 from $812.8 million for the three months ended June 30, 2021. Interest-bearing deposits at other banks decreased $523.5 million to $136.5 million for the three months ended June 30, 2021, as excess funds were used to fund loan and securities growth.
The average yield on interest-earning assets, on a taxable equivalent basis, increased 29 basis points to 3.80 percent for the three months ended June 30, 2022 from 3.51 percent for the three months ended June 30, 2021, mainly due to higher average loan balances. The average yield on loans decreased to 4.31 percent for the three months ended June 30, 2022 from 4.45 percent for the three months ended June 30, 2021, driven mainly by lower yields on commercial real estate loans. The average yield on securities,
43
on a taxable equivalent basis, increased to 1.27 percent for the three months ended June 30, 2022 from 0.69 percent for the three months ended June 30, 2021 reflecting the rising market interest rate environment.
The average balance of interest-bearing liabilities decreased $124.6 million, or 3.5 percent, to $3.43 billion for the three months ended June 30, 2022 compared to $3.55 billion for the three months ended June 30, 2021. The average balance of time deposits decreased $242.6 million offset by increases in the average balances of $107.4 million in money market and savings accounts.
The average cost of interest-bearing liabilities was 0.49 percent and 0.57 percent for the three months ended June 30, 2022 and 2021. The average cost of subordinated debentures decreased 118 basis points to 4.14 percent for the three months ended June 30, 2022 compared to 5.32 percent for the three months ended June 30, 2021. The average cost of borrowings decreased 9 basis points to 1.10 percent for the three months ended June 30, 2022 compared to 1.19 percent for the three months ended June 30, 2021. The average cost of interest-bearing deposits decreased 6 basis points to 0.31 percent for the three months ended June 30, 2022 compared to 0.37 percent for the three months ended June 30, 2021.
The following table shows: the average balance of assets, liabilities and stockholders’ equity; the amount of interest income, on a tax-equivalent basis, and net 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.
5,403,029
4.25
4,798,311
103,399
4.35
937,939
793,521
0.64
6.03
5.52
314,690
528,498
0.10
6,672,043
3.63
6,136,715
106,663
65,427
59,127
(73,538
(88,860
242,593
227,436
6,906,525
6,334,418
123,826
107,642
0.07
2,122,840
2,758
1,999,737
2,776
0.28
915,577
1,677
1,187,427
4,148
0.70
3,162,243
3,294,806
6,961
0.43
135,427
1.08
150,046
923
1.24
170,868
4,928
5.77
119,105
5.38
3,468,538
3,563,957
11,088
0.63
2,675,574
2,107,828
96,269
74,391
666,144
588,242
Net interest income (taxable equivalent basis)
95,575
0.15
3.04
2.88
3.32
3.14
45
The following table shows changes in interest income (on a tax-equivalent basis), interest expense and the amounts attributable to variation 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 rate categories in proportion to the relationship of the absolute dollar amount attributable solely to the change in volume and rate.
12,803
(2,423
10,380
507
2,396
2,903
(142
278
136
13,168
293
13,461
(2
(193
(18
(808
(1,663
(2,471
(85
(112
(197
1,478
246
1,724
765
(1,729
(964
12,403
2,022
14,425
For the six months ended June 30, 2022 and 2021, net interest income was $110.0 million and $95.6 million, respectively. The net interest spread and net interest margin, on a taxable equivalent basis, for the six months ended June 30, 2022 were 3.04 percent and 3.32 percent, respectively, compared with 2.88 percent and 3.14 percent, respectively, for the same period in 2021. Interest and dividend income increased $13.5 million, or 12.6 percent, to $120.1 million for the six months ended June 30, 2022 from $106.7 million for the same period in 2021 due to higher average interest-earning asset balances and yields. Interest expense decreased $1.0 million, or 8.7 percent, to $10.1 million for the six months ended June 30, 2022 from $11.1 million for the same period in 2021 primarily due to a shift from time deposits into lower yielding deposit accounts and lower rates paid on interest-bearing deposits, offset by the increased interest expense associated with the issuance of the 2021 Notes and the $1.1 million charge for unamortized debt issuance costs related to the redemption of the 2017 Notes.
The average balance of interest earning assets increased $535.3 million, or 8.7 percent, to $6.67 billion for the six months ended June 30, 2022 from $6.14 billion for the six months ended June 30, 2021. The average balance of loans increased $604.7 million, or 12.6 percent, to $5.40 billion for the six months ended June 30, 2022 from $4.80 billion for the six months ended June 30, 2021 due mainly to strong loan production. The average balance of securities increased $144.4 million, or 18.2 percent, to $937.9 million for the six months ended June 30, 2022 from $793.5 million for the six months ended June 30, 2021. Interest-bearing deposits at other banks decreased $213.8 million to $314.7 million for the six months ended June 30, 2021, as excess liquidity was used to fund loan growth and additional securities purchases.
The average yield on interest-earning assets, on a taxable equivalent basis, increased 12 basis points to 3.63 percent for the six months ended June 30, 2022 from 3.51 percent for the six months ended June 30, 2021, mainly due to higher average loan balances. The average yield on loans decreased to 4.25 percent for the six months ended June 30, 2022 from 4.35 percent for the six months ended June 30, 2021, driven mainly by lower yields on commercial real estate loans. The average yield on securities, on a taxable equivalent basis, increased to 1.19 percent for the six months ended June 30, 2022 from 0.64 percent for the six months ended June 30, 2021 reflecting the rising market interest rate environment.
46
The average balance of interest-bearing liabilities decreased $95.4 million, or 2.7 percent, to $3.47 billion for the six months ended June 30, 2022 compared to $3.56 billion for the six months ended June 30, 2021. The average balance of time deposits decreased $271.9 million offset by increases in the average balances of $123.1 million in money market and savings accounts and $51.8 million in subordinated debentures due to the 2021 Notes issued in August 2021.
The average cost of interest-bearing liabilities was 0.59 percent and 0.63 percent for the six months ended June 30, 2022 and 2021. The average cost of subordinated debentures increased 39 basis points to 5.77 percent for the six months ended June 30, 2022 compared to 5.38 percent for the six months ended June 30, 2021 due to a pre-tax charge of $1.1 million for the remaining debt issuance costs related to the redemption of the 2017 Notes. The average cost of borrowings decreased 16 basis points to 1.08 percent for the six months ended June 30, 2022 compared to 1.24 percent for the six months ended June 30, 2021. The average cost of interest-bearing deposits decreased 14 basis points to 0.29 percent for the six months ended June 30, 2022 compared to 0.43 percent for the six months ended June 30, 2021.
Credit Loss Expense
For the second quarter of 2022, the Company recorded $1.6 million of credit loss expense, comprised of a $1.6 million provision for loan losses, and a $45,000 negative provision for off-balance sheet items. For the same period in 2021, the Company recorded a $3.3 million recovery of credit loss expense, comprised of a $4.1 million recovery for loan losses and a $0.5 million reduction in the allowance for accrued interest receivable for loans current or previously modified under the CARES Act, offset partially by a $1.3 million provision for off-balance sheet items. The credit loss expense for the three months ended June 30, 2022 as compared to the same period in 2021 resulted from strong loan growth, offset by a combination of overall improvements in asset quality and economic forecasts, as well as a net reduction in specific qualitative factors allocated to criticized hospitality loans impacted by the pandemic.
For the six months ended June 30, 2022, the Company recorded $0.2 million of credit loss expense, comprised of a $0.5 million provision for loan losses, and a $0.3 million negative provision for off-balance sheet items. For the same period in 2021, credit loss expense recovery was $1.2 million, comprised of a $3.1 million recovery for loan losses and a $1.0 million reduction in the allowance for accrued interest receivable for current or previously modified loans, offset partially by a $2.1 million provision for an SBA guarantee repair loss and a $0.9 million provision for off-balance sheet. The credit loss expense for the six months ended June 30, 2022 as compared to the same period in 2021 resulted from strong loan growth, offset by a combination of overall improvements in asset quality and economic forecasts, as well as a net reduction in specific qualitative factors allocated to criticized hospitality loans impacted by the pandemic.
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
531
22.65
157
12.47
Servicing income
663
540
22.78
Bank-owned life insurance income
252
(2.38
)%
All other operating income
1,336
908
428
47.14
Service charges, fees & other
6,536
5,303
1,233
23.25
Gain on sale of SBA loans
3,305
(531
(16.06
Gain on sale of PPP loans
203
(203
(100.00
Legal settlement
75
(75
424
4.77
For the three months ended June 30, 2022, noninterest income was $9.3 million, an increase of $0.4 million, or 4.8 percent, compared with $8.9 million for the same period in 2021. Service charges and fees increased by $1.2 million, which was driven by updates to the Company’s business deposit account fee schedules and enhanced operational practices that increased fee collections. This favorable variance was offset by a $0.2 million decrease in gains on the sale of PPP loans and a $0.5 million decrease in the gains of sale of SBA loans.
47
1,151
25.03
12.19
1,397
1,386
0.79
508
(3.54
2,339
1,862
477
25.62
12,534
10,635
1,899
17.86
319
6.42
2,657
(2,657
325
(863
(4.62
For the six months ended June 30, 2022, noninterest income was $17.8 million, a decrease of $0.9 million, or 4.6 percent, compared with $18.7 million for the same period in 2021. The decrease was mainly attributable to a $2.7 million decrease in gains on sale of PPP loans, partially offset by a $1.9 million increase in service charges and fees, which was driven by updates to the Company’s business deposit account fee schedules and enhanced operational practices that increased fee collections, and a $0.3 million increase in the gains of sale of SBA.
Noninterest Expense
The following table sets forth the components of noninterest expense for the periods indicated:
2.61
(0.11
199
6.83
(182
(12.88
(152
(20.74
286
76.47
All other operating expenses
2,463
2,607
(144
(5.52
Subtotal
31,425
30,946
479
1.55
Other real estate owned expense (income)
50
(47
97
(206.38
Repossessed personal property expense (income)
(116
116
692
2.25
48
For the three months ended June 30, 2022, noninterest expense was $31.5 million, an increase of $0.7 million, or 2.2 percent, compared with $30.8 million for the same period in 2021. Salaries and employee benefits increased $0.5 million primarily as a result of an increase in salary, bonus and incentive expenses. A $0.3 million increase in advertising and promotion expense was primarily related to branding and promotional campaigns. Data processing increased $0.2 million due to additional software licenses.
1,374
3.91
510
8.73
(199
(6.96
(244
(16.39
745
101.78
5,649
4,984
665
13.35
63,122
60,226
2,896
4.81
174
(64.37
(17
(84
2,851
4.73
For the six months ended June 30, 2022, noninterest expense was $63.2 million, an increase of $2.9 million, or 4.7 percent, compared with $60.3 million for the same period in 2021. Salaries and employee benefits increased $1.4 million primarily as a result of an increase in salary, bonus and incentive expenses. A $0.7 million increase in advertising and promotion expense was primarily related to branding and promotional campaigns. All other operating expenses increased $0.7 million mainly due to loan related expenses (appraisal fees and real estate taxes paid). Data processing increased $0.5 million due to additional software licenses and other vendor processing fees.
Income Tax Expense
Income tax expense was $10.2 million and $8.9 million representing an effective income tax rate of 29.0 percent and 28.6 percent for the three months ended June 30, 2022 and 2021, respectively. The increase in the effective tax rate for the three months ended June 30, 2022, compared to the same period in 2021 was principally due to an increase in incremental tax charges resulting from increases related to the Company’s share-based compensation.
Income tax expense was $18.7 million and $16.4 million representing an effective income tax rate of 29.0 percent and 29.7 percent for the six months ended June 30, 2022 and 2021, respectively. The decrease in the effective tax rate for the six months ended June 30, 2022, compared to the same period in 2021 was principally due to a decrease of incremental tax charges related to the Company’s share-based compensation recognized as income tax expense.
Financial Condition
As of June 30, 2022, our securities portfolio consisted of U.S. government agency and sponsored agency mortgage-backed securities, collateralized mortgage obligations and debt securities, tax-exempt municipal bonds and, to a lesser extent, U.S. Treasury securities. Most of these securities carry fixed interest rates. Other than holdings of U.S. government agency and sponsored agency obligations, there were no securities of any one issuer exceeding 10 percent of stockholders’ equity as of June 30, 2022 or December 31, 2021.
49
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 June 30, 2022:
After One
Year But
After Five
Years But
Within One
Year
Within Five
Years
Within Ten
After Ten
Yield
1,507
2.23
22,441
1.47
1.52
151
1.96
3,628
0.84
6,390
3.11
606,851
1.37
1.38
2.29
0.96
2.26
97,890
1.46
5,000
131,387
1.06
1.04
5,155
0.45
135,022
7,803
2.96
704,741
1.33
7,362
1.41
71,287
1.34
6,662
0.85
157,463
1.11
15,165
2.20
776,028
As of June 30, 2022 and December 31, 2021, loans receivable (excluding loans held for sale), net of deferred loan fees and costs, discounts and allowance for credit losses, were $5.58 billion and $5.08 billion, respectively. The increase primarily reflected $1.15 billion in new loan production, offset by $483.1 million in loan sales and payoffs and amortization and other reductions of $156.9 million. Loan production primarily consisted of commercial real estate of $504.3 million, commercial and industrial loans of $194.6 million and residential mortgages of $172.8 million. Loan growth resulted in further diversification of the portfolio by industry, geography and loan type.
The table below shows the maturity distribution of outstanding loans, before the allowance for credit losses as of June 30, 2022. In addition, the table shows the distribution of such loans between those with floating or variable interest rates and those with fixed or predetermined interest rates.
Year but
Years but
Within
Fifteen
After
106,199
600,411
364,769
174,568
360,100
116,918
230,315
1,151,784
499,616
130,012
511,082
2,112,295
981,303
48,794
46,088
5,830
5,286
510,398
565,706
2,158,445
986,589
640,410
400,881
292,911
73,102
18,789
469,199
49,370
985,376
2,920,555
1,109,061
Loans with predetermined interest rates
418,762
2,106,115
246,419
207,794
2,979,090
Loans with variable interest rates
566,614
814,440
862,642
432,616
2,676,312
The table below shows the maturity distribution of outstanding loans, before the allowance for credit losses, with fixed or predetermined interest rates due after one year, as of June 30, 2022.
Within Three
After Three
168,573
349,363
48,850
566,786
81,233
122,560
7,158
210,951
270,177
597,545
124,050
16,297
1,008,069
519,983
1,069,468
180,058
1,785,806
27,727
2,872
191,497
194,420
547,710
1,069,519
182,930
2,007,953
6,896
12,792
14,119
33,807
175,532
293,666
518,568
730,138
1,375,977
2,560,328
The table below shows the maturity distribution of outstanding loans, before the allowance for credit losses, with floating or variable interest rates (including hybrids) due after one year, as of June 30, 2022.
53,608
28,866
315,920
398,394
128,107
28,199
109,761
266,067
134,506
149,556
375,565
113,716
773,343
316,221
206,621
801,246
1,437,804
18,361
2,413
318,900
321,325
334,594
803,659
1,777,490
66,406
206,819
58,983
332,208
401,000
413,440
2,109,698
Industry
As of June 30, 2022, the loan portfolio included the following concentrations of loans to one type of industry that were greater than 10.0 percent of loans receivable outstanding:
Percentage of
Balance as of
Lessor of nonresidential buildings
1,823,550
32.2
691,374
12.2
Loans and equipment financing agreements 30 to 89 days past due and still accruing were 0.07 percent of loans and equipment financing agreements at June 30, 2022, compared with 0.11 percent at December 31, 2021.
At June 30, 2022 and December 31, 2021, there were no loans 90 days or more past due and still accruing.
Special mention loans were $80.5 million at June 30, 2022 compared with $95.3 million at December 31, 2021. The change reflects additions of $70.8 million and reductions (comprising upgrades, downgrades, payments and payoffs) of $85.6 million. Of note, one construction loan of $22.4 million was upgraded from special mention to pass-watch, one $31.3 million commercial and industrial relationship was downgraded to special mention from pass-watch and three separate hospitality relationships totaling $22.8 million were downgraded from pass-watch to special mention.
Classified loans were $53.0 million at June 30, 2022 compared with $60.6 million at December 31, 2021. The change reflects additions of $5.7 million and reductions (comprising upgrades, payments, payoffs, sales, and charge-offs) of $13.3 million.
Activity in criticized loans was as follows for the periods indicated:
Additions
70,769
5,663
Reductions
(85,610
(13,289
76,978
140,169
146,226
60,083
(127,910
(139,619
Nonperforming Assets
Nonperforming loans consist of loans receivable on nonaccrual status and loans 90 days or more past due and still accruing interest. Nonperforming assets consist of nonperforming loans and OREO. Loans are placed on nonaccrual status when, in the opinion of management, the full timely collection of principal or interest is in doubt. Generally, the accrual of interest is discontinued when principal or interest payments become more than 90 days past due, unless we believe the loan is adequately collateralized and in the process of collection. However, in certain instances, we may place a particular loan on nonaccrual status earlier, depending upon the individual circumstances surrounding the loan’s delinquency. When a loan is placed on nonaccrual status, previously accrued but unpaid interest is reversed against current income. Subsequent collections of cash are applied as principal reductions when received, except when the ultimate collectability of principal is probable, in which case interest payments are credited to income. Nonaccrual loans may be restored to accrual status when principal and interest become current and full repayment is expected. Interest income is recognized on the accrual basis for impaired loans not meeting the criteria for nonaccrual. OREO consists of properties acquired by foreclosure or similar means, or vacant bank properties for which their usage for operations has ceased and management intends to offer for sale.
Except for nonaccrual loans, management is not aware of any other loans as of June 30, 2022 for which known credit problems of the borrower would cause serious doubts as to the ability of such borrowers to comply with their present loan or equipment financing agreement repayment terms, or any known events that would result in a loan or equipment financing agreement being designated as nonperforming at some future date. Management cannot, however, predict the extent to which a deterioration in general economic conditions, real estate values, increases in general rates of interest, inflation or changes in the financial condition or business of borrowers may adversely affect a borrower’s ability to pay.
Nonperforming loans were $11.0 million at June 30, 2022, or 0.20 percent of loans, compared with $13.4 million at December 31, 2021, or 0.26 percent of the portfolio. The change reflects reductions (comprising upgrades, payments, payoffs, sales, and charge-offs) of $6.5 million and additions of $4.1 million.
Nonperforming assets were $11.7 million at June 30, 2022, or 0.17 percent of total assets, compared with $14.0 million, or 0.20 percent, at December 31, 2021.
The Company reviews loans on an individual basis when the loan does not share similar risk characteristics with loan pools.
52
Individually evaluated loans were $11.0 million and $13.4 million as of June 30, 2022 and December 31, 2021, respectively, representing a decrease of $2.4 million, or 17.6 percent. Specific allowances associated with individually evaluated loans decreased $0.8 million to $2.0 million as of June 30, 2022 compared with $2.8 million as of December 31, 2021.
For the three months ended June 30, 2022, no loans were restructured and subsequently classified as TDRs. For the six months ended June 30, 2022, we restructured monthly payments for one loan, with a net carrying value of $92,000 at the time of modification, which was subsequently classified as a TDR. For the year ended December 31, 2021, no loans were restructured and subsequently classified as TDRs. Temporary payment structure modifications can include extending the maturity date, reducing the amount of principal and/or interest due monthly, and/or allowing for interest only monthly payments for six months or less.
As of June 30, 2022 and December 31, 2021, there were no TDRs on accrual status. As of June 30, 2022 and December 31, 2021, restructured loans on nonaccrual status were $2.3 million and $2.9 million, respectively, and the allowance for credit losses relating to these loans, respectively, was immaterial.
Allowance for Credit Losses and Allowance for Credit Losses Related to Off-Balance Sheet Items
The Company’s estimate of the allowance for credit losses at June 30, 2022 and December 31, 2021 reflected losses expected over the remaining contractual life of the assets based on historical, current, and forward-looking information. The contractual term does not consider extensions, renewals or modifications unless the Company has identified an expected troubled debt restructuring.
Management selected three loss methodologies for the collective allowance estimation. At June 30, 2022, the Company used the discounted cash flow (“DCF”) method to estimate allowances for credit losses for the commercial and industrial loan portfolio, the Probability of Default/Loss Given Default (“PD/LGD”) method for the commercial real estate, construction, SBA and residential real estate portfolios, and the Weighted Average Remaining Maturity (“WARM”) method to estimate expected credit losses for the equipment financing agreements portfolio. Loans that do not share similar risk characteristics are individually evaluated for allowances.
For the loans utilizing the DCF method, the Company determined that four quarters represented a reasonable and supportable forecast period and reverted to a historical loss rate over twelve quarters on a straight-line basis. Since reasonable and supportable forecasts of economic conditions are imbedded directly into the DCF model, qualitative adjustments are reduced but considered.
For each of 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 into loss estimates using a qualitative adjustment.
The Company applied an expected loss ratio based on internal historical losses adjusted as appropriate for qualitative factors when applying the WARM method.
As of June 30, 2022 and December 31, 2021, the Company relied on the economic projections from Moody’s Analytics Economic Scenarios and Forecasts and the Federal Open Market Committee to inform its loss driver forecasts over the four-quarter forecast period. For all loan pools, the Company utilizes and forecasts the national unemployment rate as the primary loss driver.
To adjust the historical and forecast periods to current conditions, the Company applies various qualitative factors derived from market, industry or business specific data, changes in the underlying portfolio composition, trends relating to credit quality, delinquency, nonperforming and adversely rated equipment financing agreements, and reasonable and supportable forecasts of economic conditions.
The allowance for credit losses was $73.1 million at June 30, 2022 compared with $72.6 million at December 31, 2021. The allowance attributed to individually evaluated loans was $2.0 million at June 30, 2022 compared with $2.8 million at December 31, 2021. The allowance attributed to collectively evaluated loans was $71.1 million at June 30, 2022 compared with $69.8 million at December 31, 2021, and considered the impact of changes in macroeconomic assumptions, including an improving unemployment rate and rising interest rates for the subsequent four quarters.
53
The following table reflects our allocation of the allowance for credit losses by loan category as well as the loans receivable for each loan category to total loans, including related percentages:
Percentage of Total Allowance
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
1.29
Nonaccrual loans to loans
0.20
Allowance for credit losses to nonaccrual loans
661.54
543.09
Balance:
Nonaccrual loans at end of period
Nonperforming loans at end of period
As of June 30, 2022 and December 31, 2021, the allowance for credit losses related to off-balance sheet items, primarily unfunded loan commitments, was $2.3 million and $2.6 million, respectively. The Bank closely monitors the borrower’s repayment capabilities, while funding existing commitments to ensure losses are minimized. Based on management’s evaluation and analysis of portfolio credit quality and prevailing economic conditions, we believe these allowances were adequate for current expected lifetime losses in the loan portfolio and off-balance sheet exposure as of June 30, 2022.
The following table presents a summary of net charge-offs (recoveries) for the loan portfolio:
Average Loans
Net Charge-Offs (Recoveries)
Net Charge-Offs (Recoveries) to Average Loans (1)
Commercial real estate loans
3,877,458
(62
(0.01
3,815,403
0.03
Residential loans
472,178
(0.00
440,249
706,918
(0.06
643,105
(372
(0.23
515,950
260
504,272
84
0.01
(16
3,402,300
98
3,386,150
322,817
(278
(0.34
328,812
964
613,548
668,142
414,632
991
415,207
2.66
3,906
0.33
Annualized
54
For the three months ended June 30, 2022, gross charge-offs were $0.6 million, a decrease of $0.9 million, from $1.5 million for the same period in 2021 and gross recoveries were $0.5 million, a decrease of $0.1 million, from $0.6 million for the three months ended June 30, 2021. Net loan charge-offs were $0.1 million, or 0.01 percent of average loans, compared with net loan charge-offs of $0.9 million, or 0.08 percent of average loans, for the three months ended June 30, 2022 and 2021, respectively.
For the six months ended June 30, 2022, gross charge-offs were $1.4 million, a decrease of $3.5 million, from $5.0 million for the same period in 2021 and gross recoveries were $1.5 million, an increase of $0.4 million, from $1.1 million for the six months ended June 30, 2021. Net loan charge-offs were $16,000, or 0.00 percent of average loans, compared with net loan charge-offs of $3.9 million, or 0.33 percent of average loans, for the six months ended June 30, 2022 and 2021, respectively.
The following table shows the composition of deposits by type as of the dates indicated:
Demand – noninterest-bearing
46.5
44.5
Interest-bearing:
Demand
123,614
2.1
125,183
2.2
2,102,161
35.2
2,099,381
36.3
Uninsured time deposits of more than $250,000:
Three months or less
45,109
0.8
69,464
1.2
Over three months through six months
44,951
1.3
Over six months through twelve months
81,569
1.4
29,706
0.5
Over twelve months
8,822
0.2
549
0.0
Other time deposits
790,427
13.2
813,661
14.1
Total deposits were $5.98 billion and $5.79 billion as of June 30, 2022 and December 31, 2021, respectively, representing an increase of $193.1 million, or 3.3 percent.
The increase in deposits was primarily driven by an increase in noninterest-bearing demand deposits, offset by a reduction in time deposits. At June 30, 2022, the loan-to-deposit ratio was 94.6 percent compared with 89.0 percent at December 31, 2021. The increase in noninterest-bearing deposits reflects growth from new and existing customer relationships.
As of June 30, 2022, the aggregate amount of uninsured deposits (deposits in amounts greater than $250,000, which is the maximum amount for federal deposit insurance) was $2.75 billion, of which $2.57 billion were demand deposits and money market and savings deposits and $180.5 million were time deposits. As of December 31, 2021, the aggregate amount of uninsured deposits was $2.63 billion, consisting of $2.46 billion in demand deposits and money market and savings deposits and $173.5 million in time deposits.
Borrowings and Subordinated Debentures
Borrowings mostly take the form of advances from the FHLB. At June 30, 2022 and December 31, 2021, total advances from the FHLB were $145.0 million and $137.5 million, respectively. The Bank had $20.0 million in overnight advances from the FHLB at June 30, 2022. There were no overnight advances from the FHLB at December 31, 2021.
The weighted-average interest rate of all FHLB advances at June 30, 2022 and December 31, 2021 were 1.13 percent and 1.05 percent, respectively, and weighted-average interest rate of FHLB advances for the six months ended June 30, 2022 and December 31, 2021 were 1.05 percent and 1.17 percent, respectively.
Average balances of FHLB advances for the three months ended June 30, 2022 and December 31, 2021 were $135.4 million and $145.3 million, respectively, with maximum amount outstanding at any month end during the year to date periods ended June 30, 2022 and December 31, 2021 of $215.0 million and $162.5 million, respectively.
Interest expense on borrowings for the three months ended June 30, 2022 and 2021 was $370,000 and $447,000, respectively. Interest expense on borrowings for the six months ended June 30, 2022 and 2021 was $0.7 million and $0.9 million, respectively.
55
The following is a summary of contractual maturities greater than twelve months of FHLB advances:
FHLB of San Francisco
Outstanding advances over 12 months
75,000
0.65
87,500
0.73
Subordinated debentures were $129.1 million as of June 30, 2022 and $215.0 million as of December 31, 2021. The $86.0 million decrease in subordinated debentures was primarily due to the redemption of the 2017 Notes on March 30, 2022. Subordinated debentures are comprised of fixed-to-floating subordinated notes of $108.1 million and $194.2 million as of June 30, 2022 and December 31, 2021, respectively, and junior subordinated deferrable interest debentures of $21.0 million and $20.8 million as of June 30, 2022 and December 31, 2021, respectively. See “Note 8 – Borrowings and Subordinated Debentures” to the consolidated financial statements for more details.
Interest Rate Risk Management
The spread between interest income on interest-earning assets and interest expense on interest-bearing liabilities is the principal component of net interest income, and interest rate changes substantially affect our financial performance. We emphasize capital protection through stable earnings. In order to achieve stable earnings, we prudently manage our assets and liabilities and closely monitor the percentage changes in net interest income and equity value in relation to limits established within our guidelines.
The Company performs simulation modeling to estimate the potential effects of interest rate changes. The following table summarizes one of the stress simulations performed to forecast the impact of changing interest rates on net interest income and the value of interest-earning assets and interest-bearing liabilities reflected on our balance sheet (i.e., an instantaneous parallel shift in the yield curve of the magnitude indicated below) as of June 30, 2022. The Company compares this stress simulation to policy limits, which specify the maximum tolerance level for net interest income exposure over a 1- to 12-month and a 13- to 24- month horizon, given the basis point adjustment in interest rates reflected below.
Net Interest Income Simulation
Change in
1- to 12-Month Horizon
13- to 24-Month Horizon
Dollar
Change
300%
22,889
9.19
40,479
16.33
200%
15,321
6.15
27,036
10.91
100%
8,344
3.35
15,160
6.12
(100%)
(12,720
(5.10
%)
(23,520
(9.49
Economic Value of Equity (EVE)
86,322
9.16
67,814
7.19
45,818
4.86
(77,001
(8.17
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.
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.
In response to the uncertainty surrounding the COVID-19 pandemic, the Board reduced the quarterly cash dividends paid on common stock beginning in the second quarter of 2020. Due to the continued stabilization of Company results and financial condition, the Board authorized an increase in the quarterly cash dividend to $0.12 per share for the second quarter of 2021 from $0.10 per share for the first quarter of 2021. As the effects of the pandemic continued to subside and the Company’s results and financial condition improved, the Board again increased the dividend to $0.20 per share for the fourth quarter of 2021, and to $0.22 per share for the first and second quarters of 2022. The Board expects to continue to re-evaluate the level of quarterly dividends in subsequent quarters.
The Company’s ability to pay dividends to shareholders depends in part upon dividends it receives from the Bank. California law restricts the amount available for cash dividends to the lesser of a bank’s retained earnings or net income for its last three fiscal years (less any distributions to shareholders made during such period). Where the above test is not met, cash dividends may still be paid, with the prior approval of the Department of Financial Protection and Innovation (“DFPI”), in an amount not exceeding the greatest of: (1) retained earnings of the bank; (2) net income of the bank for its last fiscal year; or (3) the net income of the bank for its current fiscal year. As of July 1, 2022, after giving effect to the $0.25 per share 2022 third quarter dividend declared by the Company, the Bank has the ability to pay dividends of approximately $73.5 million without the prior approval of the Commissioner of the DFPI.
At June 30, 2022, the Bank’s total risk-based capital ratio of 13.70 percent, Tier 1 risk-based capital ratio of 12.64 percent, common equity Tier 1 capital ratio of 12.64 percent and Tier 1 leverage capital ratio of 11.00 percent, placed the Bank in the “well capitalized” category pursuant to capital rules, which is defined as institutions with total risk-based capital ratio equal to or greater than 10.00 percent, Tier 1 risk-based capital ratio equal to or greater than 8.00 percent, common equity Tier 1 capital ratios equal to or greater than 6.50 percent, and Tier 1 leverage capital ratio equal to or greater than 5.00 percent.
At June 30, 2022, the Company's total risk-based capital ratio was 14.31 percent, Tier 1 risk-based capital ratio was 11.42 percent, common equity Tier 1 capital ratio was 11.07 percent and Tier 1 leverage capital ratio was 9.94 percent.
For a discussion of implemented changes to the capital adequacy framework prompted by Basel III and the Dodd- Frank Wall Street Reform and Consumer Protection Act, see our 2021 Annual Report on Form 10-K.
57
Liquidity
For a discussion of liquidity for the Company, see Note 14 - Liquidity included in the notes to unaudited consolidated financial statements in this Report and Note 22 – Liquidity in our 2021 Annual Report on Form 10-K.
Off-Balance Sheet Arrangements
For a discussion of off-balance sheet arrangements, see Note 12 - Off-Balance Sheet Commitments included in the notes to unaudited consolidated financial statements in this Report and “Item 1. Business - Off-Balance Sheet Commitments” in our 2021 Annual Report on Form 10-K.
Contractual Obligations
There have been no material changes to the contractual obligations described in our 2021 Annual Report on Form 10-K.
Recently Issued Accounting Standards
FASB ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, On March 12, 2020, the FASB issued ASU 2020-04 to ease the potential burden in accounting for reference rate reform. The amendments in ASU 2020-04 are elective and apply to all entities that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform.
The new guidance provided several optional expedients that reduce costs and complexity of accounting for reference rate reform, including measures to simplify or modify accounting issues resulting from reference rate reform for contract modifications, hedges, and debt securities.
The amendments are effective for all entities from the beginning of an interim period that includes the issuance date of ASU 2020-04. An entity may elect to apply the amendments prospectively through December 31, 2022.
The adoption of this standard is not expected to have a material effect on the Company’s operating results or financial condition.
FASB ASU 2022-02, Troubled Debt Restructurings and Vintage Disclosures (Topic 326): The FASB amended the accounting and disclosure requirements for expected credit losses by removing the recognition and measurement guidance on TDRs and enhancing disclosures pertaining to certain loan refinancings and restructurings by creditors made to borrowers experiencing financial difficulty. Additionally, this standard requires disclosure of current-period gross write-offs by year of origination for financing receivables.
The standard becomes effective for the Company for the interim and annual periods beginning on January 1, 2023. Early adoption is permitted.
The Company is in the process of evaluating the standard and its effect on the Company’s financial condition, results of operations, cash flows, and financial statement disclosures.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
For quantitative and qualitative disclosures regarding market risks in Hanmi Bank’s portfolio, see “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Interest Rate Risk Management” and “- Capital Resources” in this Report.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Management is responsible for the disclosure controls and procedures of the Corporation. Disclosure controls and procedures are controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods required by the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of the Corporation’s management, including the Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures. Based on that evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of June 30, 2022.
Changes in Internal Control over Financial Reporting
There were no changes in the Corporation's internal control over financial reporting (as defined in Rule 13a-15(f)) during the quarter ended June 30, 2022 that materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
Part II — Other Information
Item 1. Legal Proceedings
From time to time, Hanmi Financial and its subsidiaries are parties to litigation that arises in the ordinary course of business, such as claims to enforce liens, claims involving the origination and servicing of loans, and other issues related to the business of Hanmi Financial and its subsidiaries. In the opinion of management, the resolution of any such issues would not have a material adverse impact on the financial condition, results of operations, or liquidity of Hanmi Financial or its subsidiaries.
Item 1A. Risk Factors
There have been no material changes in risk factors applicable to the Corporation from those described in “Risk Factors” in Part I, Item 1A of the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On January 24, 2019, the Company announced a stock repurchase program that authorized the repurchase of up to 5 percent of its outstanding shares or approximately 1.5 million shares of common stock. As of June 30, 2022, 659,972 shares remained available for future purchases under that stock repurchase program. The Company acquired 22,216 shares from employees in connection with the satisfaction of employee tax withholding obligations incurred through vesting of Company stock awards for the six months ended June 30, 2022.
The following table represents information with respect to repurchases of common stock made by the Company during the three months ended June 30, 2022:
Purchase Date:
Average Price Paid Per Share
Total Number of Shares Purchased as Part of Publicly Announced Program
Maximum Shares That May Yet Be Purchased Under the Program
April 1, 2022 - April 30, 2022
659,972
May 1, 2022 - May 31, 2022
June 1, 2022 - June 30, 2022
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Item 6. Exhibits
Exhibit
Document
10.1
†First Amendment to the Amended and Restated Employment agreement by and among Hanmi Financial Corporation and Romolo C. Santarosa dated February 26, 2020.
31.1
Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
Inline XBRL Instance Document *
101.SCH
Inline XBRL Taxonomy Extension Schema Document *
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document *
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document *
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document *
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document *
104
The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2022, formatted in Inline XBRL
*
Attached as Exhibit 101 to this report are documents formatted in Inline XBRL (Extensible Business Reporting Language).
†
Constitutes a management contract or compensatory plan or arrangement.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
Hanmi Financial Corporation
Date:
August 9, 2022
By:
/s/ Bonita I. Lee
Bonita I. Lee
President and Chief Executive Officer (Principal Executive Officer)
/s/ Romolo C. Santarosa
Romolo C. Santarosa
Senior Executive Vice President and Chief Financial Officer (Principal Financial Officer)