UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2023
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From To
Commission File Number: 000-30421
HANMI FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware
95-4788120
(State or Other Jurisdiction of
(I.R.S. Employer
Incorporation or Organization)
Identification No.)
900 Wilshire Boulevard, Suite 1250
Los Angeles, California
90017
(Address of Principal Executive Offices)
(Zip Code)
(213) 382-2200
(Registrant’s Telephone Number, Including Area Code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class
Trading
Symbol(s)
Name of each exchange on which registered
Common Stock, $0.001 par value
HAFC
Nasdaq Global Select Market
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of May 3, 2023, there were 30,546,198 outstanding shares of the Registrant’s Common Stock.
Hanmi Financial Corporation and Subsidiaries Quarterly Report on Form 10-Q
Three Months Ended March 31, 2023
Table of Contents
Part I – Financial Information
Item 1.
Financial Statements
3
Consolidated Balance Sheets at March 31, 2023 (unaudited) and December 31, 2022
Consolidated Statements of Income for the three months ended March 31, 2023 and 2022 (unaudited)
4
Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2023 and 2022 (unaudited)
5
Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2023 and 2022 (unaudited)
6
Consolidated Statements of Cash Flows for the three months ended March 31, 2023 and 2022 (unaudited)
7
Notes to Consolidated Financial Statements (unaudited)
8
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
37
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
52
Item 4.
Controls and Procedures
Part II – Other Information
Legal Proceedings
53
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
54
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
55
Signatures
56
2
Part I — Financial Information
Item 1. Financial Statements
Hanmi Financial Corporation and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share data)
March 31,
December 31,
2023
2022
(Unaudited)
Assets
Cash and due from banks
$
386,201
352,421
Securities available for sale, at fair value (amortized cost of $990,052 and $978,796 as of March 31, 2023 and December 31, 2022, respectively)
878,701
853,838
Loans held for sale, at the lower of cost or fair value
3,652
8,043
Loans receivable, net of allowance for credit losses of $72,249 and $71,523 as of March 31, 2023 and December 31, 2022, respectively
5,908,209
5,895,610
Accrued interest receivable
19,004
18,537
Premises and equipment, net
22,625
22,850
Customers' liability on acceptances
41
328
Servicing assets
7,541
7,176
Goodwill and other intangible assets, net
11,193
11,225
Federal Home Loan Bank ("FHLB") stock, at cost
16,385
Income tax assets
39,658
51,924
Bank-owned life insurance
55,814
55,544
Prepaid expenses and other assets
85,106
84,381
Total assets
7,434,130
7,378,262
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Noninterest-bearing
2,334,083
2,539,602
Interest-bearing
3,866,955
3,628,470
Total deposits
6,201,038
6,168,072
Accrued interest payable
20,512
7,792
Bank's liability on acceptances
Borrowings
350,000
Subordinated debentures ($136,800 and $136,800 face amount less unamortized discount and debt issuance costs of $7,242 and $7,391 as of March 31, 2023 and December 31, 2022, respectively)
129,558
129,409
Accrued expenses and other liabilities
70,816
85,146
Total liabilities
6,771,965
6,740,747
Stockholders’ equity:
Preferred stock, $0.001 par value; authorized 10,000,000 shares; no shares issued as of March 31, 2023 and December 31, 2022
—
Common stock, $0.001 par value; authorized 62,500,000 shares; issued 33,827,801 shares (30,555,287 shares outstanding) and 33,708,234 shares (30,485,621 shares outstanding) as of March 31, 2023 and December 31, 2022, respectively
33
Additional paid-in capital
584,884
583,410
Accumulated other comprehensive loss, net of tax benefit of $32,292 and $35,973 as of March 31, 2023 and December 31, 2022, respectively
(79,059
)
(88,985
Retained earnings
283,910
269,542
Less treasury stock; 3,272,514 shares and 3,222,613 shares as of March 31, 2023 and December 31, 2022, respectively
(127,603
(126,485
Total stockholders’ equity
662,165
637,515
Total liabilities and stockholders’ equity
See Accompanying Notes to Consolidated Financial Statements (Unaudited)
Consolidated Statements of Income (Unaudited)
(in thousands, except share and per share data)
Three Months Ended
Interest and dividend income:
Interest and fees on loans receivable
80,923
53,924
Interest on securities
4,025
2,516
Dividends on FHLB stock
289
248
Interest on deposits in other banks
2,066
216
Total interest and dividend income
87,303
56,904
Interest expense:
Interest on deposits
25,498
2,013
Interest on borrowings
2,369
337
Interest on subordinated debentures
1,583
3,598
Total interest expense
29,450
5,948
Net interest income before credit loss expense
57,853
50,956
Credit loss expense (recovery)
2,133
(1,375
Net interest income after credit loss expense (recovery)
55,720
52,331
Noninterest income:
Service charges on deposit accounts
2,579
2,875
Trade finance and other service charges and fees
1,258
1,142
Gain on sale of Small Business Administration ("SBA") loans
1,869
2,521
Other operating income
2,630
1,982
Total noninterest income
8,336
8,520
Noninterest expense:
Salaries and employee benefits
20,610
17,717
Occupancy and equipment
4,412
4,646
Data processing
3,253
3,236
Professional fees
1,335
1,430
Supplies and communications
676
665
Advertising and promotion
833
817
Other operating expenses
1,672
3,181
Total noninterest expense
32,791
31,692
Income before tax
31,265
29,159
Income tax expense
9,274
8,464
Net income
21,991
20,695
Basic earnings per share
0.72
0.68
Diluted earnings per share
Weighted-average shares outstanding:
Basic
30,347,325
30,254,212
Diluted
30,430,745
30,377,580
Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(in thousands)
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on securities:
Unrealized holding gain (loss) arising during period
13,607
(52,163
Income tax benefit (expense) related to items of other comprehensive income
(3,681
15,787
Other comprehensive income (loss), net of tax
9,926
(36,376
Comprehensive income (loss)
31,917
(15,681
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
For the Three Months Ended March 31, 2023 and 2022
Common Stock - Number of Shares
Stockholders' Equity
Accumulated
Additional
Other
Treasury
Total
Shares
Common
Paid-in
Comprehensive
Retained
Stock,
Stockholders'
Issued
Outstanding
Stock
Capital
Income (Loss)
Earnings
at Cost
Equity
Balance at January 1, 2022
33,603,839
(3,196,578
30,407,261
580,796
(8,443
196,784
(125,753
643,417
Restricted stock awards, net of forfeitures
66,358
Share-based compensation expense
541
Restricted stock surrendered due to employee tax liability
(5,161
(134
Cash dividends paid (common stock, $0.22/share)
(6,691
Change in unrealized gain (loss) on securities available for sale, net of income taxes
Balance at March 31, 2022
33,670,197
(3,201,739
30,468,458
581,337
(44,819
210,788
(125,887
621,452
Balance at January 1, 2023
33,708,234
(3,222,613
30,485,621
Stock options exercised
50,000
(35,273
14,727
822
(1,003
(181
69,567
652
(11,392
(40
Options surrendered due to employee tax liability
(3,236
(75
Cash dividends paid (common stock, $0.25/share)
(7,623
Balance at March 31, 2023
33,827,801
(3,272,514
30,555,287
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31,
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
1,742
6,024
Amortization of servicing assets - net
634
544
Gain on sales of SBA loans
(1,869
(2,521
Origination of SBA loans held for sale
(25,316
(31,853
Proceeds from sales of SBA loans
30,954
32,098
Change in bank-owned life insurance
(270
(244
Change in prepaid expenses and other assets
(3,000
(13,745
Change in income tax assets
8,585
7,908
Valuation adjustment on servicing assets
(384
Change in accrued interest payable and other liabilities
276
2,062
Net cash provided by (used in) operating activities
36,128
20,134
Cash flows from investing activities:
Purchases of securities available for sale
(29,504
(52,475
Proceeds from matured, called and repayment of securities
17,499
32,730
Purchases of loans receivable
(11,000
Purchases of premises and equipment
(617
Change in loans receivable, excluding purchases
(14,773
(175,522
Net cash provided by (used in) investing activities
(27,395
(206,884
Cash flows from financing activities:
Change in deposits
32,966
(3,099
Change in borrowings
(12,500
Redemption of subordinated debentures, net of treasury debentures
(87,300
Proceeds from exercise of stock options
Cash paid for surrender of vested shares due to employee tax liability
(1,118
Cash dividends paid
Net cash provided by (used in) financing activities
25,047
(109,724
Net increase (decrease) in cash and due from banks
33,780
(296,474
Cash and due from banks at beginning of year
608,965
Cash and due from banks at end of period
312,491
Supplemental disclosures of cash flow information:
Interest paid
16,730
6,143
Income taxes paid
334
129
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
(145
Notes to Consolidated Financial Statements (Unaudited)
Note 1 — Organization and Basis of Presentation
Hanmi Financial Corporation (“Hanmi Financial,” the “Company,” “we,” “us” or “our”) is a bank holding company whose primary subsidiary is Hanmi Bank (the “Bank”). Our primary operations are related to traditional banking activities, including the acceptance of deposits and the lending and investing of money by the Bank.
In management’s opinion, the accompanying unaudited consolidated financial statements of Hanmi Financial and its subsidiaries reflect all adjustments of a normal and recurring nature that are necessary for a fair presentation of the results for the interim periods ended March 31, 2023, 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, 2022 (the “2022 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 variants that may emerge 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.
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.
FASB ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848: In March 2021, it was announced LIBOR would cease on June 30, 2023. Because the current relief in Topic 848 may not cover a period of time during which a significant number of modifications may take place, the amendments in this ASU will be deferred to December 31, 2024.
The adoption of this standard is not expected to have a material effect on the Company’s operating results or financial condition.
Accounting Standards Adopted in 2023
FASB ASU 2022-02, Troubled Debt Restructurings ("TDRs") 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 adoption of this standard did not have a material effect on the Company’s operating results or financial condition.
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 2022 Annual Report on Form 10-K.
Note 2 — Securities
The following is a summary of securities available for sale as of the dates indicated:
Gross
Estimated
Amortized
Unrealized
Fair
Cost
Gain
Loss
Value
March 31, 2023
U.S. Treasury securities
56,174
79
(1,327
54,926
U.S. government agency and sponsored agency obligations:
Mortgage-backed securities - residential
532,117
152
(68,164
464,105
Mortgage-backed securities - commercial
61,489
(10,623
50,866
Collateralized mortgage obligations
112,021
69
(11,544
100,546
Debt securities
150,362
(9,994
140,368
Total U.S. government agency and sponsored agency obligations
855,989
221
(100,325
755,885
Municipal bonds-tax exempt
77,889
(9,999
67,890
Total securities available for sale
990,052
300
(111,651
December 31, 2022
49,690
(1,664
48,026
540,590
63
(75,501
465,152
61,799
(10,507
51,292
98,236
(12,751
85,485
150,338
(11,839
138,499
850,963
(110,598
740,428
78,143
(12,759
65,384
978,796
(125,021
The amortized cost and estimated fair value of securities as of March 31, 2023 and December 31, 2022, 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
35,558
35,134
28,665
28,043
Over one year through five years
187,050
175,950
180,322
167,000
Over five years through ten years
61,568
56,330
39,213
35,318
Over ten years
705,876
611,287
730,596
623,477
9
The following table summarizes debt securities available-for-sale in an unrealized loss position for which an allowance for credit losses has not been recorded at March 31, 2023 and December 31, 2022, 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)
(186
24,606
11
(1,141
17,823
42,429
16
(989
30,094
(67,175
422,817
107
452,911
123
(65
4,094
1
(10,558
46,772
14
15
(426
18,991
(11,118
66,075
23
85,066
28
(92
13,834
(9,902
126,534
26
30
(1,572
67,013
(98,753
662,198
170
729,211
196
19
(1,758
91,619
(109,893
747,911
194
839,530
231
(414
33,812
(1,250
14,215
48,027
18
(1,712
36,009
(73,789
424,302
105
460,311
(84
4,069
(10,423
47,221
51,290
(1,011
23,606
(11,740
61,879
20
(1,103
31,714
(10,736
106,785
22
(3,910
95,398
35
(106,688
640,187
161
735,585
65,385
(4,324
129,210
49
(120,697
719,787
184
848,997
233
The Company evaluates its available-for-sale securities portfolio for impairment on a quarterly basis. The Company did not recognize unrealized losses in income because we have the ability and the intent to hold and we do not expect to be required to sell these securities until the recovery of their cost basis. The quarterly impairment assessment takes into account the changes in the credit quality of these debt securities since acquisition and the likelihood of a credit loss occurring over the life of the securities. In the event that a credit loss is expected to occur in the future, an allowance is established and a corresponding credit loss is recognized. Based on this analysis, as of March 31, 2023, 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.
Securities available for sale with market values of $22.9 million and $23.4 million as of March 31, 2023 and December 31, 2022, respectively, were pledged to secure borrowings from the Federal Reserve Bank (“FRB”) Discount Window and the new Bank Term Funding Program (“BTFP”).
At March 31, 2023, there were no holdings of securities of any one issuer, other than the U.S. government and its agencies in an amount greater than 10% of shareholders’ equity.
10
Note 3 — Loans
Loans Receivable
Loans consisted of the following as of the dates indicated:
Real estate loans:
Commercial property
Retail
1,052,353
1,023,608
Hospitality
669,012
646,893
Office
533,703
499,946
Other (1)
1,415,748
1,553,729
Total commercial property loans
3,670,816
3,724,176
Construction
113,360
109,205
Residential (2)
817,917
734,472
Total real estate loans
4,602,093
4,567,853
Commercial and industrial loans (3)
778,149
804,492
Equipment financing agreements
600,216
594,788
Loans receivable
5,980,458
5,967,133
Allowance for credit losses
(72,249
(71,523
Loans receivable, net
Accrued interest on loans was $16.4 million and $16.0 million at March 31, 2023 and December 31, 2022, respectively.
At March 31, 2023 and December 31, 2022, loans of $2.43 billion and $1.99 billion, respectively, were pledged to secure advances from the FHLB.
Loans Held for Sale
The following is the activity for loans held for sale for the three months ended March 31, 2023 and 2022:
Real Estate
Commercial and Industrial
Balance at beginning of period
3,775
4,268
Originations and transfers
16,387
8,929
25,316
Sales
(19,781
(9,918
(29,699
Principal paydowns and amortization
(2
(6
(8
Balance at end of period
379
3,273
March 31, 2022
6,954
6,388
13,342
20,164
11,689
31,853
(15,293
(14,284
(29,577
(1
11,825
3,792
15,617
Loans held for sale was comprised of $3.7 million and $8.0 million of the guaranteed portion of SBA 7(a) loans at March 31, 2023 and December 31, 2022, respectively.
Allowance for Credit Losses
The following table details the information on the allowance for credit losses by portfolio segment as of and for the three months ended March 31, 2023 and 2022:
Equipment Financing Agreements
44,026
15,267
12,230
71,523
Charge-offs
(412
(210
(1,616
(2,238
Recoveries
68
235
480
783
Provision (recovery) for credit losses
(151
2,291
2,181
Ending balance
43,531
15,333
13,385
72,249
48,890
12,418
11,249
72,557
(530
(58
(247
(835
197
317
423
937
(2,202
267
788
(1,147
46,355
12,944
12,213
71,512
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
Percentageof TotalAllowance
Total Loans
Percentage of Total Loans
(dollars in thousands)
9,405
13.0
%
17.6
7,872
11.0
17.2
14,138
19.6
11.2
13,407
18.7
10.8
2,509
3.5
8.9
2,293
3.2
8.4
9,186
12.7
23.7
13,056
18.3
26.0
35,238
48.8
61.4
36,628
51.2
62.4
4,003
5.5
1.9
4,022
5.7
1.8
Residential
4,290
6.0
13.7
3,376
4.7
12.4
60.3
77.0
61.6
76.6
Commercial and industrial loans
21.2
21.3
13.4
18.5
10.0
17.1
100.0
The following table represents the amortized cost basis of collateral-dependent loans by class of loans as of March 31, 2023 and December 31, 2022, for which repayment is expected to be obtained through the sale of the underlying collateral.
Amortized Cost
1,883
1,930
259
256
2,142
2,186
487
508
2,629
2,694
10,002
12,631
12
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.
13
Loans by Vintage Year and Risk Rating
Term Loans
Amortized Cost Basis by Origination Year (1)
2021
2020
2019
Prior
RevolvingLoansAmortizedCost Basis
Risk Rating
`
Pass / Pass-Watch
194,981
1,064,796
882,494
587,432
393,738
443,388
40,472
3,607,301
Special Mention
1,579
20,228
5,820
1,596
3,793
1,700
34,716
Classified
1,272
9,401
4,846
261
4,289
8,730
28,799
Total commercial property
196,253
1,075,776
907,568
593,513
399,623
455,911
42,172
YTD gross charge-offs
412
YTD net charge-offs
(67
345
61,150
5,549
46,661
Total construction
94,413
400,059
169,111
13,007
228
132,970
7,624
817,412
500
Total residential
132,975
8,124
350,544
1,470,404
1,098,266
600,439
393,966
576,358
48,096
4,538,073
2,200
35,216
8,735
28,804
351,816
1,481,384
1,123,340
606,520
399,851
588,886
50,296
(68
344
Commercial and industrial loans:
134,247
224,285
102,649
37,591
22,070
17,962
198,428
737,232
8,998
126
20,000
29,124
940
85
273
10,495
11,793
Total commercial and industrial loans
225,225
111,647
22,155
18,361
228,923
190
210
(13
(30
(25
Equipment financing agreements:
65,243
285,484
146,563
40,374
42,570
13,292
593,526
1,484
3,130
451
1,143
482
6,690
Total equipment financing agreements
286,968
149,693
40,825
43,713
13,774
176
935
358
147
1,616
840
154
(28
1,136
Total loans receivable:
550,034
1,980,173
1,347,478
678,404
458,606
607,612
246,524
5,868,831
29,226
3,919
22,200
64,340
7,976
712
5,517
9,490
47,287
Total loans receivable
551,306
1,993,577
1,384,680
684,936
465,719
621,021
279,219
378
2,238
163
838
406
174
(126
1,455
2018
1,184,361
901,029
600,740
404,786
301,950
207,861
50,877
3,651,604
847
13,384
5,857
7,115
6,080
1,701
34,984
4,312
12,304
20,560
37,588
1,185,208
914,413
607,009
416,213
314,254
234,501
52,578
41,662
67,543
405,975
173,236
13,102
232
731
134,766
5,422
733,464
496
405,987
135,262
5,922
1,631,998
1,141,808
613,842
405,018
302,681
342,627
56,299
4,494,273
2,201
35,484
21,056
38,096
1,632,857
1,155,192
620,111
416,445
314,985
369,763
58,500
368,778
100,537
39,577
24,117
7,342
12,282
205,951
758,584
9,285
29
102
34,113
43,529
171
1,097
81
391
639
2,379
109,822
39,748
25,214
7,452
12,775
240,703
305,249
165,313
46,970
52,133
17,608
1,798
589,071
630
2,542
311
1,581
565
88
5,717
305,879
167,855
47,281
53,714
18,173
1,886
2,306,025
1,407,658
700,389
481,268
327,631
356,707
262,250
5,841,928
22,669
6,182
36,314
79,013
642
894
6,990
12,950
21,535
46,192
2,307,514
1,432,869
707,140
495,373
340,610
384,424
299,203
Loans by Vintage Year and Payment Performance
Payment performance
Performing
1,075,696
593,252
453,511
3,668,075
Nonperforming
80
2,400
2,741
132,483
817,425
492
1,481,304
606,259
585,994
4,598,860
2,892
3,233
22,149
18,242
218,921
768,022
119
10,127
1,992,013
1,381,550
684,224
464,570
617,528
269,217
5,960,408
1,564
1,149
3,493
20,050
606,597
312,324
233,643
3,720,976
858
3,200
733,964
1,632,845
619,699
313,055
368,409
4,564,145
1,354
3,708
25,199
12,539
804,070
236
422
2,306,872
1,430,327
706,246
493,777
338,115
382,746
5,957,286
2,495
1,678
9,847
17
The following is an aging analysis of loans, including loans on nonaccrual status, disaggregated by loan class, as of the dates indicated:
30-59DaysPast Due
60-89DaysPast Due
90 Daysor MorePast Due
TotalPast Due
Current
Accruing90 Daysor MorePast Due
158
668,854
3,670,658
1,669
816,248
1,827
4,600,266
7,038
7,039
771,110
6,379
1,553
3,553
11,485
588,731
15,244
1,554
20,351
5,960,107
494
1,553,235
3,723,682
313
804
1,124
733,348
1,298
1,618
4,566,235
77
156
804,336
5,825
1,271
2,949
10,045
584,743
6,215
2,648
2,956
11,819
5,955,314
Nonaccrual Loans and Nonperforming Assets
The following table represents the amortized cost basis of loans on nonaccrual status and loans past due 90 days and still accruing as of March 31, 2023 and December 31, 2022.
Nonaccrual LoansWithNo Allowance forCredit Losses
Nonaccrual LoansWithAllowance forCredit Losses
LoansPast Due90 Days StillAccruing
TotalNonperformingLoans
2,144
65
532
2,403
338
2,890
343
6,332
3,248
16,802
1,929
540
2,469
2,977
215
5,501
5,716
3,192
6,654
9,846
The Company recognized $104,000 and $27,000 of interest income on nonaccrual loans for the three months ended March 31, 2023 and 2022, 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")
117
Total nonperforming assets
20,167
9,963
OREO is included in prepaid expenses and other assets in the accompanying Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022.
Loan Modifications
No loans were modified during the three months ended March 31, 2023 or 2022.
Note 4 — Servicing Assets
The changes in servicing assets for the three months ended March 31, 2023 and 2022 were as follows:
7,080
Addition related to sale of SBA loans
615
667
Amortization
(635
(545
Change in valuation allowance
385
7,202
At March 31, 2023 and December 31, 2022, we serviced loans sold to unaffiliated parties of $525.5 million and $523.6 million, respectively. These represented loans that were sold for which the Bank continues to provide servicing. These loans are maintained off-balance sheet and are not included in the loans receivable balance. All of the loans serviced were SBA loans.
The Company recorded servicing fee income of $1.3 million and $1.2 million for the three months ended March 31, 2023 and 2022, 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 $0.6 million and $0.5 million for the three months ended March 31, 2023 and 2022, respectively.
The fair value of servicing rights was $8.6 million at March 31, 2023 and was determined using discount rates ranging from 12.0% to 13.9% and prepayment speeds ranging from 10.9% to 17.2%, depending on the stratification of the specific right. The fair value of servicing rights was $7.1 million at December 31, 2022 and was determined using discount rates ranging from 21.9% to 25.3% and prepayment speeds ranging from 10.8% to 16.7%, depending on the stratification of the specific right.
Note 5 — Income Taxes
The Company’s income tax expense was $9.3 million and $8.5 million, representing an effective income tax rate of 29.7% and 29.0% for the three months ended March 31, 2023 and 2022, respectively.
Management concluded that as of March 31, 2023 and December 31, 2022, a valuation allowance of $1.3 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 $39.7 million and $51.9 million as of March 31, 2023 and December 31, 2022, respectively.
As of March 31, 2023, the Company was subject to examination by various taxing authorities for its federal and state tax returns for the years ending on or after December 31, 2018. During the quarter ended March 31, 2023, there was no material change to the Company’s uncertain tax positions. The Company does not expect its unrecognized tax positions to change significantly over the next twelve months.
Note 6 — Goodwill and other Intangibles
The third-party originators intangible of $0.5 million and goodwill of $11.0 million were recorded as a result of the acquisition of an equipment financing agreements portfolio in 2016. The core deposit intangible of $2.2 million was recognized for the core deposits acquired in a 2014 acquisition. The Company’s intangible assets were as follows for the periods indicated:
AmortizationPeriod
GrossCarryingAmount
AccumulatedAmortization
NetCarryingAmount
Core deposit intangible
10 years
2,213
(2,060
153
(2,031
182
Third-party originators intangible
7 years
483
(474
(471
Goodwill
N/A
11,031
Total intangible assets
13,727
(2,534
(2,502
The Company performed an impairment analysis on its goodwill and other intangible assets as of December 31, 2022 and determined there was no impairment. No triggering event has occurred subsequent to December 31, 2022 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 March 31, 2023 and December 31, 2022 were $1.05 billion and $697.0 million, respectively.
The scheduled maturities of time deposits are as follows for the periods indicated:
At March 31, 2023
TimeDeposits of$250,000or More
Other TimeDeposits
645,391
927,402
1,572,793
2024
404,225
395,667
799,892
2025
266
3,860
4,126
2026
263
2,549
2,812
2027 and thereafter
1,050,145
1,330,093
2,380,238
At December 31, 2022
696,470
1,185,020
1,881,490
68,037
3,151
3,417
2,430
2,693
570
696,999
1,259,208
1,956,207
Accrued interest payable on deposits was $20.5 million and $7.8 million at March 31, 2023 and December 31, 2022, respectively. Total deposits reclassified to loans due to overdrafts at March 31, 2023 and December 31, 2022 were $1.4 million and $1.2 million, respectively.
21
Note 8 — Borrowings and Subordinated Debentures
At March 31, 2023, the Bank had $250.0 million of overnight advances and $100.0 million of term advances outstanding with the FHLB with a weighted average interest rate of 5.11% and 1.60% respectively. At December 31, 2022, the Bank had $250.0 million of overnight advances and $100.0 million of term advances with the FHLB with a weighted average rate of 4.65% and 0.87%, respectively. Interest expense on borrowings for the three months ended March 31, 2023 and 2022 was $2.4 million and $0.3 million, respectively.
OutstandingBalance
WeightedAverage Rate
Overnight advances
250,000
5.11
4.65
Advances due within 12 months
0.37
0.97
Advances due over 12 months through 24 months
25,000
1.22
37,500
0.40
Advances due over 24 months through 36 months
4.44
12,500
1.90
Outstanding advances
4.11
3.57
The following is financial data pertaining to FHLB advances:
Weighted-average interest rate at end of period
Weighted-average interest rate during the period
3.58
1.52
Average balance of FHLB advances
268,056
148,027
Maximum amount outstanding at any month-end
The Bank maintains a secured credit facility with the FHLB, allowing the Bank to borrow on an overnight and term basis. The Bank had $2.43 billion and $1.99 billion of loans pledged as collateral with the FHLB as of March 31, 2023 and December 31, 2022, respectively. The remaining available borrowing capacity was $1.15 billion and $1.07 billion at March 31, 2023 and December 31, 2022, respectively.
The Bank also had securities with market values of $22.9 million and $23.4 million at March 31, 2023 and December 31, 2022, respectively, pledged with the FRB, which provided $22.2 million and $22.0 million in available borrowing capacity through the Fed Discount Window and the new BTFP of March 31, 2023 and December 31, 2022, respectively.
On August 20, 2021, the Company issued $110.0 million of Fixed-to-Floating Subordinated Notes (“2031 Notes”) with a maturity date of September 1, 2031. The 2031 Notes have an initial fixed interest rate of 3.75% per annum, payable semiannually in arrears on March 1 and September 1 of each year, up to but excluding September 1, 2026. From and including September 1, 2026 and thereafter, the 2031 Notes will bear interest at a floating rate per annum equal to the Benchmark rate (which is expected to be the Three-Month Term SOFR) plus 310 basis points, payable quarterly in arrears on March 1, June 1, September 1 and December 1 of each year. If the then current three-month term SOFR rate is less than zero, the three-month SOFR will be deemed to be zero. Debt issuance cost was $2.1 million, which is being amortized through the 2031 Notes’ maturity date. At March 31, 2023 and December 31, 2022, the balance of the 2031 Notes included in the Company’s Consolidated Balance Sheet, net of issuance cost, was $108.2 million.
The Company issued $100.0 million of Fixed-to-Floating Subordinated Notes (“2027 Notes”) on March 21, 2017, with a maturity on March 30, 2027. The 2027 Notes had an initial fixed interest rate of 5.45% per annum. From and including March 30, 2022 and thereafter, the 2027 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% payable quarterly.
On March 30, 2022, the Company redeemed its 2027 Notes. A portion of the redemption was funded with the proceeds from the Company’s 2021 subordinated debt offering. The redemption price for each of the 2027 Notes equaled 100% of the outstanding principal amount redeemed, plus any accrued and unpaid interest thereon. All interest accrued on the 2027 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 2027 Notes.
The Company assumed Junior Subordinated Deferrable Interest Debentures (“Subordinated Debentures”) as a result of an acquisition in 2014 with an unpaid principal balance of $26.8 million and an estimated fair value of $18.5 million. The $8.3 million discount is being amortized to interest expense through the debentures’ maturity date of March 15, 2036. A trust was formed in 2005
which issued $26.0 million of Trust Preferred Securities (“TPS”) at a 6.26% fixed rate for the first five years and a variable rate of three-month LIBOR plus 140 basis points thereafter and invested the proceeds in the Subordinated Debentures. The rate on the TPS at March 31, 2023 was 6.27%. The TPS will be subject to mandatory redemption if the Subordinated Debentures are repaid by the Company. Interest is payable quarterly, and the Company has the option to defer interest payments on the Subordinated Debentures from time to time for a period not to exceed five consecutive years. At March 31, 2023 and December 31, 2022, the balance of Subordinated Debentures included in the Company’s Consolidated Balance Sheets, net of discount of $5.5 million and $5.6 million, was $21.3 million and $21.2 million, respectively. The amortization of discount was $104,000 and $102,000 for the three months ended March 31, 2023 and 2022, respectively.
Note 9 — Earnings Per Share
Earnings per share (“EPS”) is calculated on both a basic and a diluted basis. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted from the issuance of common stock that then shared in earnings, excluding common shares in treasury. For diluted EPS, the weighted-average number of common shares includes the impact of unvested performance stock units (“PSUs”) under the treasury method.
Unvested restricted stock containing rights to non-forfeitable dividends are considered participating securities prior to vesting and have been included in the earnings allocation in computing basic and diluted EPS under the two-class method.
The following table is a reconciliation of the components used to derive basic and diluted EPS for the periods indicated:
(dollars in thousands, except per share amounts)
Basic EPS
Less: income allocated to unvested restricted stock
124
Income allocated to common shares
21,874
20,571
Weighted-average shares for basic EPS
Basic EPS (1)
Effect of dilutive stock options and unvested performance stock units
83,420
123,368
Diluted EPS
Weighted-average shares for diluted EPS
Diluted EPS (1)
On a weighted-average basis, options to purchase 31,034 shares of common stock were excluded from the calculation of diluted earnings per share for the three months ended March 31, 2023, because their effect would have been anti-dilutive. There were no anti-dilutive stock options for the three months ended March 31, 2022. There were no anti-dilutive unvested PSUs outstanding for the three months ended March 31, 2023 or 2022.
During the three months ended March 31, 2023, the Company issued 52,450 PSUs to executive officers from the 2021 Equity Compensation plan with a fair value of $1.1 million on the grant date of March 10, 2023. During the three months ended March 31, 2022, the Company issued 38,036 PSUs to executive officers from the 2021 Equity Compensation Plan with a fair value of $1.0 million on the grant date of March 23, 2022. These units have a three-year cliff vesting period and include dividend equivalent rights. Total PSUs outstanding as of March 31, 2023 were 157,049 with an aggregate grant fair value of $3.1 million. Total PSUs outstanding as of March 31, 2022 were 104,599 with an aggregate grant fair value of $2.0 million.
Note 10 — Regulatory Matters
Federal bank regulatory agencies require bank holding companies and banks to maintain a minimum ratio of qualifying total capital to risk-weighted assets of 8.0% and a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0%. In addition to the risk-based guidelines, federal bank regulatory agencies require bank holding companies and banks to maintain a minimum ratio of Tier 1 capital to average assets, referred to as the leverage ratio, of 4.0%.
In order for banks to be considered “well capitalized,” federal bank regulatory agencies require a minimum ratio of qualifying total capital to risk-weighted assets of 10.0% and a minimum ratio of Tier 1 capital to risk-weighted assets of 8.0%. In addition to the risk-based guidelines, federal bank regulatory agencies require depository institutions to maintain a minimum ratio of Tier 1 capital to average assets, referred to as the leverage ratio, of 5.0%.
At March 31, 2023, the Bank’s capital ratios exceeded the minimum requirements for the Bank to be considered “well capitalized” and the Company exceeded all of its applicable minimum regulatory capital ratio requirements.
A capital conservation buffer of 2.5% must be met to avoid limitations on the ability of the Bank and the Company to pay dividends, repurchase shares or pay discretionary bonuses. The Bank's capital conservation buffer was 6.15% and 5.86% and the Company's capital conservation buffer was 5.94% and 5.71% as of March 31, 2023 and December 31, 2022, respectively.
In March 2020, federal banking agencies announced an interim final rule to delay the impact on regulatory capital arising from the implementation of CECL. The interim final rule maintains the three-year transition option in the previous rule and provides banks the option to delay for two years an estimate of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period (five-year transition option). The Company and the Bank adopted the capital transition relief over the permissible five-year period.
The capital ratios of Hanmi Financial and the Bank as of March 31, 2023 and December 31, 2022 were as follows:
Minimum
Minimum to Be
Regulatory
Categorized as
Actual
Requirement
“Well Capitalized”
Amount
Ratio
Total capital (to risk-weighted assets):
Hanmi Financial
917,551
14.80
495,951
8.00
Hanmi Bank
876,961
14.15
495,874
619,842
10.00
Tier 1 capital (to risk-weighted assets):
740,064
11.94
371,963
6.00
809,474
13.06
371,905
Common equity Tier 1 capital (to risk-weighted assets)
718,717
11.59
278,973
4.50
278,929
402,897
6.50
Tier 1 capital (to average assets):
10.09
293,509
4.00
11.06
292,658
365,822
5.00
901,239
14.49
497,508
860,503
13.86
496,607
620,758
728,344
11.71
373,131
797,608
12.85
372,455
707,101
11.37
279,848
279,341
403,493
10.07
289,311
11.07
288,110
360,137
24
Note 11 — Fair Value Measurements
Fair Value Measurements
ASC 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value including a three-level valuation hierarchy, and expands disclosures about fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The three-level fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value are defined as follows:
Fair value is used on a recurring basis for certain assets and liabilities in which fair value is the primary basis of accounting. Additionally, fair value is used on a non-recurring basis to evaluate assets or liabilities for impairment or for disclosure purposes.
We record securities available for sale at fair value on a recurring basis. Certain other assets, such as loans held for sale, impaired loans, OREO, and core deposit intangible, are recorded at fair value on a non-recurring basis. Non-recurring fair value measurements typically involve assets that are periodically evaluated for impairment and for which any impairment is recorded in the period in which the re-measurement is performed.
The following methods and assumptions were used to estimate the fair value of each class of financial instrument below:
Securities available for sale - The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges. If quoted prices are not available, fair values are measured using matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities, or other model-based valuation techniques requiring observable inputs other than quoted prices such as yield curve, prepayment speeds, and default rates. Level 1 securities include U.S. Treasury securities that are traded on an active exchange or by dealers or brokers in active over-the-counter markets. The fair value of these securities is determined by quoted prices on an active exchange or over-the-counter market. Level 2 securities primarily include U.S. government agency and sponsored agency mortgage-backed securities, collateralized mortgage obligations and debt securities as well as municipal bonds in markets that are active. In determining the fair value of the securities categorized as Level 2, we obtain reports from nationally recognized broker-dealers detailing the fair value of each investment security held as of each reporting date. The broker-dealers use prices obtained from nationally recognized pricing services to value our fixed income securities. The fair value of the municipal securities is determined based on pricing data provided by nationally recognized pricing services. We review the prices obtained for reasonableness based on our understanding of the marketplace, and also consider any credit issues related to the bonds. As we have not made any adjustments to the market quotes provided to us and as they are based on observable market data, they have been categorized as Level 2 within the fair value hierarchy. Level 3 securities are instruments that are not traded in the market. As such, no observable market data for the instrument is available, which necessitates the use of significant unobservable inputs.
Derivatives – The fair values of derivatives are based on valuation models using observable market data as of the measurement date (Level 2). Our derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rates, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services.
25
Loans held for sale - Loans held for sale includes the guaranteed portion of SBA 7(a) loans carried at the lower of cost or fair value. Management obtains quotes, bids or pricing indication sheets on all or part of the loans directly from the purchasing financial institutions. Premiums received or to be received on the quotes, bids or pricing indication sheets are indicative of the fact that cost is lower than fair value. At March 31, 2023 and December 31, 2022, the entire balance of loans held for sale was recorded at its cost. We record loans held for sale on a nonrecurring basis with Level 2 inputs.
Nonperforming loans – Nonaccrual loans receivable and loans 90-days past due and still accruing interest are considered nonperforming for reporting purposes and are measured and recorded at fair value on a non-recurring basis. All nonperforming loans with a carrying balance over $250,000 are individually evaluated for the amount of impairment, if any. Nonperforming loans with a carrying balance of $250,000 or less are evaluated collectively. However, from time to time, nonrecurring fair value adjustments to collateral dependent nonperforming loans are recorded based on either the current appraised value of the collateral, or management’s judgment and estimation of value reported on older appraisals that are then adjusted based on recent market trends, and result in a Level 3 measurement.
OREO - Fair value of OREO is based primarily on third party appraisals, less costs to sell and result in a Level 3 classification of the inputs for determining fair value. Appraisals are required annually and may be updated more frequently as circumstances require and the fair value adjustments are made to OREO based on the updated appraised value of the property.
Servicing assets - On a quarterly basis, the Company utilizes a third party service to evaluate servicing assets related to loans sold to unaffiliated parties with servicing retained, and result in a Level 3 classification. Servicing assets are assessed for impairment or increased obligation based on fair value at each reporting date.
Other repossessed assets – Fair value of equipment from equipment financing agreements 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.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
As of March 31, 2023 and December 31, 2022, 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:
823,775
Derivative financial instruments
5,621
5,617
805,812
7,507
7,375
27
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
As of March 31, 2023 and December 31, 2022, assets and liabilities measured at fair value on a non-recurring basis are as follows:
Inputs With No
With Identical
Collateral dependent loans (1)
10,191
Other real estate owned
Repossessed personal property
629
Collateral dependent loans (2)
467
The following table represents quantitative information about Level 3 fair value assumptions for assets measured at fair value on a non-recurring basis at March 31, 2023 and December 31, 2022:
ValuationTechniques
UnobservableInput(s)
Range (WeightedAverage)
Collateral dependent loans:
Market approach
Adjustments to market data
5% to 25% / 16%
(1)
(35)% to (10)% / (24)%
(13)% to 5% / (2)%
7,562
10% to 15% / 11%
(10)% to 5% / (2)%
(2)
(42)% to 3% / (24)%
(15)% to 3% / (1)%
(20)% to 20% / (2)%
Prepayment rateDiscount rate
11% to 17% / 16%22% to 25% / 22%
(3)
ASC 825, Financial Instruments, requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured on a recurring basis or non-recurring basis are discussed above.
The estimated fair value of financial instruments has been determined by using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data in order to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that we could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
Recognition and Measurement of Financial Assets and Financial Liabilities (Topic 825), among other provisions, requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. Other than certain financial instruments for which we had concluded that the carrying amounts approximate fair value, the fair value estimates shown below were based on an exit price notion as of March 31, 2023, as required by ASU 2016-01. The financial instruments for which we had concluded that the carrying amounts approximate fair value include, cash and due from banks, accrued interest receivable and payable, and noninterest-bearing deposits.
The estimated fair values of financial instruments were as follows:
Carrying
Financial assets:
Securities available for sale
Loans held for sale
3,653
Loans receivable, net of allowance for credit losses
5,753,059
Financial liabilities:
Noninterest-bearing deposits
Interest-bearing deposits
3,870,056
Borrowings and subordinated debentures
479,558
346,689
131,791
8,423
5,808,190
3,623,827
479,409
345,867
126,828
The methods and assumptions used to estimate the fair value of each class of financial instruments for which it was practicable to estimate that value are explained below:
Cash and due from banks – The carrying amounts of cash and due from banks approximate fair value due to the short-term nature of these instruments (Level 1).
Securities – The fair value of securities, consisting of securities available for sale, is generally obtained from market bids for similar or identical securities, from independent securities brokers or dealers, or from other model-based valuation techniques described above (Level 1 and 2).
Loans held for sale – Loans held for sale, representing the guaranteed portion of SBA loans, are carried at the lower of aggregate cost or fair market value, as determined based upon quotes, bids or sales contract prices (Level 2).
Loans receivable, net of allowance for credit losses – The fair value of loans receivable is estimated based on the discounted cash flow approach. To estimate the fair value of the loans, certain loan characteristics such as account types, remaining terms, annual interest rates or coupons, interest types, past delinquencies, timing of principal and interest payments, current market rates, loan-to-value ratios, loss exposures, and remaining balances are considered. Additionally, the Company’s prior charge-off rates and loss ratios as well as various other assumptions relating to credit, interest, and prepayment risks are used as part of valuing the loan portfolio. Subsequently, the loans were individually evaluated by sorting and pooling them based on loan types, credit risk grades, and payment types. Consistent with the requirements of ASU 2016-01 which was adopted by the Company on January 1, 2018, the fair value of the Company's loans receivable is considered to be an exit price notion as of March 31, 2023 (Level 3).
The fair value of collateral dependent loans is estimated based on the net realizable fair value of the collateral or the observable market price of the most recent sale or quoted price from loans held for sale. The Company does not record loans at fair value on a recurring basis. Nonrecurring fair value adjustments to collateral dependent loans are recorded based on the current appraised value of the collateral (Level 3).
Accrued interest receivable – The carrying amount of accrued interest receivable approximates its fair value (Level 1).
Noninterest-bearing deposits – The fair value of noninterest-bearing deposits is the amount payable on demand at the reporting date (Level 2).
Interest-bearing deposits – The fair value of interest-bearing deposits, such as savings accounts, money market checking, and certificates of deposit, is estimated based on discounted cash flows. The cash flows for non-maturity deposits, including savings accounts and money market checking, are estimated based on their historical decaying experiences. The discount rate used for fair valuation is based on interest rates currently being offered by the Bank on comparable deposits as to amount and term (Level 3).
Borrowings and subordinated debentures – Borrowings consist of FHLB advances, subordinated debentures and other borrowings. Discounted cash flows based on current market rates for borrowings with similar remaining maturities are used to estimate the fair value of borrowings (Level 2 and 3).
Accrued interest payable – The carrying amount of accrued interest payable approximates its fair value (Level 1).
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Note 12 — Off-Balance Sheet Commitments
The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk similar to the risk involved with on-balance sheet items.
The Bank’s exposure to losses in the event of non-performance by the other party to commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for extending loan facilities to customers. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, was based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, premises and equipment, and income-producing or borrower-occupied properties.
The following table shows the distribution of total loan commitments as of the dates indicated:
Unused commitments to extend credit
834,661
780,543
Standby letters of credit
71,518
71,829
Commercial letters of credit
18,192
19,945
Total commitments
924,371
872,317
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:
3,114
2,586
Provision expense (recovery) for credit losses
(48
(228
3,066
2,358
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 March 31, 2023, the outstanding balances for our right-of-use asset and lease liability were $38.6 million and $42.4 million, respectively. The outstanding balances of the right-of-use asset and lease liability were $40.4 million and $44.2 million,
32
respectively, as of December 31, 2022. The right-of-use asset is reported in prepaid expenses and other assets line item and lease liability is reported in accrued expenses and other liabilities line item on the Consolidated Balance Sheets.
In determining the discount rates, since most of our leases do not provide an implicit rate, we used our incremental borrowing rate provided by the FHLB of San Francisco based on the information available at the commencement date to calculate the present value of lease payments.
At March 31, 2023, future minimum rental commitments under these non-cancelable operating leases, with initial or remaining terms of one year or more, were as follows:
7,995
7,319
6,418
5,275
2027
5,105
Thereafter
14,030
Remaining lease commitments
46,142
Interest
(3,741
Present value of lease liability
42,401
Weighted average remaining lease terms for the Company's operating leases were 6.91 years and 7.12 years as of March 31, 2023 and December 31, 2022, respectively. Weighted average discount rates used for the Company's operating leases were 2.41% and 2.42% as of March 31, 2023 and December 31, 2022, respectively. Net lease expense recognized for the three months ended March 31, 2023 and 2022 was $2.0 million and $2.1 million, respectively. This included operating lease costs of $2.1 million and $2.0 million for the three months ended March 31, 2023 and 2022, respectively. Sublease income for operating leases was immaterial for both the three months ended March 31, 2023 and 2022.
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 $2.1 million and $2.0 million for the three months ended March 31, 2023 and 2022.
Note 14 — Liquidity
As of March 31, 2023, Hanmi Financial had $13.1 million in cash on deposit with its bank subsidiary and $24.3 million of U.S. Treasury securities at fair value. As of December 31, 2022, the Company had $10.6 million in cash on deposit with its bank subsidiary and $17.7 million of U.S. Treasury securities at fair value. Management believes that Hanmi Financial, on a stand-alone basis, had adequate liquid assets to meet its current debt obligations.
The principal objective of our liquidity management program is to maintain the Bank’s ability to meet the day-to-day cash flow requirements of our customers who wish either to withdraw funds or to draw upon credit facilities to meet their cash needs. Management believes that the Bank, on a stand-alone basis, has adequate liquid assets to meet its current obligations. The Bank’s primary funding source will continue to be deposits originating from its branch platform. The Bank’s wholesale funds historically consisted of FHLB advances and brokered deposits. As of March 31, 2023 and December 31, 2022, the Bank had $350.0 million of FHLB advances, and $83.1 million and $83.3 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% of its assets. As of March 31, 2023 and December 31, 2022, the total borrowing capacity available, based on pledged collateral was $1.62 billion and $1.54 billion, respectively. The remaining available borrowing capacity was $1.15 billion and $1.07 billion as of March 31, 2023 and December 31, 2022, respectively.
The amount that the FHLB is willing to advance differs based on the quality and character of qualifying collateral pledged by the Bank, and the FHLB may adjust the advance rates for qualifying collateral upwards or downwards from time to time. To the extent deposit renewals and deposit growth are not sufficient to fund maturing and withdrawable deposits, repay maturing borrowings,
fund existing and future loans, equipment financing agreements and securities, and otherwise fund working capital needs and capital expenditures, the Bank may utilize the remaining borrowing capacity from its FHLB borrowing arrangement.
As a means of augmenting its liquidity, the Bank had an available borrowing source of $22.2 million from the Federal Reserve Discount Window and the new BTFP, to which the Bank pledged securities with a carrying value of $26.6 million, with no borrowings as of March 31, 2023. The Bank also maintains a line of credit for repurchase agreements up to $100.0 million. The Bank also had three unsecured federal funds lines of credit totaling $115.0 million with no outstanding balances as of March 31, 2023.
Note 15 — Derivatives and Hedging Activities
The Company’s derivative financial instruments consist entirely of interest rate swap agreements between the Company and its customers and other third party counterparties. The Company enters into “back-to-back swap” arrangements whereby the Company executes interest rate swap agreements with its customers and acquires an offsetting swap position from a third party counterparty. These derivative financial statements are accounted for at fair value, with changes in fair value recognized in the Company’s Consolidated Statements of Income.
The table below presents the fair value of the Company’s derivative financial instruments as well as their location on the Balance Sheet as of March 31, 2023 and December 31, 2022.
As of March 31, 2023
Derivative Assets
Derivative Liabilities
Notional Amount
Balance Sheet Location
Derivatives not designated as hedging instruments
Interest rate products
106,480
Other Assets
Other Liabilities
Total derivatives not designated as hedging instruments
As of December 31, 2022
61,460
The table below presents the effect of the Company’s derivative financial instruments that are not designated as hedging instruments on the Income Statement for the three months ended March 31, 2023 and 2022.
Derivatives Not Designated as HedgingInstruments under Subtopic 815-20
Location of Gain or (Loss) Recognized in Income on Derivative
Amount of Gain or (Loss)Recognized in Income on Derivative
Other income
(128
The Company recognized $0.6 million of fee income from its derivative financial instruments for the three months ended March 31, 2023. No fee income was earned for the three months ended March 31, 2022.
34
The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives as of March 31, 2023 and December 31, 2022. The net amounts of derivative assets or liabilities can be reconciled to the tabular disclosure of fair value. The derivative assets are located within the prepaid and other assets line item on the Consolidated Balance Sheets and the derivative liabilities are located within the accrued expenses and other liabilities line item on the Consolidated Balance Sheets.
Offsetting of Derivative Assets
Gross Amounts Not Offset in the Consolidated Balance Sheets
Gross Amounts of Recognized Assets
Gross Amounts Offset in the Consolidated Balance Sheets
Net Amounts of Assets presented in the Consolidated Balance Sheets
Financial Instruments
Cash Collateral Received
Net Amount
Derivatives
Offsetting of Derivative Liabilities
Gross Amounts of Recognized Liabilities
Net Amounts of Liabilities presented in the Consolidated Balance Sheets
Cash Collateral Provided
132
The Company has agreements with each of its derivative counterparties that contain a provision stating if the Company either defaults or is capable of being declared in default on any of its indebtedness, then the Company could also be declared in default on its derivative obligations. In addition, these agreements may also require the Company to post additional collateral should it fail to maintain its status as a well- or adequately- capitalized institution.
As of March 31, 2023 and December 31, 2022, 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 $5.6 million and $7.4 million, respectively. As of March 31, 2023, the Company had not posted any collateral with its counterparties related to these agreements and is adequately collateralized since its net asset position was $4,000 ($5.6 million of fair value of assets less $5.6 million of fair value of liabilities) as of March 31, 2023. As of December 31, 2022, the Company had not posted collateral related to these agreements and was adequately collateralized since its net asset position was $132,000 ($7.5 million of fair value of assets less $7.4 million of fair value of liabilities).
Note 16 — Subsequent Events
Cash Dividend
On April 27, 2023, the Board of Directors of the Company declared a quarterly cash dividend of $0.25 per share to be paid on May 24, 2023 to stockholders of record as of the close of business on May 8, 2023.
36
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following is management’s discussion and analysis of our results of operations and financial condition as of and for the three months ended March 31, 2023. This analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Annual Report on Form 10-K”) and with the unaudited consolidated financial statements and notes thereto set forth in this Quarterly Report on Form 10-Q for the period ended March 31, 2023 (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; changes in liquidity, including the size and composition of our deposit portfolio, including the percentage of uninsured deposits in the portfolio; 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; changes in the fiscal and monetary policies of the Board of Governors of the Federal Reserve System; 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 2022 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 2022 Annual Report on Form 10-K. We had no significant changes in our accounting policies since the filing of our 2022 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 2022 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 $22.0 million, or $0.72 per diluted share, for the three months ended March 31, 2023 compared with $20.7 million, or $0.68 per diluted share, for the same period a year ago. The increase in net income was primarily driven by an increase in net interest income of $6.9 million, offset by a $1.1 million increase in noninterest expense attributable to higher salaries and employee benefits and an increase in credit loss expense of $3.5 million. The increase in credit loss expense during the first quarter of 2023 was due to $2.1 million in credit loss expense in the first quarter of 2023 and a $1.4 million recovery of credit loss expense in the first quarter of 2022.
Other financial highlights include the following:
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.
38
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 /
Balance
Expense
Rate
Interest-earning assets:
Loans receivable (1)
5,944,399
5.51
5,231,672
4.18
Securities (2)
980,712
1.67
930,505
1.11
FHLB stock
7.16
6.14
Interest-bearing deposits in other banks
192,902
4.34
494,887
0.18
Total interest-earning assets
7,134,398
4.96
6,673,449
3.46
Noninterest-earning assets:
65,088
62,968
(71,452
(73,177
Other assets
239,121
229,952
7,367,155
6,893,192
Interest-bearing liabilities:
Demand: interest-bearing
109,391
0.11
124,892
0.06
Money market and savings
1,453,569
7,315
2.04
2,106,008
1,189
0.23
Time deposits
2,223,615
18,154
3.31
937,044
807
0.35
Total interest-bearing deposits
3,786,575
2.73
3,167,944
0.26
130,556
1.05
Subordinated debentures
129,483
4.89
213,171
6.75
Total interest-bearing liabilities
4,184,114
2.85
3,511,671
0.69
Noninterest-bearing liabilities and equity:
Demand deposits: noninterest-bearing
2,324,413
2,634,398
Other liabilities
127,112
88,367
Stockholders’ equity
731,516
658,756
Net interest income
Cost of deposits (3)
1.69
0.14
Net interest spread (taxable equivalent basis) (4)
2.10
2.77
Net interest margin (taxable equivalent basis) (5)
3.28
3.10
39
The table below shows changes in interest income and interest expense and the amounts attributable to variations in interest rates and volumes for the periods indicated. The variances attributable to simultaneous volume and rate changes have been allocated to the change due to volume and the change due to rate categories in proportion to the relationship of the absolute dollar amount attributable solely to the change in volume and to the change in rate.
March 31, 2023 vs March 31, 2022
Increases (Decreases) Due to Change In
Volume
7,288
19,711
26,999
136
1,373
1,509
(132
1,850
7,292
23,107
30,399
(372
6,498
6,126
1,108
16,239
17,347
355
1,677
2,032
(1,415
(600
(2,015
(326
23,828
23,502
Change in net interest income
7,618
(721
6,897
For the three months ended March 31, 2023 and 2022, net interest income was $57.9 million and $51.0 million, respectively. The net interest spread and net interest margin, on a taxable equivalent basis, for the quarter ended March 31, 2023, were 2.10% and 3.28%, respectively, compared with 2.77% and 3.10%, respectively, for the same period in 2022. Interest and dividend income increased $30.4 million, or 53.4%, to $87.3 million for the three months ended March 31, 2023 from $56.9 million for the same period in 2022 due to higher average interest-earning asset balances and yields. Interest expense increased $23.5 million, or 395.1%, to $29.5 million for the three months ended March 31, 2023 from $5.9 million for the same period in 2022 primarily due to higher deposit and borrowing rates due to the rising interest rate environment offset by lower subordinated debenture costs.
The average balance of interest earning assets increased $460.9 million, or 6.9%, to $7.13 billion for the three months ended March 31, 2023 from $6.67 billion for the three months ended March 31, 2022. The average balance of loans increased $712.7 million, or 13.6%, to $5.94 billion for the three months ended March 31, 2023 from $5.23 billion for the three months ended March 31, 2022 due mainly to lower payoffs and $303.6 million of loan production during the quarter. The average balance of securities increased $50.2 million, or 5.4%, to $980.7 million for the three months ended March 31, 2023 from $930.5 million for the three months ended March 31, 2022. The average balance of interest-bearing deposits at other banks decreased $302.0 million to $192.9 million for the three months ended March 31, 2022, as excess funds were used to fund loan and securities growth.
The average yield on interest-earning assets, on a taxable equivalent basis, increased 150 basis points to 4.96% for the three months ended March 31, 2023 from 3.46% for the three months ended March 31, 2022, mainly due to the higher interest rate environment. The average yield on loans increased to 5.51% for the three months ended March 31, 2023 from 4.18% for the three months ended March 31, 2022, driven mainly by the higher interest rate environment. The average yield on securities, on a taxable equivalent basis, increased to 1.67% for the three months ended March 31, 2023 from 1.11% for the three months ended March 31, 2022, reflecting the rising market interest rate environment. The average yield on interest-bearing deposits in other banks increased 416 basis points to 4.34% for the three months ended March 31, 2023 from 0.18% for the three months ended March 31, 2022 mainly due to higher market rates.
The average balance of interest-bearing liabilities increased $672.4 million, or 19.1%, to $4.18 billion for the three months ended March 31, 2023 compared to $3.51 billion for the three months ended March 31, 2022. The average balance of time deposits and borrowings increased $1.29 billion and $137.5 million, respectively, offset by decreases in the average balance of money market and savings accounts and subordinated debentures of $652.4 million and $83.7 million, respectively.
40
The average cost of interest-bearing liabilities was 2.85% and 0.69% for the three months ended March 31, 2023 and 2022, respectively. The average cost of subordinated debentures decreased 186 basis points to 4.89% for the three months ended March 31, 2023 compared to 6.75% for the three months ended March 31, 2022, due to a pre-tax charge of $1.1 million for the three months ended March 31, 2022 for the remaining debt issuance costs due upon redemption on the 2027 Notes. The average cost of borrowings increased 253 basis points to 3.58% for the three months ended March 31, 2023 compared to 1.05% for the three months ended March 31, 2022. The average cost of interest-bearing deposits increased 247 basis points to 2.73% for the three months ended March 31, 2023, compared to 0.26% for the three months ended March 31, 2022. The increased costs were primarily due to increased market interest rates.
Credit Loss Expense
For the first quarter of 2023, the Company recorded $2.1 million of credit loss expense, comprised of a $2.2 million credit loss expense for loan losses, and a $48,000 negative provision for off-balance sheet items. For the same period in 2022, the Company recorded a $1.4 million recovery of credit loss expense, comprised of a $1.2 million negative provision for loan losses, and a $0.2 million negative provision for off-balance sheet items. The increase in credit loss expense for the three months ended March 31, 2023 as compared to the same period in 2022 was mainly attributable to a specific reserve allocation of $2.5 million on a nonperforming commercial and industrial loan in the health-care industry. The recovery of credit loss expense for the three months ended March 31, 2022 resulted from a combination of overall improvements in asset quality and economic forecasts, as well as a net reduction in specific qualitative factors allocated to criticized hospitality loans impacted by the pandemic, offset by strong loan growth
See also “Allowance for Credit Losses and Allowance for Credit Losses Related to Off-Balance Sheet Items” for further details.
Noninterest Income
The following table sets forth the various components of noninterest income for the periods indicated:
Increase(Decrease)
Percent
(296
(10.30
)%
116
10.16
Servicing income
742
734
1.09
Bank-owned life insurance income
270
244
10.66
All other operating income
1,004
614
61.16
Service charges, fees & other
6,467
5,999
468
7.80
Gain on sale of SBA loans
(652
(25.86
(184
(2.16
For the three months ended March 31, 2023, noninterest income was $8.3 million, a decrease of $0.2 million, or 2.2%, compared with $8.5 million for the same period in 2022. The decrease was mainly attributable to a $0.7 million decrease in the gain on loan sales resulting from lower volume and net trade premiums, offset by a $0.5 million increase in swap fee income included in other operating income.
Noninterest Expense
The following table sets forth the components of noninterest expense for the periods indicated:
2,893
16.33
(234
(5.04
0.53
(95
(6.64
1.65
1.96
All other operating expenses
1,957
3,186
(1,229
(38.58
Subtotal
33,076
31,697
1,379
4.35
Other real estate owned expense (income)
(201
(213
NM
Repossessed personal property expense (income)
(17
394.12
1,099
3.47
For the three months ended March 31, 2023, noninterest expense was $32.8 million, an increase of $1.1 million, or 3.5% compared with $31.7 million for the same period in 2022. Salaries and employee benefits increased $2.9 million due to annual merit and bonus increases, and a 3.3% increase in average full-time equivalent employees. All other operating expenses decreased $1.2 million attributable mainly to a decrease in loan-related expenses.
Income Tax Expense
Income tax expense was $9.3 million and $8.5 million representing an effective income tax rate of 29.7% and 29.0% for the three months ended March 31, 2023 and 2022, respectively. The increase in the effective tax rate for the three months ended March 31, 2023, compared to the same period in 2022 was principally due to an increase in tax charges from the Company’s share-based compensation and an increase in disallowed interest expense.
Financial Condition
As of March 31, 2023, 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% of stockholders’ equity as of March 31, 2023 or December 31, 2022. Securities increased $24.9 million to $878.7 million at March 31, 2023 from $853.8 million at December 31, 2022, due to $29.5 million in securities purchases and a $13.6 million increase in the fair value of securities at March 31, 2023 compared to December 31, 2022.
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The following table summarizes the contractual maturity schedule for securities, at amortized cost, and their cost weighted average yield, which is calculated using amortized cost as the weight, as of March 31, 2023:
After OneYear But
After FiveYears But
Within OneYear
Within FiveYears
Within TenYears
After TenYears
Yield
3.36
38,827
2.97
0.00
3.09
2.52
114
2.90
5,565
526,437
1.59
1.60
7,310
2.44
1,482
1.06
52,697
1.54
1.64
255
1.28
725
2.65
111,041
2.40
18,211
1.34
132,151
1.36
18,212
139,830
1.42
7,772
2.49
690,175
1.72
19,985
1.38
57,904
1.32
35,559
2.33
178,657
1.75
27,757
748,079
1.68
As of March 31, 2023 and December 31, 2022, loans receivable (excluding loans held for sale), net of deferred loan fees and costs, discounts and allowance for credit losses, were $5.91 billion and $5.90 billion, respectively. The increase primarily reflected $303.6 million in new loan production, offset by $154.9 million in loan sales and payoffs, and amortization and other reductions of $139.7 million. Loan production primarily consisted of residential mortgages of $97.2 million, commercial real estate of $75.5 million, equipment financing agreements of $69.3 million, SBA loans of $34.5 million and commercial and industrial loans of $27.1 million.
The table below shows the maturity distribution of outstanding loans, before the allowance for credit losses as of March 31, 2023. In addition, the table shows the distribution of such loans between those with floating or variable interest rates and those with fixed or predetermined interest rates.
After OneYear butWithinThreeYears
After ThreeYears butWithinFiveYears
After FiveYears butWithinFifteenYears
AfterFifteenYears
100,032
230,151
315,128
369,914
37,128
129,528
229,840
144,816
146,465
18,363
41,917
184,439
273,115
29,981
4,251
120,904
393,833
517,131
322,487
61,393
392,381
1,038,263
1,250,190
868,847
121,135
85,072
28,288
6,669
46
5,053
806,134
484,122
1,066,597
1,250,205
873,900
927,269
316,499
162,837
190,337
108,476
23,942
179,185
355,378
41,711
824,563
1,408,619
1,795,920
1,024,087
Loans with predetermined interest rates
360,056
953,702
1,394,647
185,588
254,158
3,148,151
Loans with variable interest rates
464,507
454,917
401,273
838,499
673,111
2,832,307
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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 March 31, 2023.
After OneYear butWithin ThreeYears
After ThreeYears butWithin FiveYears
203,787
272,471
57,949
534,207
91,464
134,054
6,497
232,015
144,714
217,817
362,531
303,177
408,040
65,111
7,721
784,049
743,142
1,032,382
129,557
1,912,802
2,723
246,437
249,215
771,470
1,032,397
132,280
2,190,305
3,047
6,872
11,597
21,516
576,274
2,788,095
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 March 31, 2023.
26,364
42,657
311,965
418,114
138,377
10,761
139,968
307,469
39,725
55,298
129,255
90,656
109,091
257,375
53,672
510,794
295,122
217,807
739,289
113,414
1,365,632
2,331
559,697
562,033
295,127
741,620
1,927,665
159,790
183,466
96,879
440,135
2,367,800
Industry
As of March 31, 2023, the loan portfolio included the following concentrations of loans to one type of industry that were greater than 10.0% of loans receivable outstanding:
Percentage of
Balance as of
Lessor of nonresidential buildings
1,780,674
29.8
704,088
11.8
Loans 30 to 89 days past due and still accruing were $15.4 million at March 31, 2023, compared with $7.5 million at December 31, 2022, attributable mainly to a $6.7 million past due and accruing loan at March 31, 2023, that resolved its delinquency subsequent to the end of the first quarter.
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At March 31, 2023 and December 31, 2022, there were no loans 90 days or more past due and still accruing interest.
Special mention loans were $64.3 million at March 31, 2023 compared with $79.0 million at December 31, 2022. The $14.7 million decrease in special mention loans included downgrades to classified loans of $10.0 million, and payoffs of $4.6 million.
Classified loans were $47.3 million at March 31, 2023 compared with $46.2 million at December 31, 2022. The $1.1 million increase was primarily driven by the downgrade of one loan in the amount of $10.0 million, offset by loan upgrades of $8.8 million.
Activity in criticized loans was as follows for the periods indicated:
Additions
766
13,808
Reductions
(15,439
(12,713
95,294
60,633
133,134
15,808
(149,415
(30,249
Balance at December 31, 2022
Nonperforming Assets
Nonperforming loans consist of loans receivable on nonaccrual status and loans 90 days or more past due and still accruing interest. Nonperforming assets consist of nonperforming loans and OREO. Loans are placed on nonaccrual status when, in the opinion of management, the full timely collection of principal or interest is in doubt. Generally, the accrual of interest is discontinued when principal or interest payments become more than 90 days past due, unless we believe the loan is adequately collateralized and in the process of collection. However, in certain instances, we may place a particular loan on nonaccrual status earlier, depending upon the individual circumstances surrounding the loan’s delinquency. When a loan is placed on nonaccrual status, previously accrued but unpaid interest is reversed against current income. Subsequent collections of cash are applied as principal reductions when received, except when the ultimate collectability of principal is probable, in which case interest payments are credited to income. Nonaccrual loans may be restored to accrual status when principal and interest become current and full repayment is expected. Interest income is recognized on the accrual basis for impaired loans not meeting the criteria for nonaccrual. OREO consists of properties acquired by foreclosure or similar means, or vacant bank properties for which their usage for operations has ceased and management intends to offer for sale.
Except for nonaccrual loans, management is not aware of any other loans as of March 31, 2023 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 $20.1 million at March 31, 2023, or 0.34% of loans, compared with $9.8 million at December 31, 2022, or 0.17% of the portfolio. The increase reflects a $10.0 million commercial and industrial loan in the health-care industry secured by real estate and business assets for which there was a specific allowance of $2.5 million.
Nonperforming assets were $20.2 million at March 31, 2023, or 0.27% of total assets, compared with $10.0 million, or 0.14%, at December 31, 2022.
Individually Evaluated Loans
The Company reviews loans on an individual basis when the loan does not share similar risk characteristics with loan pools.
45
Individually evaluated loans were $20.1 million and $9.8 million as of March 31, 2023 and December 31, 2022, respectively, representing an increase of $10.3 million, or 103.6%. The increase primarily reflects the addition of a $10.0 million nonperforming commercial and industrial loan in the health-care industry. Specific allowances associated with individually evaluated loans increased $2.9 million to $6.2 million as of March 31, 2023 compared with $3.3 million as of December 31, 2022. The increase primarily reflects the addition of a $2.5 million specific allowance on the previously mentioned nonperforming loan in the health-care industry.
Allowance for Credit Losses and Allowance for Credit Losses Related to Off-Balance Sheet Items
The Company’s estimate of the allowance for credit losses at March 31, 2023 and December 31, 2022 reflected losses expected over the remaining contractual life of the assets based on historical, current, and forward-looking information. The contractual term does not consider extensions, renewals or modifications unless the Company has identified an expected troubled debt restructuring.
Management selected three loss methodologies for the collective allowance estimation. At March 31, 2023, 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. Reasonable and supportable forecasts of economic conditions are imbedded in the DCF model.
For each of the loan segments identified above, the Company applied an annualized historical PD/LGD using all available historical periods. The PD/LGD method incorporates a forecast of economic conditions into loss estimates using a qualitative adjustment.
The Company applied an expected loss ratio based on internal historical losses adjusted as appropriate for qualitative factors when applying the WARM method.
As of March 31, 2023 and December 31, 2022, the Company relied on the economic projections from Moody’s to inform its loss driver forecasts over the four-quarter forecast period. For all loan pools, the Company utilizes and forecasts the national unemployment rate as the primary loss driver.
To adjust the historical and forecast periods to current conditions, the Company applies various qualitative factors derived from market, industry or business specific data, changes in the underlying portfolio composition, trends relating to credit quality, delinquency, nonperforming and adversely rated equipment financing agreements, and reasonable and supportable forecasts of economic conditions.
The allowance for credit losses was $72.2 million at March 31, 2023 compared with $71.5 million at December 31, 2022. The allowance attributed to individually evaluated loans was $6.2 million at March 31, 2023 compared with $3.3 million at December 31, 2022. The allowance attributed to collectively evaluated loans was $66.0 million at March 31, 2023 compared with $68.2 million at December 31, 2022, and considered the impact of changes in macroeconomic assumptions, lower average loss rates in the commercial and industrial segment and normalized interest rate forecasts for the subsequent four quarters.
The following table reflects our allocation of the allowance for credit losses by loan category as well as the amount of loans in each loan category, including related percentages:
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
1.21
1.20
Nonaccrual loans to loans
0.34
0.17
Allowance for credit losses to nonaccrual loans
360.34
726.42
Balance:
Nonaccrual loans at end of period
Nonperforming loans at end of period
As of March 31, 2023 and December 31, 2022, the allowance for credit losses related to off-balance sheet items, primarily unfunded loan commitments, was $3.1 million. The Bank closely monitors the borrower’s repayment capabilities, while funding existing commitments to ensure losses are minimized. Based on management’s evaluation and analysis of portfolio credit quality and prevailing economic conditions, we believe these allowances were adequate for current expected lifetime losses in the loan portfolio and off-balance sheet exposure as of March 31, 2023.
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
3,800,499
(0.04
Residential loans
780,833
0.03
760,835
0.01
602,232
(1,136
(0.75
(1,455
(0.10
3,752,658
(335
407,967
578,583
492,464
For the three months ended March 31, 2023, gross charge-offs were $2.2 million, an increase of $1.4 million, from $0.8 million for the same period in 2022 and gross recoveries were $0.8 million, a decrease of $0.1 million, from $0.9 million for the three
47
months ended March 31, 2022. Net loan charge-offs were $1.5 million, or 0.10% of average loans, compared with net loan recoveries of $0.1 million, or 0.01% of average loans, for the three months ended March 31, 2023 and 2022, respectively.
Deposits
The following table shows the composition of deposits by type as of the dates indicated:
Demand – noninterest-bearing
37.6
41.3
Interest-bearing:
Demand
104,245
1.7
115,573
1,382,472
22.3
1,556,690
25.2
Uninsured time deposits of more than $250,000:
Three months or less
96,204
1.6
44,828
0.7
Over three months through six months
94,526
1.5
123,471
2.0
Over six months through twelve months
452,572
7.3
191,248
3.1
Over twelve months
72,093
1.2
138,451
2.2
Other time deposits
1,664,843
26.8
1,458,209
23.6
Total deposits were $6.20 billion and $6.17 billion as of March 31, 2023 and December 31, 2022, respectively, representing an increase of $33.0 million, or 0.5%. The increase in deposits was primarily driven by an increase of $424.0 million in time deposits, offset by a decrease of $391.0 million in all other deposits due to rising market rates and the shift to time deposits. At March 31, 2023, the loan-to-deposit ratio was 96.4% compared with 96.7% at December 31, 2022.
As of March 31, 2023, the aggregate amount of uninsured deposits (deposits in amounts greater than $250,000, which is the maximum amount for federal deposit insurance) was $2.60 billion, of which $1.88 billion were demand, money market and savings deposits and $715.4 million were time deposits. As of December 31, 2022, the aggregate amount of uninsured deposits was $2.65 billion, consisting of $2.15 billion in demand, money market and savings deposits and $498.0 million in time deposits.
Borrowings and Subordinated Debentures
Borrowings mostly take the form of advances from the FHLB. At both March 31, 2023 and December 31, 2022, total advances from the FHLB were $350.0 million. The Bank had $250.0 million of overnight advances from the FHLB at both March 31, 2023 and December 31, 2022.
The weighted-average interest rate of all FHLB advances at March 31, 2023 and December 31, 2022 was 4.11% and 3.57%, respectively.
The FHLB maximum amount outstanding at any month end during each of the year to date periods ended March 31, 2023 and December 31, 2022 was $350.0 million.
The following is a summary of contractual maturities greater than twelve months of FHLB advances:
FHLB of San Francisco
WeightedAverageRate
Outstanding advances over 12 months
2.83
0.78
48
Subordinated debentures were $129.6 million as of March 31, 2023 and $129.4 million as of December 31, 2022. Subordinated debentures are comprised of fixed-to-floating subordinated notes of $108.2 million as of March 31, 2023 and December 31, 2022, and junior subordinated deferrable interest debentures of $21.3 million and $21.2 million as of March 31, 2023 and December 31, 2022, respectively. See “Note 8 – Borrowings and Subordinated Debentures” to the consolidated financial statements for more details.
Stockholders’ equity at March 31, 2023 was $662.2 million, compared with $637.5 million at December 31, 2022. The increase was primarily due to $14.4 million of first quarter net income net of dividends as well as a $9.9 million reduction in unrealized after-tax loss due to changes in the value of the securities portfolio resulting from decreases in intermediate-term interest rates during the first quarter.
Interest Rate Risk Management
The spread between interest income on interest-earning assets and interest expense on interest-bearing liabilities is the principal component of net interest income, and interest rate changes substantially affect our financial performance. We emphasize capital protection through stable earnings. In order to achieve stable earnings, we prudently manage our assets and liabilities and closely monitor the percentage changes in net interest income and equity value in relation to limits established within our guidelines.
The Company performs simulation modeling to estimate the potential effects of interest rate changes. The following table summarizes one of the stress simulations performed to forecast the impact of changing interest rates on net interest income and the value of interest-earning assets and interest-bearing liabilities reflected on our balance sheet (i.e., an instantaneous parallel shift in the yield curve of the magnitude indicated below) as of March 31, 2023. 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
Percentage
Change
300%
14,669
6.24
7,822
3.16
200%
9,031
3.84
3,210
1.30
100%
5,337
2.27
3,616
1.46
(100%)
(7,224
(3.07
%)
(7,704
(3.11
(200%)
(16,260
(6.92
(19,522
(7.88
(300%)
(26,613
(11.32
(34,516
(13.93
Economic Value of Equity (EVE)
(30,634
(4.05
(20,334
(2.69
522
0.07
(22,630
(2.99
(69,952
(9.25
(140,113
(18.53
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
76
* 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, to $0.22 per share for the first and second quarters of 2022, and to $0.25 per share for the third and fourth quarters of 2022 and first quarter of 2023. The Board will 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 greater of: (1) retained earnings of the bank; (2) net income of the bank for its last fiscal year; or (3) the net income of the bank for its current fiscal year. As of April 1, 2023, the Bank has the ability to pay dividends of approximately $156.1 million, after giving effect to the $0.25 dividend declared for the second quarter of 2023, without the prior approval of the Commissioner of the DFPI.
At March 31, 2023, the Bank’s total risk-based capital ratio of 14.15%, Tier 1 risk-based capital ratio of 13.06%, common equity Tier 1 capital ratio of 13.06% and Tier 1 leverage capital ratio of 11.06%, placed the Bank in the “well capitalized” category pursuant to capital rules, which is defined as institutions with total risk-based capital ratio equal to or greater than 10.00%, Tier 1 risk-based capital ratio equal to or greater than 8.00%, common equity Tier 1 capital ratios equal to or greater than 6.50%, and Tier 1 leverage capital ratio equal to or greater than 5.00%.
At March 31, 2023, the Company's total risk-based capital ratio was 14.80%, Tier 1 risk-based capital ratio was 11.94%, common equity Tier 1 capital ratio was 11.59% and Tier 1 leverage capital ratio was 10.09%.
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 2022 Annual Report on Form 10-K.
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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 2022 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 2022 Annual Report on Form 10-K.
Contractual Obligations
There have been no material changes to the contractual obligations described in our 2022 Annual Report on Form 10-K.
51
Item 3. Quantitative and Qualitative Disclosures about Market Risk
For quantitative and qualitative disclosures regarding market risks in Hanmi Bank’s portfolio, see “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Interest Rate Risk Management” and “- Capital Resources” in this Report.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Management is responsible for the disclosure controls and procedures of the Corporation. Disclosure controls and procedures are controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods required by the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of the Corporation’s management, including the Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures. Based on that evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of March 31, 2023.
Changes in Internal Control over Financial Reporting
There were no changes in the Corporation's internal control over financial reporting (as defined in Rule 13a-15(f)) during the quarter ended March 31, 2023 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
Except as provided below, 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, 2022.
Our stock price may be negatively impacted by unrelated bank failures and negative depositor confidence in depository institutions. Further, if we are unable to adequately manage our liquidity, deposits, capital levels and interest rate risk, which have come under greater scrutiny in light of recent bank failures, it may have a material adverse effect on our financial condition and results of operations
On March 9, 2023, Silvergate Bank, La Jolla, California, announced its decision to voluntarily liquidate its assets and wind down operations. On March 10, 2023, Silicon Valley Bank, Santa Clara, California, was closed by the California Department of Financial Protection and Innovation and on March 12, 2023, Signature Bank, New York, New York, was closed by the New York State Department of Financial Services. In each case, the FDIC was named receiver. These banks also had elevated levels of uninsured deposits, which may be less likely to remain at the bank over time and less stable as a source of funding than insured deposits. These failures led to volatility and declines in the market for bank stocks and questions about depositor confidence in depository institutions.
These events have led to a greater focus by institutions, investors and regulators on the on-balance sheet liquidity of and funding sources for financial institutions, the composition of its deposits, including the amount of uninsured deposits, the amount of accumulated other comprehensive loss, capital levels and interest rate risk management. If we are unable to adequately manage our liquidity, deposits, capital levels and interest rate risk, it may have a material adverse effect on our financial condition and results of operations.
Rising Interest Rates Have Decreased the Value of the Company’s Securities Portfolio, and the Company Would Realize Losses if it Were Required to Sell Such Securities to Meet Liquidity Needs
As a result of inflationary pressures and the resulting rapid increases in interest rates over the last year, the trading value of previously issued government and other fixed income securities has declined significantly. These securities make up a majority of the securities portfolio of most banks in the U.S., including ours, resulting in unrealized losses embedded in the securities portfolios. While the Company does not currently intend to sell these securities, if the Company were required to sell such securities to meet liquidity needs, it may incur losses, which could impair the Company’s capital, financial condition, and results of operations and require the Company to raise additional capital on unfavorable terms, thereby negatively impacting its profitability. While the Company has taken actions to maximize its funding sources, there is no guarantee that such actions will be successful or sufficient in the event of sudden liquidity needs. Furthermore, while the Federal Reserve Board has announced a BTFP available to eligible depository institutions secured by U.S. treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral at par, to mitigate the risk of potential losses on the sale of such instruments, there is no guarantee that such programs will be effective in addressing liquidity needs as they arise.
Recent Negative Developments Affecting the Banking Industry, and Resulting Media Coverage, Have Eroded Customer Confidence in the Banking System
The recent high-profile bank failures involving Silicon Valley Bank and Signature Bank have generated significant market volatility among publicly traded bank holding companies and, in particular, regional banks. These market developments have negatively impacted customer confidence in the safety and soundness of financial institutions. As a result, customers may choose to maintain deposits with larger financial institutions or invest in higher yielding short-term fixed income securities, all of which could materially adversely impact the Company’s liquidity, loan funding capacity, net interest margin, capital and results of operations. While the Department of the Treasury, the Federal Reserve, and the FDIC have made statements ensuring that depositors of these recently failed banks would have access to their deposits, including uninsured deposit accounts, there is no guarantee that such actions will be successful in restoring customer confidence in regional banks and the banking system more broadly.
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% of its outstanding shares or approximately 1.5 million shares of common stock. As of March 31, 2023, 659,972 shares remained available for future purchases under that stock repurchase program.
The following table represents information with respect to repurchases of common stock made by the Company during the three months ended March 31, 2023:
Purchase Date:
Average Price Paid Per Share
Total Number of Shares Purchased as Part of Publicly Announced Program
Maximum Shares That May Yet Be Purchased Under the Program
January 1, 2023 - January 31, 2023
659,972
February 1, 2023 - February 28, 2023
March 1, 2023 - March 31, 2023
The Company acquired 14,628 shares from employees in connection with the satisfaction of employee tax withholding obligations incurred through vesting of Company stock awards for the three months ended March 31, 2023. Shares withheld to cover income taxes upon the vesting of stock awards are repurchased pursuant to the terms of the applicable plan and not under the Company's repurchase program.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Item 6. Exhibits
Exhibit
Document
31.1
Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
Inline XBRL Instance Document *
101.SCH
Inline XBRL Taxonomy Extension Schema 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 March 31, 2023, formatted in Inline XBRL
* Attached as Exhibit 101 to this report are documents formatted in Inline XBRL (Extensible Business Reporting Language).
† Constitutes a management contract or compensatory plan or arrangement.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
Hanmi Financial Corporation
Date:
May 8, 2023
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)