UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2024
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From To
Commission File Number: 000-30421
HANMI FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware
95-4788120
(State or Other Jurisdiction of
(I.R.S. Employer
Incorporation or Organization)
Identification No.)
900 Wilshire Boulevard, Suite 1250
Los Angeles, California
90017
(Address of Principal Executive Offices)
(Zip Code)
(213) 382-2200
(Registrant’s Telephone Number, Including Area Code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class
Trading
Symbol(s)
Name of each exchange on which registered
Common Stock, $0.001 par value
HAFC
Nasdaq Global Select Market
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of July 30, 2024, there were 30,268,376 outstanding shares of the Registrant’s Common Stock.
Hanmi Financial Corporation and Subsidiaries Quarterly Report on Form 10-Q
Three Months Ended June 30, 2024
Table of Contents
Part I – Financial Information
Item 1.
Financial Statements
3
Consolidated Balance Sheets at June 30, 2024 (unaudited) and December 31, 2023
Consolidated Statements of Income for the three and six months ended June 30, 2024 and 2023 (unaudited)
4
Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2024 and 2023 (unaudited)
5
Consolidated Statements of Changes in Stockholders’ Equity for the three and six months ended June 30, 2024 and 2023 (unaudited)
6
Consolidated Statements of Cash Flows for the six months ended June 30, 2024 and 2023 (unaudited)
8
Notes to Consolidated Financial Statements (unaudited)
9
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
43
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
64
Item 4.
Controls and Procedures
Part II – Other Information
Legal Proceedings
65
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
66
Signatures
67
2
Part I — Financial Information
Item 1. Financial Statements
Hanmi Financial Corporation and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share data)
June 30,
December 31,
2024
2023
(Unaudited)
Assets
Cash and due from banks
$
313,079
302,324
Securities available for sale, at fair value (amortized cost of $985,305 and $967,031 as of June 30, 2024 and December 31, 2023, respectively)
877,638
865,739
Loans held for sale, at the lower of cost or fair value
10,467
12,013
Loans receivable, net of allowance for credit losses of $67,729 and $69,462 as of June 30, 2024 and December 31, 2023, respectively
6,108,630
6,112,972
Accrued interest receivable
23,958
23,371
Premises and equipment, net
21,955
21,959
Customers' liability on acceptances
551
625
Servicing assets
6,836
7,070
Goodwill and other intangible assets, net
11,048
11,099
Federal Home Loan Bank ("FHLB") stock, at cost
16,385
Income tax assets
42,246
35,226
Bank-owned life insurance
56,534
56,335
Prepaid expenses and other assets
97,020
105,223
Total assets
7,586,347
7,570,341
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Noninterest-bearing
1,959,963
2,003,596
Interest-bearing
4,369,377
4,276,978
Total deposits
6,329,340
6,280,574
Accrued interest payable
47,699
39,306
Bank's liability on acceptances
Borrowings
292,500
325,000
Subordinated debentures ($136,800 and $136,800 face amount less unamortized discount and debt issuance costs of $6,482 and $6,788 as of June 30, 2024 and December 31, 2023, respectively)
130,318
130,012
Accrued expenses and other liabilities
78,880
92,933
Total liabilities
6,879,288
6,868,450
Stockholders’ equity:
Preferred stock, $0.001 par value; authorized 10,000,000 shares; no shares issued as of June 30, 2024 and December 31, 2023
—
Common stock, $0.001 par value; authorized 62,500,000 shares; issued 34,124,910 shares (30,272,110 shares outstanding) and 33,918,035 shares (30,368,655 shares outstanding) as of June 30, 2024 and December 31, 2023, respectively
34
Additional paid-in capital
588,647
586,912
Accumulated other comprehensive loss, net of tax benefit of $31,854 and $29,058 as of June 30, 2024 and December 31, 2023, respectively
(78,000
)
(71,928
Retained earnings
333,392
319,048
Less treasury stock; 3,852,800 shares and 3,549,380 shares as of June 30, 2024 and December 31, 2023, respectively
(137,014
(132,175
Total stockholders’ equity
707,059
701,891
Total liabilities and stockholders’ equity
See Accompanying Notes to Consolidated Financial Statements (Unaudited)
Consolidated Statements of Income (Unaudited)
(in thousands, except share and per share data)
Three Months Ended
Six Months Ended
Interest and dividend income:
Interest and fees on loans receivable
90,752
83,567
182,427
164,490
Interest on securities
5,238
4,126
10,193
8,152
Dividends on FHLB stock
357
283
719
572
Interest on deposits in other banks
2,313
2,794
4,914
4,859
Total interest and dividend income
98,660
90,770
198,253
178,073
Interest expense:
Interest on deposits
46,495
32,115
92,133
57,613
Interest on borrowings
1,896
1,633
3,551
4,002
Interest on subordinated debentures
1,649
1,600
3,295
3,182
Total interest expense
50,040
35,348
98,979
64,797
Net interest income before credit loss expense
48,620
55,422
99,274
113,276
Credit loss expense (recovery)
961
(77
1,188
2,056
Net interest income after credit loss expense (recovery)
47,659
55,499
98,086
111,220
Noninterest income:
Service charges on deposit accounts
2,429
2,571
4,878
5,151
Trade finance and other service charges and fees
1,277
1,173
2,691
2,431
Gain on sale of Small Business Administration ("SBA") loans
1,644
1,212
3,126
3,081
Other operating income
2,707
2,979
5,095
5,608
Total noninterest income
8,057
7,935
15,790
16,271
Noninterest expense:
Salaries and employee benefits
20,434
20,365
42,019
40,975
Occupancy and equipment
4,607
4,500
9,144
8,912
Data processing
3,686
3,465
7,237
6,718
Professional fees
1,749
1,376
3,642
2,710
Supplies and communications
570
638
1,172
1,314
Advertising and promotion
669
748
1,576
1,581
Other operating expenses
3,561
3,188
6,930
4,862
Total noninterest expense
35,276
34,280
71,720
67,072
Income before tax
20,440
29,154
42,156
60,419
Income tax expense
5,989
8,534
12,541
17,807
Net income
14,451
20,620
29,615
42,612
Basic earnings per share
0.48
0.68
0.98
1.40
Diluted earnings per share
0.67
0.97
1.39
Weighted-average shares outstanding:
Basic
30,055,913
30,324,264
30,089,341
30,320,281
Diluted
30,133,646
30,387,041
30,166,181
30,383,226
Consolidated Statements of Comprehensive Income (Unaudited)
(in thousands)
Other comprehensive income (loss), net of tax:
Unrealized gain (loss):
Unrealized holding gain (loss) on available for sale securities
(1,277
(9,730
(6,375
3,877
Unrealized loss on cash flow hedges
(746
(2,953
Unrealized gain (loss)
(2,023
(9,328
Income tax benefit (expense) related to other comprehensive income items
588
2,827
2,933
(849
Other comprehensive income (loss), net of tax
(1,435
(6,903
(6,395
3,028
Reclassification adjustment for losses included in net income
460
1,871
Income tax benefit related to reclassification adjustment
(135
(548
(137
(553
Reclassification adjustment for losses included in net income, net of tax
325
1,323
323
1,318
Other comprehensive income (loss) net of tax
(1,110
(5,580
(6,072
4,346
Total comprehensive income
13,341
15,040
23,543
46,958
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
For the Three Months Ended June 30, 2024 and 2023
Common Stock - Number of Shares
Stockholders' Equity
Accumulated
Additional
Other
Treasury
Total
Shares
Common
Paid-in
Comprehensive
Retained
Stock,
Stockholders'
Issued
Outstanding
Stock
Capital
Loss
Earnings
at Cost
Equity
Balance at April 1, 2023
33,827,801
(3,272,514
30,555,287
33
584,884
(79,059
283,910
(127,603
662,165
Issuance of awards pursuant to equity incentive plans, net of forfeitures
35,620
Share-based compensation expense
507
Shares surrendered to satisfy tax liability upon vesting of equity awards
(5,119
(79
Repurchase of common stock
(100,000
(1,444
Cash dividends paid (common stock, $0.25/share)
(7,629
Change in unrealized gain (loss) on securities available for sale, net of income taxes
Balance at June 30, 2023
33,863,421
(3,377,633
30,485,788
585,391
(84,639
296,901
(129,126
668,560
Balance at April 1, 2024
33,957,284
(3,680,926
30,276,358
587,687
(76,890
326,526
(134,257
703,100
167,626
960
(1,874
(28
(170,000
(2,729
(7,585
(906
Change in unrealized gain (loss) on cash flow hedge, net of income taxes
(204
Balance at June 30, 2024
34,124,910
(3,852,800
30,272,110
For the Six Months Ended June 30, 2024 and 2023
Balance at January 1, 2023
33,708,234
(3,222,613
30,485,621
583,410
(88,985
269,542
(126,485
637,515
Stock options exercised
50,000
821
105,187
1,160
(55,020
(1,197
Cash dividends paid (common stock, $0.50/share)
(15,253
Balance at January 1, 2024
33,918,035
(3,549,380
30,368,655
206,875
1,735
(33,420
(518
(270,000
(4,321
(15,271
(4,298
(1,774
7
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30,
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
3,214
3,467
Amortization of servicing assets - net
1,366
1,223
Credit loss expense
Loss on sales of securities
(Gain) loss on sales of SBA loans
(3,126
(3,081
Origination of SBA loans held for sale
(47,595
(48,904
Proceeds from sales of SBA loans
51,070
51,710
(Gain) loss on sales of residential loans
(808
Change in bank-owned life insurance
131
(541
Change in prepaid expenses and other assets
4,730
(1,417
Change in income tax assets
(4,087
7,091
Valuation adjustment on servicing assets
(385
Change in accrued interest payable and other liabilities
(5,399
13,269
Net cash provided by operating activities
32,034
70,131
Cash flows from investing activities:
Purchases of securities available for sale
(78,454
(32,928
Proceeds from matured, called and repayment of securities
58,848
44,347
Proceeds from sales of securities available for sale
8,149
Purchases of loans receivable
(24,656
Proceeds from sales of mortgage loans
50,352
Purchases of premises and equipment
(1,563
(1,663
Change in loans receivable, excluding purchases
(21,956
(1,173
Net cash provided by (used in) investing activities
(17,429
16,732
Cash flows from financing activities:
Change in deposits
48,765
147,696
Change in borrowings
(32,500
(225,000
Cash paid for employee vested shares surrendered due to employee tax liability
(376
(4,326
Cash dividends paid
Net cash used in financing activities
(3,850
(94,377
Net increase (decrease) in cash and due from banks
10,755
(7,514
Cash and due from banks at beginning of year
352,421
Cash and due from banks at end of period
344,907
Supplemental disclosures of cash flow information:
Interest paid
90,586
37,968
Income taxes paid
22,365
9,994
Non-cash activities:
Transfer of fixed assets to other real estate owned
655
2,796
(1,402
Change in right-of-use asset obtained in exchange for lease liability
(1,932
1,089
Cashless exercise of stock options
Notes to Consolidated Financial Statements (Unaudited)
Note 1 — Organization and Basis of Presentation
Hanmi Financial Corporation (“Hanmi Financial,” the “Company,” “we,” “us” or “our”) is a bank holding company whose primary subsidiary is Hanmi Bank (the “Bank”). Our primary operations are related to traditional banking activities, including the acceptance of deposits and the lending and investing of money by the Bank.
In management’s opinion, the accompanying unaudited consolidated financial statements of Hanmi Financial and its subsidiaries reflect all adjustments of a normal and recurring nature that are necessary for a fair presentation of the results for the interim period ended June 30, 2024. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted. The unaudited consolidated financial statements are prepared in conformity with GAAP and in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission. Operating results for the three-month or six-month periods ended June 30, 2024 are not necessarily indicative of the results that may be expected for the year ended December 31, 2024 or for any other period. The interim information should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2023 (the “2023 Annual Report on Form 10-K”).
The preparation of interim unaudited consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions affect the amounts reported in the unaudited financial statements and disclosures provided, and actual results could differ.
Recently Issued Accounting Standards Not Yet Effective
Accounting Standards Update (“ASU”) 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures: In December 2023, the Financial Accounting Standards Board (“FASB”) issued ASU 2023-09 to enhance the transparency and usefulness of income tax disclosures primarily related to income tax rate reconciliation and income taxes information. The amendments in ASU 2023-09 are effective for fiscal years beginning after December 15, 2024. The adoption of ASU 2023-09 is not expected to have material effect on the Company’s operating results or financial condition.
ASU 2023-07, Segment Reporting (Topic 280): Segment Reporting: In November 2023, FASB issued ASU 2023-07 to provide updates that improve reportable segment disclosure requirements, primarily through enhanced disclosures on significant segment expenses. The amendments in ASU 2023-07 are effective for fiscal years beginning after December 15, 2024. The adoption of ASU 2023-07 is not expected to have material effect on the Company’s operating results or financial condition.
Note 2 — Securities
The following is a summary of securities available for sale as of the dates indicated:
Gross
Estimated
Amortized
Unrealized
Fair
Cost
Gain
Value
June 30, 2024
U.S. Treasury securities
101,003
24
(1,031
99,996
U.S. government agency and sponsored agency obligations:
Mortgage-backed securities - residential
480,881
162
(66,175
414,868
Mortgage-backed securities - commercial
65,402
21
(12,551
52,872
Collateralized mortgage obligations
134,155
116
(10,059
124,212
Debt securities
127,258
(6,656
120,602
Total U.S. government agency and sponsored agency obligations
807,696
299
(95,441
712,554
Municipal bonds-tax exempt
76,606
(11,518
65,088
Total securities available for sale
985,305
(107,990
December 31, 2023
86,355
173
(1,040
85,488
504,544
481
(62,697
442,328
59,973
(11,982
47,991
106,823
237
(9,649
97,411
132,215
(7,590
124,625
803,555
718
(91,918
712,355
77,121
(9,225
67,896
967,031
891
(102,183
The amortized cost and estimated fair value of securities as of June 30, 2024 and December 31, 2023, by contractual or expected maturity, are shown below. Collateralized mortgage obligations are included in the table shown below based on their expected maturities. All other securities are included based on their contractual maturities.
Available for Sale
Fair Value
Within one year
103,597
101,624
62,521
61,828
Over one year through five years
138,045
131,977
169,176
160,983
Over five years through ten years
89,869
80,840
83,720
77,608
Over ten years
653,794
563,197
651,614
565,320
10
The following table summarizes debt securities available for sale in an unrealized loss position for which an allowance for credit losses has not been recorded at June 30, 2024 or December 31, 2023, aggregated by major security type and length of time in a continuous unrealized loss position:
Holding Period
Less than 12 Months
12 Months or More
Number
of
Securities
(in thousands, except number of securities)
53,200
17
(827
33,383
11
86,583
28
(223
26,217
(65,952
379,731
117
405,948
128
(4
4,380
1
(12,547
46,487
15
50,867
16
(259
37,445
(9,800
64,784
26
102,229
36
25
(486
68,042
22
(94,955
611,604
183
679,646
205
19
(690
121,242
39
(107,300
710,075
213
831,317
252
(57
21,024
(983
32,449
53,473
18
(11
2,324
(62,686
411,417
118
413,741
123
(38
7,074
(9,611
63,610
70,684
(49
9,398
(91,869
647,643
657,041
190
(106
30,422
14
(102,077
747,988
778,410
227
The Company evaluates its available for sale securities portfolio for impairment on a quarterly basis. The Company did not recognize unrealized losses in income because it has the ability and the intent to hold and does not expect to be required to sell these securities until the recovery of their cost basis. The quarterly impairment assessment takes into account the changes in the credit quality of these debt securities since acquisition and the likelihood of a credit loss occurring over the life of the securities. In the event that a credit loss is expected to occur in the future, an allowance is established and a corresponding credit loss is recognized. Based on this analysis, as of June 30, 2024, the Company determined that no credit losses were expected to be realized on the tax-exempt municipal bond portfolio. The remainder of the portfolio consists of U.S. Treasury obligations, U.S. government agency securities, and U.S. government sponsored agency securities, all of which have the backing of the U.S. government, and are therefore not expected to incur credit losses.
Realized gains and losses on sales of securities and proceeds from sales of securities were as follows for the periods indicated:
Gross realized gains on sales of securities
Gross realized losses on sales of securities
(1,871
Net realized gains (losses) on sales of securities
Proceeds from sales of securities
There were no sales of securities during the three and six months ended June 30, 2024. During the three and six months ended June 30, 2023, there were $1.9 million in net losses in earnings resulting from the sale of $8.1 million of securities previously recorded with $1.7 million unrealized losses in accumulated other comprehensive income.
Securities available for sale with market values of $31.4 million and $24.8 million as of June 30, 2024 and December 31, 2023, respectively, were pledged to secure borrowings from the Federal Reserve Bank (“FRB”) Discount Window.
At June 30, 2024, there were no holdings of securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of stockholders’ equity.
Note 3 — Loans
Loans Receivable
Loans consisted of the following as of the dates indicated:
Real estate loans:
Commercial property
Retail
1,094,728
1,107,360
Hospitality
754,600
740,519
Office
572,532
574,981
Other (1)
1,360,139
1,366,534
Total commercial property loans
3,781,999
3,789,394
Construction
106,506
100,345
Residential (2)
954,209
962,661
Total real estate loans
4,842,714
4,852,400
Commercial and industrial loans (3)
802,372
747,819
Equipment financing agreements
531,273
582,215
Loans receivable
6,176,359
6,182,434
Allowance for credit losses
(67,729
(69,462
Loans receivable, net
Accrued interest on loans was $20.0 million and $19.8 million at June 30, 2024 and December 31, 2023, respectively.
At June 30, 2024 and December 31, 2023, loans with carrying values of $2.41 billion and $2.36 billion, respectively, were pledged to secure advances from the FHLB.
Loans Held for Sale
The following is the activity for loans held for sale for the following periods:
Real Estate
Commercial and Industrial
Three months ended June 30, 2024
Balance at beginning of period
1,454
2,545
3,999
Originations and transfers
20,572
9,391
29,963
Sales
(14,877
(8,613
(23,490
Principal paydowns and amortization
(5
Balance at end of period
7,149
3,318
Three months ended June 30, 2023
379
3,273
3,652
14,494
9,094
23,588
(9,329
(10,614
(19,943
5,544
7,293
12
Six months ended June 30, 2024
8,792
3,221
30,186
17,409
47,595
(31,775
(17,301
(49,076
Principal payoffs and amortization
(54
(65
Six months ended June 30, 2023
3,775
4,268
8,043
30,881
18,023
48,904
(29,111
(20,532
(49,643
(1
(10
The following table presents loans purchased by portfolio segment for the following periods:
Commercial real estate
6,060
6,334
Commercial and industrial
8,398
18,322
Residential real estate
5,178
19,636
29,834
Allowance for Credit Losses
The following table details the information on the allowance for credit losses by portfolio segment for the following periods:
Equipment Financing Agreements
42,584
11,836
13,850
68,270
Charge-offs
(93
(2,152
(2,338
Recoveries
166
318
548
(403
(1,346
2,998
1,249
Ending balance
42,152
10,563
15,014
67,729
43,531
15,333
13,385
72,249
(103
(2,604
(2,707
62
555
350
967
(539
244
810
515
43,054
16,029
11,941
71,024
13
45,499
10,257
13,706
69,462
(248
(4,120
(4,461
111
224
741
1,076
(3,365
330
4,687
1,652
44,026
15,267
12,230
71,523
(412
(312
(4,220
(4,944
130
791
829
1,750
3,102
2,695
The table below presents the allowance for credit losses by portfolio segment as a percentage of the total allowance for credit losses and loans by portfolio segment as a percentage of the aggregate investment of loans receivable as of:
Allowance Amount
Percentage of Total Allowance
Total Loans
Percentage of Total Loans
(dollars in thousands)
10,126
15.0
%
17.7
10,264
14.8
17.9
11,995
12.2
15,534
22.4
12.0
3,712
5.5
9.3
3,024
4.4
7,889
11.6
22.0
8,663
12.4
22.1
33,722
49.8
61.2
37,485
54.0
61.3
2,371
3.5
1.7
2,756
4.0
1.6
Residential
8.9
15.5
5,258
7.5
15.6
42,153
62.2
78.4
65.5
78.5
Commercial and industrial loans
13.0
12.1
15,013
22.2
8.6
19.7
9.4
100.0
The following table represents the amortized cost basis of collateral-dependent loans by class of loans, for which repayment is expected to be obtained through the sale of the underlying collateral, as of:
560
1,530
282
338
2,950
305
3,792
2,173
1,225
813
5,830
2,174
3,927
9,757
7,352
Loan Quality Indicators
As part of the on-going monitoring of the quality of our loans portfolio, we utilize an internal loan grading system to identify credit risk and assign an appropriate grade (from 1 to 8) for each loan in our portfolio. Third-party loan reviews are conducted annually on a sample basis. Additional adjustments are made when determined to be necessary. The loan grade definitions are as follows:
Pass and Pass-Watch: Pass and Pass-Watch loans, grades (1-4), are in compliance with the Bank’s credit policy and regulatory requirements, and do not exhibit any potential or defined weaknesses as defined under “Special Mention”, “Substandard”
or “Doubtful.” This category is the strongest level of the Bank’s loan grading system. It consists of all performing loans with no identified credit weaknesses. It includes cash and stock/security secured loans or other investment grade loans.
Special Mention: A Special Mention loan, grade (5), has potential weaknesses that deserve management’s close attention. If not corrected, these potential weaknesses may result in deterioration of the repayment of the debt and result in a Substandard classification. Loans that have significant actual, not potential, weaknesses are considered more severely classified.
Substandard: A Substandard loan, grade (6), has a well-defined weakness that jeopardizes the liquidation of the debt. A loan graded Substandard is not protected by the sound worth and paying capacity of the borrower, or of the value and type of collateral pledged. With a Substandard loan, there is a distinct possibility that the Bank will sustain some loss if the weaknesses or deficiencies are not corrected.
Doubtful: A Doubtful loan, grade (7), is one that has critical weaknesses that would make the collection or liquidation of the full amount due improbable. However, there may be pending events which may work to strengthen the loan, and therefore the amount or timing of a possible loss cannot be determined at the current time.
Loss: A loan classified as Loss, grade (8), is considered uncollectible and of such little value that their continuance as active bank assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this asset even though partial recovery may be possible in the future. Loans classified as Loss will be charged off in a timely manner.
Under regulatory guidance, loans graded special mention or worse are considered criticized loans, and loans graded substandard or worse are considered classified loans.
Loans by Vintage Year and Risk Rating
Term Loans
Amortized Cost Basis by Origination Year (1)
2022
2021
2020
Prior
RevolvingLoansAmortizedCost Basis
Risk Rating
`
Pass / Pass-Watch
275,556
591,728
969,146
835,446
566,215
482,632
35,069
3,755,792
Special Mention
6,168
1,312
260
7,740
Classified
6,146
3,212
8,919
18,467
Total commercial property
281,914
975,292
838,658
567,527
491,811
YTD gross charge-offs
93
YTD net charge-offs (recoveries)
(13
(3
(16
50,939
26,024
76,963
28,318
Total construction
52,164
68,358
239,937
361,458
153,374
12,387
111,714
5,461
952,689
250
1,270
Total residential
241,207
5,711
(2
394,853
857,689
1,330,604
988,820
578,602
594,346
40,530
4,785,444
36,308
1,415
20,962
402,436
858,959
1,336,750
1,020,350
579,914
603,525
40,780
(18
Commercial and industrial loans:
131,352
80,571
138,965
46,328
16,075
17,018
367,024
797,333
294
97
23
200
614
392
4,425
Total commercial and industrial loans
131,646
139,058
16,185
17,433
371,151
155
29
248
153
(20
(173
Equipment financing agreements:
73,866
179,004
169,734
75,420
15,330
9,360
522,714
1,534
4,113
2,256
239
417
8,559
Total equipment financing agreements
180,538
173,847
77,676
15,569
9,777
347
2,525
874
262
112
4,120
315
2,302
685
219
(142
3,379
Total loans receivable:
600,071
1,117,264
1,639,303
1,110,568
610,007
620,724
407,554
6,105,491
6,462
1,409
450
36,922
2,804
10,352
5,468
9,728
33,946
Total loans receivable
607,948
1,120,068
1,649,655
1,144,354
611,668
630,735
411,931
411
2,680
234
4,461
2,455
206
(167
3,385
2019
683,819
986,822
858,821
572,950
378,067
238,400
30,236
3,749,115
4,400
3,997
3,271
5,670
711
2,310
1,406
21,765
3,065
1,080
4,899
5,578
3,892
18,514
691,284
991,899
866,991
578,620
384,356
244,602
31,642
216
627
403
(81
322
72,039
28,306
290,196
375,712
158,618
12,656
217
119,736
5,025
962,160
500
119,737
5,525
(7
1,046,054
1,362,534
1,017,439
585,606
378,284
358,136
35,261
4,783,314
31,577
1,906
50,571
3,893
18,515
1,053,519
1,367,611
1,053,915
591,276
384,573
364,339
37,167
(88
177,864
169,209
84,198
31,348
9,971
12,920
242,044
727,554
14,578
102
14,744
329
79
174
4,939
5,521
178,193
183,787
31,450
10,050
13,159
246,982
110
410
6,120
6,657
101
(6,621
6,090
(432
215,670
211,228
101,622
24,340
18,832
3,192
574,884
4,171
1,945
365
401
57
7,331
216,062
215,399
103,567
24,705
19,233
3,249
178
3,944
3,267
386
799
232
8,806
3,744
2,858
(114
7,160
1,439,588
1,742,971
1,203,259
641,294
407,087
374,248
277,305
6,085,752
18,575
5,772
2,375
1,905
65,315
3,786
5,251
6,844
6,058
4,124
31,367
1,447,774
1,766,797
1,241,680
647,431
413,856
380,747
284,149
3,961
797
909
858
16,090
3,749
2,851
647
351
(6,823
7,043
Loans by Vintage Year and Payment Performance
Payment performance
Performing
281,724
975,172
487,487
3,777,365
Nonperforming
120
4,324
4,634
105,281
12,053
111,235
953,396
334
479
401,021
1,336,630
579,580
598,722
4,836,042
4,803
6,672
17,346
367,224
798,358
87
4,014
606,533
1,118,534
1,645,422
1,142,098
611,095
625,428
408,004
6,157,114
4,233
573
5,307
19,245
689,449
866,841
384,275
243,819
3,786,545
1,835
150
81
783
2,849
962,660
1,051,684
1,053,765
384,492
363,555
4,849,550
784
2,850
31,415
13,066
242,134
742,514
35
4,848
5,305
18,844
574,896
389
7,319
1,445,218
1,762,626
1,239,585
647,031
413,386
379,813
279,301
6,166,960
2,556
2,095
400
470
934
15,474
The following is an aging analysis of loans, including loans on nonaccrual status, disaggregated by loan class, as of:
30-59DaysPast Due
60-89DaysPast Due
90 Daysor MorePast Due
TotalPast Due
Current
833
1,393
1,093,335
(24
754,624
816
571,716
3,314
1,356,825
1,975
3,510
5,499
3,776,500
824
2,366
812
950,207
2,799
2,380
4,322
9,501
4,833,213
752
301
3,931
4,984
797,388
6,823
2,515
5,191
14,529
516,744
10,374
5,196
13,444
29,014
6,147,345
632
1,106,728
172
740,347
592
1,365,942
1,224
1,396
3,787,998
521
336
961,803
1,745
486
2,254
4,850,146
76
5,374
742,445
7,138
2,134
4,551
13,823
568,392
8,959
2,740
9,752
21,451
6,160,983
20
Nonaccrual Loans and Nonperforming Assets
The following tables represent the amortized cost basis of loans on nonaccrual status and loans past due 90 days and still accruing as of:
Nonaccrual LoansWithNo Allowance forCredit Losses
Nonaccrual LoansWithAllowance forCredit Losses
LoansPast Due90 Days StillAccruing
TotalNonperformingLoans
697
525
1,222
259
2,949
204
3,153
3,905
729
5,943
4,010
678
7,881
6,625
12,620
1,717
321
2,038
488
2,360
489
2,361
5,213
92
6,749
8,144
7,330
The Company recognized $29,000 and $30,000 of interest income on nonaccrual loans for the three months ended June 30, 2024 and 2023, respectively. Interest income recognized on nonaccrual loans for the six months ended June 30, 2024 and 2023 was $38,000 and $134,000, respectively.
The following table details nonperforming assets as of the dates indicated:
Nonaccrual loans
Loans receivable 90 days or more past due and still accruing
Total nonperforming loans receivable
Other real estate owned (“OREO”)
772
Total nonperforming assets
20,017
15,591
OREO of $0.8 million and $0.1 million is included in prepaid expenses and other assets in the accompanying Consolidated Balance Sheets as of June 30, 2024 and December 31, 2023, respectively.
Loan Modifications
The following table presents loan modifications made to borrowers experiencing financial difficulty, by type of modification, with related amortized cost balances, respective percentage shares of the total class of loans, and the related financial effect, for the periods indicated:
Term Extension
Amortized Cost Basis
% of Total Class of Loans
Financial Effect
Three and six months ended June 30, 2024
2.6
1 loan with term extension of 6 years
The modified loan above is current at June 30, 2024.
No loans were modified to borrowers experiencing financial difficulty during the three and six months ended June 30, 2023.
Note 4 — Servicing Assets
The activity in servicing assets was as follows for the periods indicated:
Three Months Ended June 30,
6,890
7,542
Addition related to sale of SBA loans
482
399
Addition related to sale of residential loans
136
Amortization
(672
(589
Change in valuation allowance
7,176
996
1,014
(1,366
(1,223
385
At June 30, 2024 and December 31, 2023, we serviced loans sold to unaffiliated parties of $536.1 million and $539.6 million, respectively. These represented loans that were sold for which the Bank continues to provide servicing. These loans are maintained off-balance sheet and are not included in the loans receivable balance. At June 30, 2024, all of the loans serviced were SBA loans, except for $19.5 million of residential mortgage loans.
The Company recorded servicing fee income of $1.4 million and $1.3 million for the three months ended June 30, 2024 and 2023, respectively and $2.7 million and $2.6 million for the six months ended June 30, 2024 and 2023, 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 $0.7 million and $0.6 million for the three months ended June 30, 2024 and 2023, respectively, and $1.4 million and $1.2 million for the six months ended June 30, 2024 and 2023, respectively.
The fair value of servicing rights was $8.1 million at June 30, 2024 and was determined using discount rates ranging from 10.1% to 25.5% and prepayment speeds ranging from 11.4% to 21.4%, depending on the stratification of the specific right. The fair value of servicing rights was $7.7 million at December 31, 2023 and was determined using discount rates ranging from 14.4% to 24.7% and prepayment speeds ranging from 12.2% to 19.7%, depending on the stratification of the specific right.
Note 5 — Income Taxes
The Company’s income tax expense was $6.0 million and $8.5 million, representing an effective income tax rate of 29.3% and 29.3% for the three months ended June 30, 2024 and 2023, respectively. The Company’s income tax expense was $12.5 million and $17.8 million, representing an effective income tax rate of 29.7% and 29.5% for the six months ended June 30, 2024 and 2023, respectively.
Management concluded that as of June 30, 2024 and December 31, 2023, a valuation allowance of $1.8 million and $1.9 million, respectively, was appropriate against certain state net operating loss carry forwards. For all other deferred tax assets, management believes it was more likely than not these deferred tax assets will be realized principally through future taxable income and reversal of existing taxable temporary differences. Net deferred tax assets were $35.9 million and $35.2 million as of June 30, 2024 and December 31, 2023, respectively.
As of June 30, 2024, the Company was subject to examination by various taxing authorities for its federal tax returns for the periods ended after December 31, 2019 and state tax returns for the periods ended after December 31, 2018. During the quarter ended June 30, 2024, there was no material change to the Company’s uncertain tax positions. The Company does not expect its unrecognized tax positions to change significantly over the next twelve months.
Note 6 — Goodwill and other Intangibles
The goodwill of $11.0 million was 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
(2,196
(2,145
68
Third-party originator's intangible
7 years
483
(483
Goodwill
N/A
11,031
Total intangible assets
13,244
13,727
(2,628
The Company performed an impairment analysis in the second quarter of 2024 and determined there was no impairment as of June 30, 2024. No triggering event occurred as of, or subsequent to June 30, 2024, that would require a reassessment of goodwill and other intangible assets.
Note 7 — Deposits
The scheduled maturities of time deposits are as follows for the periods indicated:
TimeDeposits MoreThan $250,000
Other TimeDeposits
At June 30, 2024
720,184
959,204
1,679,388
2025
282,055
483,676
765,731
2026
263
4,953
5,216
2027
955
2028 and thereafter
309
1,002,502
1,449,097
2,451,599
At December 31, 2023
995,830
1,444,509
2,440,339
3,928
6,205
10,133
3,142
3,405
418
1,000,021
1,454,846
2,454,867
Accrued interest payable on deposits was $47.6 million and $39.2 million at June 30, 2024 and December 31, 2023, respectively. Total deposits reclassified to loans due to overdrafts at June 30, 2024 and December 31, 2023 were $1.4 million and $1.6 million, respectively.
Note 8 — Borrowings and Subordinated Debentures
At June 30, 2024, the Bank had $180.0 million of open advances and $112.5 million of term advances at the FHLB with a weighted average interest rate of 5.65% and 3.91%, respectively. At December 31, 2023, the Bank had $212.5 million of open advances and $112.5 million of term advances at the FHLB with a weighted average rate of 5.70% and 2.77%, respectively. Interest expense on borrowings for the six months ended June 30, 2024 and 2023 was $3.6 million and $4.0 million, respectively.
OutstandingBalance
WeightedAverage Rate
Open advances
180,000
5.65
212,500
5.70
Advances due within 12 months
3.33
37,500
0.40
Advances due over 12 months through 24 months
4.25
12,500
1.90
Advances due over 24 months through 36 months
4.85
62,500
4.37
Outstanding advances
4.98
4.69
The following is financial data pertaining to FHLB advances:
Weighted-average interest rate at end of period
Weighted-average interest rate during the period
4.30
3.48
Average balance of FHLB advances
165,810
197,390
Maximum amount outstanding at any month-end
450,000
The Bank maintains a secured credit facility with the FHLB, allowing the Bank to borrow on an overnight and term basis. The Bank had pledged $2.41 billion and $2.36 billion of loans at carrying values as collateral with the FHLB as of June 30, 2024 and
December 31, 2023, respectively. The remaining available borrowing capacity was $1.22 billion and $1.09 billion at June 30, 2024 and December 31, 2023, respectively.
The Bank also had securities pledged with the FRB with market values of $31.4 million and $24.8 million at June 30, 2024 and December 31, 2023, respectively. The pledged securities provided $29.4 million, and $23.2 million in available borrowing capacity through the Fed Discount Window as of June 30, 2024 and December 31, 2023, 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 June 30, 2024 and December 31, 2023, the balance of the 2031 Notes included in the Company’s Consolidated Balance Sheet, net of issuance cost, was $108.4 million and $108.3 million, respectively.
The Company assumed Junior Subordinated Deferrable Interest Debentures (“Subordinated Debentures”) as a result of an acquisition in 2014 with an unpaid principal balance of $26.8 million and an estimated fair value of $18.5 million. The $8.3 million discount is being amortized to interest expense through the debentures’ maturity date of March 15, 2036. A trust was formed in 2005 which issued $26.0 million of Trust Preferred Securities (“TPS”) at a 6.26% fixed rate for the first five years and a variable rate of three-month LIBOR plus 140 basis points thereafter and invested the proceeds in the Subordinated Debentures. Beginning September 15, 2023, the variable rate on the TPS changed to three-month SOFR plus 166 basis points, representing the credit spread of 140 basis points and a 26 basis point adjustment to convert three-month LIBOR to three-month SOFR. The rate on the TPS at June 30, 2024 was 7.00%. The TPS will be subject to mandatory redemption if the Subordinated Debentures are repaid by the Company. Interest is payable quarterly, and the Company has the option to defer interest payments on the Subordinated Debentures from time to time for a period not to exceed five consecutive years. At June 30, 2024 and December 31, 2023, the balance of Subordinated Debentures included in the Company’s Consolidated Balance Sheets, net of discount of $4.9 million and $5.1 million, was $21.9 million and $21.7 million, respectively. The amortization of discount was $106,000 and $104,000 for the three months ended June 30, 2024 and 2023, respectively and $212,000 and $208,000 for the six months ended June 30, 2024 and 2023, respectively.
Note 9 — Earnings Per Share
Earnings per share (“EPS”) is calculated on both a basic and a diluted basis. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted from the issuance of common stock that then shared in earnings, excluding common shares in treasury. For diluted EPS, the weighted-average number of common shares includes the impact of unvested performance stock units (“PSUs”) under the treasury method.
Unvested restricted stock containing rights to non-forfeitable dividends are considered participating securities prior to vesting and have been included in the earnings allocation in computing basic and diluted EPS under the two-class method.
The following table is a reconciliation of the components used to derive basic and diluted EPS for the periods indicated:
(dollars in thousands, except per share amounts)
Basic EPS
Less: income allocated to unvested restricted stock
129
222
268
Income allocated to common shares
14,322
20,492
29,393
42,344
Weighted-average shares for basic EPS
Basic EPS (1)
Effect of dilutive stock options and unvested performance stock units
77,733
62,777
76,840
62,945
Diluted EPS
Weighted-average shares for diluted EPS
Diluted EPS (1)
On a weighted-average basis, options to purchase 31,000 and 61,000 shares of common stock were excluded from the calculation of diluted earnings per share for the three and six months ended June 30, 2024 and 2023, respectively, because their effect would have been anti-dilutive. There were 91,732 anti-dilutive unvested PSUs outstanding for the three and six months ended June 30, 2024.
During the six months ended June 30, 2024, 88,598 PSUs were awarded to executive officers from the 2021 Equity Compensation Plan, with a fair value of $1.3 million on the grant date of April 1, 2024. During the six months ended June 30, 2023, the Company issued 53,696 PSUs to executive officers from the 2021 Equity Compensation Plan, with a fair value of $1.1 million on the grant date of March 10, 2023. These units have a three-year cliff vesting period and include dividend equivalent rights. Total PSUs outstanding as June 30, 2024 were 180,330 with an aggregate grant fair value of $3.4 million. Total PSUs outstanding as of June 30, 2023 were 158,295 with an aggregate grant fair value of $3.1 million.
Note 10 — Regulatory Matters
Federal bank regulatory agencies require bank holding companies and banks to maintain a minimum ratio of qualifying total capital to risk-weighted assets of 8.0% and a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0%. In addition to the risk-based guidelines, federal bank regulatory agencies require bank holding companies and banks to maintain a minimum ratio of Tier 1 capital to average assets, referred to as the leverage ratio, of 4.0%.
In order for banks to be considered “well capitalized,” federal bank regulatory agencies require a minimum ratio of qualifying total capital to risk-weighted assets of 10.0% and a minimum ratio of Tier 1 capital to risk-weighted assets of 8.0%. In addition to the risk-based guidelines, federal bank regulatory agencies require depository institutions to maintain a minimum ratio of Tier 1 capital to average assets, referred to as the leverage ratio, of 5.0%.
At June 30, 2024, the Bank’s capital ratios exceeded the minimum requirements for the Bank to be considered “well capitalized” and the Company exceeded all of its applicable minimum regulatory capital ratio requirements.
A capital conservation buffer of 2.5% must be met to avoid limitations on the ability of the Bank and the Company to pay dividends, repurchase shares or pay discretionary bonuses. The Bank's capital conservation buffer was 6.51% and 6.27% and the Company's capital conservation buffer was 6.46% and 6.20% as of June 30, 2024 and December 31, 2023, respectively.
In March 2020, federal banking agencies announced an interim final rule to delay the impact on regulatory capital arising from the implementation of CECL. The interim final rule maintains the three-year transition option in the previous rule and provides banks the option to delay for two years an estimate of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period (five-year transition option). The Company and the Bank adopted the capital transition relief over the permissible five-year period.
The capital ratios of Hanmi Financial and the Bank as of June 30, 2024 and December 31, 2023 were as follows:
Minimum
Minimum to Be
Regulatory
Categorized as
Actual
Requirement
“Well Capitalized”
Amount
Ratio
Total capital (to risk-weighted assets):
Hanmi Financial
962,585
15.24
505,278
8.00
Hanmi Bank
916,437
14.51
505,135
631,419
10.00
Tier 1 capital (to risk-weighted assets):
786,761
12.46
378,958
6.00
850,613
13.47
378,851
Common equity Tier 1 capital (to risk-weighted assets)
764,886
12.11
284,219
4.50
284,139
410,422
6.50
Tier 1 capital (to average assets):
10.51
299,570
4.00
11.41
298,076
372,595
5.00
947,286
14.95
506,891
904,153
14.27
506,741
633,426
773,179
12.20
380,168
840,046
13.26
380,056
751,516
11.86
285,126
285,042
411,727
10.37
298,277
11.32
296,948
371,185
27
Note 11 — Fair Value Measurements
Fair Value Measurements
ASC 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value including a three-level valuation hierarchy, and expands disclosures about fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The three-level fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value are defined as follows:
Fair value is used on a recurring basis for certain assets and liabilities in which fair value is the primary basis of accounting. Additionally, fair value is used on a non-recurring basis to evaluate assets or liabilities for impairment or for disclosure purposes.
We record securities available for sale at fair value on a recurring basis. Certain other assets, such as loans held for sale, impaired loans, OREO, and core deposit intangible, are recorded at fair value on a non-recurring basis. Non-recurring fair value measurements typically involve assets that are periodically evaluated for impairment and for which any impairment is recorded in the period in which the re-measurement is performed.
The following methods and assumptions were used to estimate the fair value of each class of financial instrument below:
Securities available for sale - The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges. If quoted prices are not available, fair values are measured using matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities, or other model-based valuation techniques requiring observable inputs other than quoted prices such as yield curve, prepayment speeds, and default rates. Level 1 securities include U.S. Treasury securities that are traded on an active exchange or by dealers or brokers in active over-the-counter markets. The fair value of these securities is determined by quoted prices on an active exchange or over-the-counter market. Level 2 securities primarily include U.S. government agency and sponsored agency mortgage-backed securities, collateralized mortgage obligations and debt securities as well as municipal bonds in markets that are active. In determining the fair value of the securities categorized as Level 2, we obtain reports from nationally recognized broker-dealers detailing the fair value of each investment security held as of each reporting date. The broker-dealers use prices obtained from nationally recognized pricing services to value our fixed income securities. The fair value of the municipal securities is determined based on pricing data provided by nationally recognized pricing services. We review the prices obtained for reasonableness based on our understanding of the marketplace, and also consider any credit issues related to the bonds. As we have not made any adjustments to the market quotes provided to us and as they are based on observable market data, they have been categorized as Level 2 within the fair value hierarchy. Level 3 securities are instruments that are not traded in the market. As such, no observable market data for the instrument is available, which necessitates the use of significant unobservable inputs.
Derivatives – The fair values of derivatives are based on valuation models using observable market data as of the measurement date (Level 2). Our derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rates, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services.
Loans held for sale - Loans held for sale includes the guaranteed portion of SBA 7(a) loans carried at the lower of cost or fair value. Management obtains quotes, bids or pricing indication sheets on all or part of the loans directly from the purchasing financial institutions. Premiums received or to be received on the quotes, bids or pricing indication sheets are indicative of the fact that cost is lower than fair value. At June 30, 2024 and December 31, 2023, the entire balance of loans held for sale was recorded at its cost. We record loans held for sale on a nonrecurring basis with Level 2 inputs.
Nonperforming loans – Nonaccrual loans receivable and loans 90-days past due and still accruing interest are considered nonperforming for reporting purposes. 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, for which repayment is expected to be obtained through the sale of the underlying collateral, are recorded based on either the current appraised value of the collateral, or management’s judgment, that are then adjusted based on recent market trends. When the fair value of the collateral is less than the book value, a valuation allowance is established to carry the loan at the fair value of the collateral, and results in a Level 3 measurement.
OREO - Fair value of OREO is based primarily on third party appraisals, less costs to sell and result in a Level 3 classification of the inputs for determining fair value. Appraisals are required annually and may be updated more frequently as circumstances require and the fair value adjustments are made to OREO based on the updated appraised value of the property.
Servicing assets - On a quarterly basis, the Company utilizes a third party service to evaluate servicing assets related to loans sold to unaffiliated parties with servicing retained, and result in a Level 3 classification. Servicing assets are assessed for impairment or increased obligation based on fair value at each reporting date.
Other repossessed assets – Fair value of equipment from equipment financing agreements is based primarily on a third party valuation service, less costs to sell and result in a Level 3 classification of the inputs for determining fair value. Valuations are required at the time the asset is repossessed and may be subsequently updated periodically due to the Company’s short-term possession of the asset prior to sale or as circumstances require and the fair value adjustments are made to the asset based on its value prior to sale.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
As of June 30, 2024 and December 31, 2023, assets and liabilities measured at fair value on a recurring basis are as follows:
Level 1
Level 2
Level 3
Significant
Observable
Quoted Prices in
Inputs with No
Active Markets
Active Market
for Identical
with Identical
Unobservable
Characteristics
Inputs
Total Fair Value
Assets:
Securities available for sale:
777,642
Derivative financial instruments
6,216
8,570
780,251
6,245
5,920
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Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
As of June 30, 2024 and December 31, 2023, assets and liabilities measured at fair value on a non-recurring basis are as follows:
Inputs With No
With Identical
Collateral dependent loans (1)
7,795
Other real estate owned
Repossessed personal property
1,245
Collateral dependent loans (2)
1,305
31
The following table represents quantitative information about Level 3 fair value assumptions for assets measured at fair value on a non-recurring basis at June 30, 2024 and December 31, 2023:
ValuationTechniques
UnobservableInput(s)
Range (WeightedAverage)
Collateral dependent loans:
561
Market approach
Adjustments to market data
(45%) to 30% / (15)%
(1)
(30)% to 35% / (3)%
(11)% to 21% / 2%
5% to 20% / 15%
(13) to 5% / (1)%
5,832
1,963
(2)
(35)% to 5% / (12)%
(3)
(30)% to 35% / (1)%
(6)% to 1% / (2)%
(15)% to 3% / (6)%
(20)% to 55% / (2)%
(10)% to 5% / (2)%
ASC 825, Financial Instruments, requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring
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basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured on a recurring basis or non-recurring basis are discussed above.
The estimated fair value of financial instruments has been determined by using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data in order to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that we could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
Recognition and Measurement of Financial Assets and Financial Liabilities (Topic 825), among other provisions, requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. Other than certain financial instruments for which we had concluded that the carrying amounts approximate fair value, the fair value estimates shown below were based on an exit price notion as of June 30, 2024, as required by ASU 2016-01. The financial instruments for which we had concluded that the carrying amounts approximate fair value include cash and due from banks, accrued interest receivable and payable, and noninterest-bearing deposits.
The estimated fair values of financial instruments were as follows:
Carrying
Financial assets:
Securities available for sale
Loans held for sale
10,639
Loans receivable, net of allowance for credit losses
6,023,684
Financial liabilities:
Noninterest-bearing deposits
Interest-bearing deposits
4,364,613
Borrowings and subordinated debentures
422,818
291,145
133,245
12,238
6,007,975
4,271,711
455,012
323,491
128,229
The methods and assumptions used to estimate the fair value of each class of financial instruments for which it was
practicable to estimate that value are explained below:
Cash and due from banks – The carrying amounts of cash and due from banks approximate fair value due to the short-term nature of these instruments (Level 1).
Securities – The fair value of securities, consisting of securities available for sale, is generally obtained from market bids for similar or identical securities, from independent securities brokers or dealers, or from other model-based valuation techniques described above (Level 1 and 2).
Loans held for sale – Loans held for sale, representing the guaranteed portion of SBA loans, are carried at the lower of aggregate cost or fair market value, as determined based upon quotes, bids or sales contract prices (Level 2).
Loans receivable, net of allowance for credit losses – The fair value of loans receivable is estimated based on the discounted cash flow approach. To estimate the fair value of the loans, certain loan characteristics such as account types, remaining terms, annual interest rates or coupons, interest types, past delinquencies, timing of principal and interest payments, current market rates, loan-to-value ratios, loss exposures, and remaining balances are considered. Additionally, the Company’s prior charge-off rates and loss ratios as well as various other assumptions relating to credit, interest, and prepayment risks are used as part of valuing the loan portfolio. Subsequently, the loans were individually evaluated by sorting and pooling them based on loan types, credit risk grades, and payment types. Consistent with the requirements of ASU 2016-01, the fair value of the Company's loans receivable is considered to be an exit price notion as of June 30, 2024 (Level 3).
The fair value of collateral dependent loans is estimated based on the net realizable fair value of the collateral or the observable market price of the most recent sale or quoted price from loans held for sale. The Company does not record loans at fair value on a recurring basis. Nonrecurring fair value adjustments to collateral dependent loans are recorded based on the current appraised value of the collateral (Level 3).
Accrued interest receivable – The carrying amount of accrued interest receivable approximates its fair value (Level 1).
Noninterest-bearing deposits – The fair value of noninterest-bearing deposits is the amount payable on demand at the reporting date (Level 2).
Interest-bearing deposits – The fair value of interest-bearing deposits, such as savings accounts, money market checking, and certificates of deposit, is estimated based on discounted cash flows. The cash flows for non-maturity deposits, including savings accounts and money market checking, are estimated based on their historical decaying experiences. The discount rate used for fair valuation is based on interest rates currently being offered by the Bank on comparable deposits as to amount and term (Level 3).
Borrowings and subordinated debentures – Borrowings consist of FHLB advances, subordinated debentures and other borrowings. Discounted cash flows based on current market rates for borrowings with similar remaining maturities are used to estimate the fair value of borrowings (Level 2 and 3).
Accrued interest payable – The carrying amount of accrued interest payable approximates its fair value (Level 1).
Note 12 — Off-Balance Sheet Commitments
The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk similar to the risk involved with on-balance sheet items.
The Bank’s exposure to losses in the event of non-performance by the other party to commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for extending loan facilities to customers. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, was based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, premises and equipment, and income-producing or borrower-occupied properties.
Some of the commitments to fund existing loans, lines of credit and letters of credit are expected to expire without being drawn upon. Therefore, the total commitments do not necessarily represent future cash requirements. As of June 30, 2024, the Bank was obligated on $120.0 million of letters of credit to the FHLB of San Francisco, which were being used as collateral for $120.0 million in public fund deposits from the State of California.
The following table shows the distribution of total loan commitments as of the dates indicated:
Unused commitments to extend credit
795,391
813,960
Standby letters of credit
87,186
83,725
Commercial letters of credit
23,806
33,140
Total commitments
906,383
930,825
The allowance for credit losses related to off-balance sheet items was maintained at a level believed to be sufficient to absorb current expected lifetime losses related to these unfunded credit facilities. The determination of the allowance adequacy was based on periodic evaluations of the unfunded credit facilities including an assessment of the probability of commitment usage, credit risk factors for loans outstanding to these same customers, and the terms and expiration dates of the unfunded credit facilities.
Activity in the allowance for credit losses related to off-balance sheet items was as follows for the periods indicated:
2,297
3,066
2,474
3,114
Credit loss recovery
(287
(591
(464
(639
2,010
2,475
Note 13 — Leases
The Company enters into leases in the normal course of business primarily for bank branch offices, back-office operations locations, business development offices, information technology data centers and information technology equipment. The Company’s leases have remaining terms ranging from one month to nine years and nine months, some of which include renewal or termination options to extend the lease for up to seven years.
The Company includes lease extension and termination options in the lease term if, after considering relevant economic factors, it is reasonably certain the Company will exercise the option. In addition, the Company has elected to account for any non-lease components in its real estate leases as part of the associated lease component. The Company has also elected not to recognize leases with original lease terms of 12 months or less (short-term leases) on the Company’s balance sheet.
Leases are classified as operating or finance leases at the lease commencement date. Lease expense for operating leases and short-term leases is recognized on a straight-line basis over the term of the lease. Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease.
Right-of-use assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of the lease payments over the lease term.
As of June 30, 2024, the outstanding balances for our right-of-use asset and lease liability were $38.0 million and $42.3 million, respectively. The outstanding balances of the right-of-use asset and lease liability were $42.4 million and $46.4 million, respectively, as of December 31, 2023. The right-of-use asset is reported in prepaid expenses and other assets line item and lease liability is reported in accrued expenses and other liabilities line item on the Consolidated Balance Sheets.
In determining the discount rates, since most of our leases do not provide an implicit rate, we used our incremental borrowing rate provided by the FHLB of San Francisco based on the information available at the commencement date to calculate the present value of lease payments.
At June 30, 2024, future minimum rental commitments under these non-cancelable operating leases, with initial or remaining terms of one year or more, were as follows:
8,448
7,327
6,599
6,559
2028
5,566
Thereafter
12,627
Remaining lease commitments
47,126
Interest
(4,792
Present value of lease liability
42,334
Net lease expense recognized for the three months ended June 30, 2024 and 2023 was $2.5 million and $2.2 million, respectively. Net lease expense recognized for the six months ended June 30, 2024 and 2023 was $4.7 million and $4.2 million, respectively. This included operating lease costs of $2.4 million and $2.1 million for the three months ended June 30, 2024 and 2023, respectively. Operating lease costs were $4.6 million and $4.2 million for the six months ended June 30, 2024 and 2023, respectively. Sublease income for operating leases was immaterial for both the three and six months ended June 30, 2024 and 2023.
Weighted average remaining lease terms for the Company's operating leases were 6.58 years and 6.82 years as of June 30, 2024 and December 31, 2023, respectively. Weighted average discount rates used for the Company's operating leases were 3.21% and 2.98% as of June 30, 2024 and December 31, 2023, respectively.
Cash paid and included in cash flows from operating activities for amounts used in the measurement of the lease liability of the Company's operating leases was $2.0 million and $2.1 million for the three months ended June 30, 2024 and 2023, respectively, and $4.2 million and $4.1 million for the six months ended June 30, 2024 and 2023, respectively.
Note 14 — Liquidity
As of June 30, 2024, Hanmi Financial had $7.5 million in cash on deposit with its bank subsidiary and $35.5 million of U.S. Treasury securities at fair value. As of December 31, 2023, the Company had $7.5 million in cash on deposit with its bank subsidiary and $32.4 million of U.S. Treasury securities at fair value. Management believes that Hanmi Financial, on a stand-alone basis, had adequate liquid assets to meet its current debt obligations.
The principal objective of our liquidity management program is to maintain the Bank’s ability to meet the day-to-day cash flow requirements of its customers who wish either to withdraw funds or to draw upon credit facilities to meet their cash needs. Management believes that the Bank, on a stand-alone basis, has adequate liquid assets to meet its current obligations. The Bank’s primary funding source will continue to be deposits originating from its branch platform. The Bank’s wholesale funds historically consisted of FHLB advances, brokered deposits, as well as State of California time deposits. As of June 30, 2024 and December 31, 2023, the Bank had $292.5 million and $325.0 million of FHLB advances, and $28.2 million and $58.3 million of brokered deposits, respectively. As of June 30, 2024 and December 31, 2023, the Bank had $120.0 million of State of California time 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 June 30, 2024 and December 31, 2023, the total borrowing capacity available, based on pledged collateral was $1.63 and $1.54 billion, respectively. The remaining available borrowing capacity was $1.22 billion and $1.09 billion as of June 30, 2024 and December 31, 2023, respectively.
The amount that the FHLB is willing to advance differs based on the quality and character of qualifying collateral pledged by the Bank, and the FHLB may adjust the advance rates for qualifying collateral upwards or downwards from time to time. To the extent deposit renewals and deposit growth are not sufficient to fund maturing and withdrawable deposits, repay maturing borrowings, fund existing and future loans, equipment financing agreements and securities, and otherwise fund working capital needs and capital expenditures, the Bank may utilize the remaining borrowing capacity from its FHLB borrowing arrangement.
As a means of augmenting its liquidity, the Bank had an available borrowing source of $29.4 million from the Federal Reserve Discount Window, to which the Bank pledged securities with a carrying value of $38.4 million, with no borrowings as of June 30, 2024. The Bank also maintains a line of credit for repurchase agreements up to $100.0 million. The Bank also had three unsecured federal funds lines of credit totaling $115.0 million with no outstanding balances as of June 30, 2024 or December 31, 2023.
Note 15 — Derivatives and Hedging Activities
Risk Management Objective of Using Derivative
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities and through the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates.
Derivatives Designated as Hedging Instruments - Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest income and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of fixed-rate amounts from a counterparty in exchange for the Company making variable-rate payments over the life of the agreements without exchange of the underlying notional amount. Such derivatives were used to hedge the variable cash flows associated with existing variable-rate assets. During the fourth quarter of 2023, the Company entered into a $100.0 million notional interest rate swap designated as a cash flow hedge, with an effective date of May 1, 2024 and a maturity date of May 1, 2026, to hedge a pool of Prime-indexed loans against falling rates. The principal balance of the loan pool designated for the Prime-indexed loans was $142.7 million as of June 30, 2024. During the first quarter of 2024, the Company entered into a $75.0 million notional interest rate swap designated as a cash flow hedge, with an effective date of May 1, 2024 and a maturity date of May 1, 2026, to hedge a pool of one-month SOFR-indexed loans against falling rates. The principal balance of the loan pool designated for the SOFR-indexed loans was $103.2 million as of June 30, 2024.
For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive income and subsequently reclassified into interest income in the same period(s) during which the hedged transaction affects earnings. Management evaluated the effectiveness of the Company’s derivatives designated as cash flow hedges at inception and at the balance sheet date and determined they are effective. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest income as interest payments are received on the Company’s variable-rate asset. During the next 12 months, the Company estimates that an additional $1.9 million will be reclassified as a decrease to interest income.
Derivatives Not Designated as Hedging Instruments
The Company also enters into interest rate swap agreements between the Company and its customers and other third-party counterparties. The Company enters into “back to back swap” arrangements whereby the Company executes interest rate swap agreements with its customers and acquires an offsetting swap position from a third-party counterparty. These derivative financial statements are accounted for at fair value, with changes in fair value recognized in the Company’s Consolidated Statements of Income.
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The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Balance Sheet as of June 30, 2024 and December 31, 2023.
As of June 30, 2024
Derivative Assets
Derivative Liabilities
Notional Amount
Balance Sheet Location
Derivatives not designated as hedging instruments
Interest rate products
103,246
Other Assets
Other Liabilities
6,171
Total derivatives not designated as hedging instruments
Derivatives designated as hedging instruments
175,000
2,399
Total derivatives designated as hedging instruments
As of December 31, 2023
104,571
5,939
100,000
306
The table below presents the effect of cash flow hedge accounting on Accumulated Other Comprehensive Income for the three and six months ended June 30, 2024 and 2023.
Derivatives in Subtopic 815-20 Hedging Relationships
Amount of Gain or (Loss) Recognized in OCI on Derivative
Amount of Gain or (Loss)Recognized in OCI IncludedComponent
Amount of Gain or (Loss)Recognized in OCI ExcludedComponent
Location of Gain or (Loss) Recognized from Accumulated Other Comprehensive Income into Income
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income Included Component
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income Excluded Component
Derivatives in Cash Flow Hedging Relationships
Interest Rate Products
Interest Income
(460
Three Months Ended June 30, 2023
38
Six Months Ended June 30, 2024
Six Months Ended June 30, 2023
The table below presents the effect of cash flow hedge accounting on the Income Statement for the three and six months ended June 30, 2024 and 2023.
Location and Amount of Gain or (Loss) Recognized in Income on Cash Flow Hedging Relationship
Interest Expense
Gain or (loss) on cash flow hedging relationships in Subtopic 815-20
Interest contracts
Amount of gain or (loss) reclassified from accumulated other comprehensive loss into income
Amount of gain or (loss) reclassified from accumulated other comprehensive loss into income - included component
The table below presents the effect of the Company’s derivative financial instruments that are not designated as hedging instruments on the Income Statement for the three and six months ended June 30, 2024 and 2023.
Derivatives Not Designated as HedgingInstruments under Subtopic 815-20
Location of Gain or (Loss) Recognized in Income on Derivative
Amount of Gain or (Loss)Recognized in Income on Derivative
Other income
(85
No fee income was recognized from its derivative financial instruments for the three and six months ended June 30, 2024. The Company recognized $0.6 million of fee income for the six months ended June 30, 2023.
40
The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives as of June 30, 2024 and December 31, 2023. The net amounts of derivative assets or liabilities can be reconciled to the tabular disclosure of fair value. The derivative assets are located within the prepaid and other assets line item on the Consolidated Balance Sheets and the derivative liabilities are located within the accrued expenses and other liabilities line item on the Consolidated Balance Sheets.
Offsetting of Derivative Assets
Gross Amounts Not Offset in the Consolidated Balance Sheets
Gross Amounts of Recognized Assets
Gross Amounts Offset in the Consolidated Balance Sheets
Net Amounts of Assets presented in the Consolidated Balance Sheets
Financial Instruments
Cash Collateral Received
Net Amount
Derivatives
3,817
Offsetting of Derivative Liabilities
Gross Amounts of Recognized Liabilities
Net Amounts of Liabilities presented in the Consolidated Balance Sheets
Cash Collateral Provided
284
5,731
230
5,636
41
The Company has agreements with each of its derivative counterparties that contain a provision stating if the Company either defaults or is capable of being declared in default on any of its indebtedness, then the Company could also be declared in default on its derivative obligations. In addition, these agreements may also require the Company to post additional collateral should it fail to maintain its status as a well- or adequately- capitalized institution.
As of June 30, 2024 and December 31, 2023, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $0. As of June 30, 2024 and December 31, 2023, no collateral was provided related to these agreements.
Note 16 — Subsequent Events
Cash Dividend
On July 25, 2024, the Company announced that the Board of Directors of the Company declared a quarterly cash dividend of $0.25 per share to be paid on August 21, 2024 to stockholders of record as of the close of business on August 5, 2024.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following is management’s discussion and analysis of our results of operations and financial condition as of and for the three and six months ended June 30, 2024. This analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2023 (the “2023 Annual Report on Form 10-K”) and with the unaudited consolidated financial statements and notes thereto set forth in this Quarterly Report on Form 10-Q for the period ended June 30, 2024 (this “Report”).
Forward-Looking Statements
Some of the statements contained in this Report are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements in this Report other than statements of historical fact are “forward–looking statements” for purposes of federal and state securities laws, including, but not limited to, statements about anticipated future operating and financial performance, financial condition and liquidity, business strategies, regulatory and competitive outlook, investment and expenditure plans, capital and financing needs and availability, plans and objectives of management for future operations, developments regarding our capital and strategic plans and other similar forecasts and statements of expectation and statements of assumptions underlying any of the foregoing. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue,” or the negative of such terms and other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.
Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, financial condition, levels of activity, performance or achievements to differ from those expressed or implied by the forward-looking statements. These factors include the following:
For additional information concerning risks we face, see “Part II, Item 1A. Risk Factors” in this Report and “Item 1A. Risk Factors” in Part I of the 2023 Annual Report on Form 10-K. We undertake no obligation to update these forward-looking statements to reflect events or circumstances that occur after the date on which such statements were made, except as required by law.
Critical Accounting Policies
We have established various accounting policies that govern the application of GAAP in the preparation of our financial statements. Our significant accounting policies are described in the Notes to the consolidated financial statements in our 2023 Annual Report on Form 10-K. We had no significant changes in our accounting policies since the filing of our 2023 Annual Report on Form 10-K.
Certain accounting policies require us to make significant estimates and assumptions that have a material impact on the carrying value of certain assets and liabilities, and we consider these critical accounting policies. For a description of these critical accounting policies, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies” in our 2023 Annual Report on Form 10-K. Actual results could differ significantly from these estimates and assumptions, which could have a material impact on the carrying value of assets and liabilities at the balance sheet dates and our results of operations for the reporting periods. Management has discussed the development and selection of these critical accounting policies with the Audit Committee of the Company’s Board of Directors.
Executive Overview
Financial results include the following:
As of or for the
(dollars in thousands, except per share data)
Earnings per diluted share
Dividends per share
0.25
0.50
Return on average assets
0.77
1.12
0.79
1.17
Return on average stockholders’ equity
7.50
11.14
7.70
11.66
Net income was $14.5 million, or $0.48 per diluted share, for the three months ended June 30, 2024 compared to $20.6 million, or $0.67 per diluted share, for the same period a year ago. The decrease in net income was driven by a $6.8 million decrease in net interest income, a $1.0 million increase in credit loss expense, and a $1.0 million increase in noninterest expense, offset by a $2.5 million decrease in income tax expense. Credit loss expense for the second quarter of 2024 was $1.0 million compared to a $0.1 million recovery for the second quarter of 2023. Credit loss expense for the second quarter of 2024 consisted of a $1.2 million provision for loan losses, offset by a $0.3 million recovery for off-balance sheet items. Credit loss recovery for the second quarter of 2023 included a $0.5 million provision for loan losses, offset by a $0.6 million recovery for off-balance sheet items.
For the six months ended June 30, 2024, net income was $29.6 million, or $0.97 per diluted share, compared to $42.6 million, or $1.39 per diluted share, for the same period a year ago. The decrease in net income was primarily driven by a decrease in net interest income of $14.0 million, and a $4.6 million increase in noninterest expense, offset by decreases in credit loss expense of $0.9 million and income tax expense of $5.3 million. Credit loss expense for the six months of 2024 was $1.2 million compared to a $2.1 million for the same period a year ago. Credit loss expense for the six months of 2024 consisted of a $1.7 million provision for loan losses, offset by a $0.5 million recovery for off-balance sheet items. Credit loss expense for the first six months of 2023 included a $2.7 million provision for loan losses, offset by a $0.6 million recovery for off-balance sheet items.
44
Other financial highlights include the following:
Securities available for sale, at fair value
Deposits
Results of Operations
Net Interest Income
Our primary source of revenue is net interest income, which is the difference between interest derived from earning assets, and interest paid on liabilities obtained to fund those assets. Our net interest income is affected by changes in the level and mix of interest-earning assets and interest-bearing liabilities, referred to as volume changes. Net interest income is also affected by changes in the yields earned on assets and rates paid on liabilities, referred to as rate changes. Interest rates charged on loans receivable are affected principally by changes to market interest rates, the demand for loans receivable, the supply of money available for lending purposes, and other competitive factors. Those factors are, in turn, affected by general economic conditions and other factors beyond our control, such as federal economic policies, the general supply of money in the economy, legislative tax policies, governmental budgetary matters, and the actions of the Federal Reserve.
45
The following table shows the average balance of assets, liabilities and stockholders’ equity; the amount of interest income, on a tax-equivalent basis, and interest expense; the average yield or rate for each category of interest-earning assets and interest-bearing liabilities; and the net interest spread and the net interest margin for the periods indicated. All average balances are daily average balances.
June 30, 2023
Average
Income /
Yield /
Balance
Expense
Rate
Interest-earning assets:
Loans receivable (1)
6,089,440
5.99
5,941,071
5.64
Securities (2)
979,671
2.17
971,531
1.73
FHLB stock
8.77
6.92
Interest-bearing deposits in other banks
180,177
5.16
230,974
Total interest-earning assets
7,265,673
5.46
7,159,961
5.09
Noninterest-earning assets:
55,442
62,036
(67,908
(72,098
Other assets
252,410
232,058
7,505,617
7,381,957
Interest-bearing liabilities:
Demand: interest-bearing
85,443
0.15
99,057
0.11
Money market and savings
1,845,870
17,324
3.77
1,463,304
9,887
2.71
Time deposits
2,453,154
29,139
4.78
2,403,685
22,201
3.70
Total interest-bearing deposits
4,384,467
4.27
3,966,046
3.25
169,525
196,776
Subordinated debentures
130,239
5.07
129,631
4.94
Total interest-bearing liabilities
4,684,231
4,292,453
3.30
Noninterest-bearing liabilities and equity:
Demand deposits: noninterest-bearing
1,883,765
2,213,171
Other liabilities
162,543
133,623
Stockholders’ equity
775,078
742,710
Net interest income
Cost of deposits (3)
2.98
2.08
Net interest spread (taxable equivalent basis) (4)
1.16
1.79
Net interest margin (taxable equivalent basis) (5)
2.69
3.11
46
The table below shows changes in interest income and interest expense and the amounts attributable to variations in interest rates and volumes for the periods indicated. The variances attributable to simultaneous volume and rate changes have been allocated to the change due to volume and the change due to rate categories in proportion to the relationship of the absolute dollar amount attributable solely to the change in volume and to the change in rate.
June 30, 2024 vs June 30, 2023
Increases (Decreases) Due to Change In
Volume
1,848
5,337
7,185
1,077
1,112
74
(619
138
(481
1,262
6,628
7,890
2,551
4,886
7,437
395
6,543
6,938
(232
495
49
2,718
11,974
14,692
Change in net interest income
(1,456
(5,346
(6,802
For the three months ended June 30, 2024 and 2023, net interest income was $48.6 million and $55.4 million, respectively. The net interest spread and net interest margin, on a taxable equivalent basis, for the quarter ended June 30, 2024, were 1.16% and 2.69%, respectively, compared to 1.79% and 3.11%, respectively, for the same period in 2023. Interest and dividend income increased $7.9 million, or 8.7%, to $98.7 million for the three months ended June 30, 2024 from $90.8 million for the same period in 2023, primarily due to higher average interest-earning asset yields, primarily related to loans, and an increase in the average balance of loans and securities. Interest expense increased $14.7 million, or 41.6%, to $50.0 million for the three months ended June 30, 2024 from $35.3 million for the same period in 2023 primarily due to increases in deposit rates and average deposit balances and, to a lesser extent, an increase in the cost of borrowings. The increases in average interest-earning asset yields and deposit and borrowing rates were due to the rising interest rate environment.
The average balance of interest earning assets increased $105.7 million, or 1.5%, to $7.27 billion for the three months ended June 30, 2024, from $7.16 billion for the three months ended June 30, 2023. The average balance of loans increased $148.4 million, or 2.5%, to $6.09 billion for the three months ended June 30, 2024, from $5.94 billion for the three months ended June 30, 2023. The average balance of securities increased $8.1 million, or 0.8%, to $979.7 million for the three months ended June 30, 2024, from $971.5 million for the three months ended June 30, 2023. The average balance of interest-bearing deposits at other banks decreased $50.8 million, or 22.0%, to $180.2 million for the three months ended June 30, 2024, from $231.0 million for the three months ended June 30, 2023.
The average yield on interest-earning assets, on a taxable equivalent basis, increased 37 basis points to 5.46% for the three months ended June 30, 2024, from 5.09% for the three months ended June 30, 2023. The average yield on loans increased to 5.99% for the three months ended June 30, 2024, from 5.64% for the three months ended June 30, 2023. The average yield on securities, on a taxable equivalent basis, increased to 2.17% for the three months ended June 30, 2024, from 1.73% for the three months ended June 30, 2023. The average yield on interest-bearing deposits in other banks increased 31 basis points to 5.16% for the three months ended June 30, 2024, from 4.85% for the three months ended June 30, 2023. The increased yields were primarily due to increases in market interest rates.
47
The average balance of interest-bearing liabilities increased $391.8 million, or 9.1%, to $4.68 billion for the three months ended June 30, 2024 compared with $4.29 billion for the three months ended June 30, 2023. The average balances of time deposits and money market and savings accounts increased $49.5 million and $382.6 million, respectively, offset partially by decreases in interest-bearing demand deposits and borrowings of $13.6 million and $27.3 million, respectively.
The average cost of interest-bearing liabilities was 4.30% and 3.30% for the three months ended June 30, 2024 and 2023, respectively. The average cost of interest-bearing deposits increased 102 basis points to 4.27% for the three months ended June 30, 2024, compared with 3.25% for the three months ended June 30, 2023. The average cost of time deposits increased 108 basis points to 4.78% for the three months ended June 30, 2024 compared with 3.70% for the three months ended June 30, 2023. The average cost of money market and savings accounts increased 106 basis points to 3.77% for the three months ended June 30, 2023 compared with 2.71% for the three months ended June 30, 2023.The average cost of subordinated debentures increased 13 basis points to 5.07% for the three months ended June 30, 2024 compared with 4.94% for the three months ended June 30, 2023. The average cost of borrowings increased 117 basis points to 4.50% for the three months ended June 30, 2024 compared with 3.33% for the three months ended June 30, 2023. The increased costs were primarily due to increases in market interest rates.
48
6,113,664
5,942,726
5.58
974,596
2.12
976,096
1.70
8.82
7.04
190,950
5.18
212,043
4.62
7,295,595
7,147,250
5.02
56,912
63,553
(68,507
(71,777
248,555
235,571
7,532,555
7,374,597
85,922
61
0.14
104,196
56
1,830,478
33,877
3.72
1,458,463
17,201
2.38
2,480,492
58,195
4.72
2,314,148
40,356
3.52
4,396,892
4.21
3,876,807
3.00
165,972
232,219
130,163
5.06
129,557
4.91
4,693,027
4.24
4,238,583
3.08
1,902,477
2,268,485
163,533
130,385
773,518
737,144
2.94
1.89
1.22
1.94
2.74
3.20
5,182
12,755
17,937
2,054
2,041
148
147
(498
553
55
4,670
15,510
20,180
4,352
12,324
16,676
2,798
15,041
17,839
(1,158
707
(451
98
113
5,997
28,185
34,182
(1,327
(12,675
(14,002
For the six months ended June 30, 2024 and 2023, net interest income was $99.3 million and $113.3 million, respectively. The net interest spread and net interest margin, on a taxable equivalent basis, for the six months ended June 30, 2024, were 1.22% and 2.74%, respectively, compared to 1.94% and 3.20%, respectively, for the same period in 2023. Interest and dividend income increased $20.2 million, or 11.3%, to $198.3 million for the six months ended June 30, 2024 from $178.1 million for the same period in 2023, primarily due to higher average interest-earning asset yields and an increase in the average balance of loans. Interest expense increased $34.2 million, or 52.8%, to $99.0 million for the six months ended June 30, 2024 from $64.8 million for the same period in 2023, primarily due to increases in deposit rates and average deposit balances and, to a lesser extent, an increase in the cost of borrowings. The increases in average interest-earning asset yields and deposit and borrowing rates were due to the rising interest rate environment.
The average balance of interest earning assets increased $148.3 million, or 2.1%, to $7.30 billion for the six months ended June 30, 2024, from $7.15 billion for the six months ended June 30, 2023. The average balance of loans increased $170.9 million, or 2.9%, to $6.11 billion for the six months ended June 30, 2024, from $5.94 billion for the six months ended June 30, 2023. The average balance of securities decreased $1.5 million, or 0.2%, to $974.6 million for the six months ended June 30, 2024, from $976.1 million for the six months ended June 30, 2023. The average balance of interest-bearing deposits at other banks decreased $21.1 million, or 9.9%, to $191.0 million for the six months ended June 30, 2024, from $212.0 million for the six months ended June 30, 2023.
The average yield on interest-earning assets, on a taxable equivalent basis, increased 44 basis points to 5.46% for the six months ended June 30, 2024, from 5.02% for the six months ended June 30, 2023. The average yield on loans increased to 6.00% for the six months ended June 30, 2024, from 5.58% for the six months ended June 30, 2023. The average yield on securities, on a taxable equivalent basis, increased to 2.12% for the six months ended June 30, 2024, from 1.70% for the six months ended June 30, 2023. The average yield on interest-bearing deposits in other banks increased 56 basis points to 5.18% for the six months ended June 30, 2024, from 4.62% for the six months ended June 30, 2023. The increased yields were primarily due to increases in market interest rates.
The average balance of interest-bearing liabilities increased $454.4 million, or 10.7%, to $4.69 billion for the six months ended June 30, 2024 compared with $4.24 billion for the six months ended June 30, 2023. The average balances of time deposits and money market and savings accounts increased $166.3 million and $372.0 million, respectively, offset partially by decreases in interest-bearing demand deposits and borrowings of $18.3 million and $66.2 million, respectively.
The average cost of interest-bearing liabilities was 4.24% and 3.08% for the six months ended June 30, 2024 and 2023, respectively. The average cost of interest-bearing deposits increased 121 basis points to 4.21% for the six months ended June 30, 2024, compared with 3.00% for the six months ended June 30, 2023. The average cost of time deposits increased 120 basis points to 4.72% for the six months ended June 30, 2024 compared with 3.52% for the six months ended June 30, 2023. The average cost of
50
money market and savings accounts increased 134 basis points to 3.72% for the six months ended June 30, 2023 compared with 2.38% for the six months ended June 30, 2023. The average cost of subordinated debentures increased 15 basis points to 5.06% for the six months ended June 30, 2024 compared with 4.91% for the six months ended June 30, 2023. The average cost of borrowings increased 82 basis points to 4.30% for the six months ended June 30, 2024 compared with 3.48% for the six months ended June 30, 2023. The increased costs were primarily due to increases in market interest rates.
Credit Loss Expense
For the second quarter of 2024, the Company recorded $1.0 million of credit loss expense, comprised of a $1.2 million provision for loan losses, partially offset by a $0.3 million recovery for off-balance sheet items. For the same period in 2023, the Company recorded $0.1 million of credit loss recovery, comprised of a $0.5 million provision for loan losses, offset by a $0.6 million recovery for off-balance sheet items.
For the six months ended June 30, 2024, the Company recorded $1.2 million of credit loss expense, comprised of a $1.7 million provision for loan losses, partially offset by a $0.5 million recovery for off-balance sheet items. For the same period in 2023, the Company recorded $2.1 million of credit loss expense, comprised of a $2.7 million provision for loan losses, partially offset by a $0.6 million recovery for off-balance sheet items.
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
(5.52
)%
104
8.87
Servicing income
796
825
(29
(3.52
Bank-owned life insurance income
271
367
135.42
All other operating income
908
1,811
(903
(49.86
Service charges, fees & other
6,048
6,651
(603
(9.07
Gain on sale of SBA loans
432
35.64
Gain on sale of mortgage loans
Net loss on sale of securities
(100.00
Legal settlement
1,943
(1,943
122
1.54
For the three months ended June 30, 2024, noninterest income was $8.1 million, an increase of $0.1 million, or 1.5%, compared to $7.9 million for the same period in 2023, due primarily to an increase in the gains on sales of SBA and mortgage loans and in bank-owned life insurance benefit income, offset partially by a decrease in all other operating income. The $0.9 million decrease in all other operating income was mainly attributed to a one-time $0.6 million increase in income related to equipment financing agreements in the second quarter in 2023. During the second quarter of 2024, the Company sold $19.5 million of residential loans and recognized a net gain of $0.4 million. In the second quarter of 2024 the Company also sold $23.5 million of SBA loans and recognized a net gain of $1.6 million. For the three months ended June 30, 2024, trade premiums on SBA loan sales increased 79 basis points, to 8.54%, from 7.75% for the three months ended June 30, 2023.
51
(273
(5.30
10.70
1,508
1,567
(59
(3.77
942
541
74.12
1,837
3,428
(1,591
(46.41
11,856
13,118
(1,262
(9.62
1.46
808
100.00
(2.96
For the six months ended June 30, 2024, noninterest income was $15.8 million, a decrease of $0.5 million, or 3.0%, compared to $16.3 million for the same period in 2023, due primarily to a decrease in all other operating income, offset primarily by bank-owned life insurance benefit income in the second quarter of 2024, and gain on sale of mortgage loans. The $1.6 million decrease in all other operating income was mainly attributed to a one time $0.6 million increase in income related to equipment financing agreements in the second quarter in 2023, and $0.6 million in swap fee income in the six months ended June 30, 2023. During the first six months in 2024, the Company sold $49.2 million of residential loans and recognized a net gain of $0.8 million.
Noninterest Expense
The following table sets forth the components of noninterest expense for the periods indicated:
69
0.34
107
221
6.38
373
27.11
(68
(10.66
(10.56
All other operating expenses
2,992
3,243
(251
(7.74
Subtotal
34,707
34,335
372
1.08
Branch consolidation expense
Other real estate owned expense
50.00
Repossessed personal property expense (income)
(544.07
2.91
For the three months ended June 30, 2024, noninterest expense was $35.3 million, an increase of $1.0 million, or 2.9%, compared with $34.3 million for the same period in 2023. The increase was mainly attributed to a $0.4 million increase in professional fees, $0.3 million in branch consolidation expense due to the consolidation of three branches; two branches in Texas and one branch in California, and a $0.3 million increase in repossessed personal property expense. The increase in professional fees was mainly attributed to increases in legal and consulting expenses. Repossessed personal property expense increased due to a loss on sale of lease assets.
52
1,044
2.55
8,843
(69
(0.77
519
7.73
932
34.39
(10.81
(0.32
6,451
5,202
24.01
70,940
67,412
3,528
5.23
Other real estate owned expense (income)
(197
225
(114.21
451
(143
594
(415.38
4,648
6.93
For the six months ended June 30, 2024, noninterest expense was $71.7 million, an increase of $4.6 million, or 6.9%, compared with $67.1 million for the same period in 2023. Salaries and employee benefits increased $1.0 million due to higher salaries, group insurance, and share-based compensation expense, offset primarily by capitalized labor costs associated with the Company's investment in a new loan origination system. Professional fees increased $0.9 million due to higher consulting and legal expenses. All other operating expenses increased $1.2 million mainly due to a $0.5 million increase in loan related expense and a $0.4 million SBA servicing asset adjustment. Repossessed personal property expense increased due to a $0.6 million loss on sale of lease assets.
Income Tax Expense
Income tax expense was $6.0 million and $8.5 million for the three months ended June 30, 2024 and 2023, respectively, representing an effective income tax rate of 29.3% for both periods. Income tax expense was $12.5 million and $17.8 million representing an effective income tax rate of 29.7% and 29.5% for the six months ended June 30, 2024 and 2023, respectively.
Financial Condition
As of June 30, 2024, our securities portfolio consisted of U.S. government agency and sponsored agency mortgage-backed securities, collateralized mortgage obligations and debt securities, tax-exempt municipal bonds and U.S. Treasury securities. Most of these securities carry fixed interest rates. Other than holdings of U.S. government agency and sponsored agency obligations, there were no securities of any one issuer exceeding 10% of stockholders’ equity as of June 30, 2024 or December 31, 2023.
Securities increased $11.9 million to $877.6 million at June 30, 2024 from $865.7 million at December 31, 2023, mainly attributed to $78.5 million in securities purchases, partially offset by $58.8 million in paydowns and maturities, and an increase in unrealized securities losses of $6.4 million during the six months ended June 30, 2024.
53
The following table summarizes the contractual maturity schedule for securities, at amortized cost, and their cost weighted average yield, which is calculated using amortized cost as the weight, as of June 30, 2024:
After OneYear But
After FiveYears But
Within OneYear
Within FiveYears
Within TenYears
After TenYears
Yield
42,682
4.02
58,321
4.20
0.00
4.12
3.01
20,882
3.37
459,979
1.80
5,280
5,027
2.60
55,095
2.04
146
1.28
278
2.61
133,731
3.65
55,218
1.48
72,040
1.33
60,518
1.61
77,213
1.41
21,160
3.36
648,805
2.14
2.06
35,173
1.35
41,433
1.34
103,200
135,534
56,333
2.11
690,238
2.09
2.22
As of June 30, 2024 and December 31, 2023, loans receivable (excluding loans held for sale), net of deferred loan fees and costs, discounts and allowance for credit losses, were $6.11 billion. For the six months ended June 30, 2024, there was $507.9 million in new loan production, which included $24.7 million in SBA loan purchases, offset partially by $333.0 million in loan sales and payoffs, and amortization and other reductions of $181.0 million. Loan production consisted of commercial real estate loans of $147.7 million, residential mortgages of $83.3 million, commercial and industrial loans of $109.8 million, equipment financing agreements of $81.7 million and SBA loans of $85.3 million.
The table below shows the maturity distribution of outstanding loans, before the allowance for credit losses as of June 30, 2024. In addition, the table shows the distribution of such loans between those with floating or variable interest rates and those with fixed or predetermined interest rates.
After OneYear butWithinThreeYears
After ThreeYears butWithinFiveYears
After FiveYears butWithinFifteenYears
AfterFifteenYears
138,475
377,456
368,065
152,789
57,943
218,302
212,578
211,732
96,112
15,876
142,582
292,872
116,191
14,263
6,624
150,352
526,468
479,618
161,280
42,421
649,711
1,409,374
1,175,606
424,444
122,864
65,551
39,013
1,942
4,851
126
4,833
944,338
720,113
1,448,448
1,177,674
429,277
1,067,202
396,857
184,125
66,738
154,652
28,521
214,846
273,091
14,815
1,145,491
1,847,419
1,517,503
598,744
Loans with predetermined interest rates
533,731
1,357,175
801,668
54,840
258,850
3,006,264
Loans with variable interest rates
611,760
490,244
715,835
543,904
808,352
3,170,095
54
The table below shows the maturity distribution of outstanding loans, before the allowance for credit losses, with fixed or predetermined interest rates, as of June 30, 2024.
After OneYear butWithin ThreeYears
After ThreeYears butWithin FiveYears
106,447
341,635
140,340
229
588,686
78,945
151,046
97,498
17,908
345,397
105,081
212,512
54,519
372,112
107,215
434,730
223,088
13,017
3,356
781,406
397,688
1,139,923
515,445
30,960
3,585
2,087,601
29,542
1,537
2,472
255,265
259,335
428,767
1,139,984
33,432
2,376,478
76,443
2,345
13,133
6,592
98,513
273,090
14,816
The table below shows the maturity distribution of outstanding loans, before the allowance for credit losses, with floating or variable interest rates (including hybrids), as of June 30, 2024.
32,028
35,821
227,726
152,754
57,715
506,044
139,358
61,532
114,234
78,203
409,203
37,501
80,360
61,672
14,262
200,419
43,137
91,739
256,531
148,257
39,063
578,727
252,024
269,452
660,163
393,476
119,278
1,694,393
36,009
39,014
76,965
689,074
694,874
291,347
308,466
662,231
395,836
2,466,232
320,413
181,778
53,604
148,068
703,863
Industry
As of June 30, 2024, the loan portfolio included the following concentrations of loans to one type of industry that were greater than 10.0% of loans receivable outstanding:
Percentage of
Balance as of
Lessor of nonresidential buildings
1,705,755
27.6
759,127
12.3
Loans 30 to 89 days past due and still accruing were $13.8 million at June 30, 2024, compared with $10.3 million at December 31, 2023, attributable to an increase of $1.4 million in past due residential loans and an increase of $2.6 million in equipment financing arrangements, offset by payoffs and other reductions.
At June 30, 2024 and December 31, 2023, there were no loans 90 days or more past due and still accruing interest.
Activity in criticized loans was as follows for the periods indicated:
62,316
23,669
Additions
1,969
13,993
Reductions
(27,363
(3,716
64,340
47,287
25,933
3,042
(45,640
(11,489
44,633
38,840
2,522
16,571
(30,915
(13,992
79,013
46,192
26,699
16,850
(61,079
(24,202
Special mention loans were $36.9 million and $65.3 million at June 30, 2024 and December 31, 2023, respectively. The $28.4 million decrease included upgrades to pass loans of $19.4 million, downgrades to classified loans of $8.0 million, and paydowns and payoffs of $3.7 million, offset by downgrades from pass loans of $2.7 million. The upgrades to pass loans were primarily attributable to upgrades of two commercial and industrial loans totaling $13.6 million and one commercial real estate loan of $4.3 million during the second quarter.
Classified loans were $33.9 million and $31.4 million at June 30, 2024 and December 31, 2023, respectively. The $2.5 million increase was primarily driven by new downgrades to classified of $17.6 million, offset by payoffs of $8.3 million, charge-offs of $3.7 million, and paydowns and amortization of $3.1 million.
Nonperforming Assets
Nonperforming loans consist of nonaccrual loans and loans 90 days or more past due and still accruing interest. Nonperforming assets consist of nonperforming loans and OREO. Loans are placed on nonaccrual status when, in the opinion of management, the full timely collection of principal or interest is in doubt. Generally, the accrual of interest is discontinued when principal or interest payments become more than 90 days past due, unless we believe the loan is adequately collateralized and in the process of collection. However, in certain instances, we may place a particular loan on nonaccrual status earlier, depending upon the individual circumstances surrounding the loan’s delinquency. When a loan is placed on nonaccrual status, previously accrued but unpaid interest is reversed against current income. Subsequent collections of cash are applied as principal reductions when received, except when the ultimate collectability of principal is probable, in which case interest payments are credited to income. Nonaccrual
loans may be restored to accrual status when principal and interest become current and full repayment is expected, which generally occurs after sustained payment of six months. Interest income is recognized on the accrual basis for loans not meeting the criteria for nonaccrual. OREO consists of properties acquired by foreclosure or similar means.
Except for nonaccrual loans, management is not aware of any other loans as of June 30, 2024 for which known credit problems of the borrower would cause serious doubts as to the ability of such borrowers to comply with their present loan repayment terms, or any known events that would result in a loan being designated as nonperforming at some future date.
Nonaccrual loans were $19.2 million and $15.5 million as of June 30, 2024 and December 31, 2023, respectively, representing an increase of $3.7 million, or 23.7%. The increase in nonaccrual loans resulted from additions to nonperforming loans of $10.6 million, offset by payoffs, paydowns, and upgrades of $6.9 million. The additions to nonperforming loans consisted of equipment financing agreements of $2.6 million and two SBA loans for $0.7 million. As of June 30, 2024 and December 31, 2023, 1.61% and 1.25% of equipment financing agreements were on nonaccrual status, respectively. As of June 30, 2024 and December 31, 2023, all loans 90 days or more past due were classified as nonaccrual.
The $19.2 million of nonperforming loans as of June 30, 2024 had individually evaluated allowances of $6.8 million, compared to $15.5 million of nonperforming loans with individually evaluated allowances of $3.4 million as of December 31, 2023.
Nonperforming assets were $20.0 million at June 30, 2024, or 0.26% of total assets, compared to $15.6 million, or 0.21%, at December 31, 2023. Additionally, not included in nonperforming assets were repossessed personal property assets associated with equipment finance agreements of $1.2 million and $1.3 million at June 30, 2024 and December 31, 2023, respectively.
Individually Evaluated Loans
The Company reviews loans on an individual basis when the loan does not share similar risk characteristics with loan pools. Individually evaluated loans are measured for expected credit losses based on the present value of expected cash flows discounted at the effective interest rate, the observable market price, or the fair value of collateral.
Individually evaluated loans were $19.2 million and $15.5 million as of June 30, 2024 and December 31, 2023, respectively, representing an increase of $3.7 million, or 24.0%. Specific allowances associated with individually evaluated loans increased $3.4 million to $6.8 million as of June 30, 2024 compared with $3.4 million as of December 31, 2023, mainly attributed to a $1.9 million specific reserve allocation on a commercial and industrial loan in the health-care industry.
A borrower is experiencing financial difficulties when there is a probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. The Company may modify loans to borrowers experiencing financial difficulties by providing principal forgiveness, a term extension, an other-than-insignificant payment delay, or an interest rate reduction.
The following table presents loan modifications made to borrowers experiencing financial difficulty by type of modification, with related amortized cost balances, respective percentage shares of the total class of loans, and the related financial effect, for the periods indicated:
The modified loan above was current at June 30, 2024.
Allowance for Credit Losses and Allowance for Credit Losses Related to Off-Balance Sheet Items
The Company’s estimate of the allowance for credit losses at June 30, 2024 and December 31, 2023 reflected losses expected over the remaining contractual life of assets based on historical, current, and forward-looking information. The contractual term does not consider extensions, renewals or modifications.
Management selected three loss methodologies for the collective allowance estimation. At June 30, 2024, the Company used the discounted cash flow (“DCF”) method to estimate allowances for credit losses for the commercial and industrial loan portfolio, the Probability of Default/Loss Given Default (“PD/LGD”) method for the commercial real estate, construction and residential real estate portfolios, and the Weighted Average Remaining Maturity (“WARM”) method to estimate expected credit losses for equipment financing agreements. Loans that do not share similar risk characteristics are individually evaluated for allowances.
For all loans utilizing the DCF method, the Company determined that four quarters represented a reasonable and supportable forecast period and reverted to a historical loss rate over twelve quarters on a straight-line basis. For each of these loan segments, the Company applied an annualized historical PD/LGD using all available historical periods. Since reasonable and supportable forecasts of economic conditions are embedded directly into the DCF model, qualitative adjustments are considered but were minimal.
For each of the loan segments identified above, the Company applied an annualized historical PD/LGD using all available historical periods. The PD/LGD method incorporates a forecast of economic conditions into loss estimates using a qualitative adjustment.
For loan pools utilizing the PD/LGD method, the Company used historical periods that included an economic downturn to derive historical losses for better alignment in the estimation of expected losses under the PD/LGD method. The Company relied on Frye-Jacobs modeled LGD rates for loan segments with insufficient historical loss data. The Frye-Jacobs model provides a means of applying an LGD rate in the event that limited to no loss data is available. The PD/LGD method incorporates a forecast into loss estimates using a qualitative adjustment.
The Company used the WARM method to estimate expected credit losses for the equipment financing agreements portfolio. The Company applied an expected loss ratio based on internal historical losses adjusted as appropriate for qualitative factors.
As of June 30, 2024 and December 31, 2023, the Company relied on the economic projections from Moody’s to inform its loss driver forecasts over the four-quarter forecast period. For all loan pools, the Company utilizes and forecasts the national unemployment rate as the primary loss driver.
To adjust the historical and forecast periods to current conditions, the Company applies various qualitative factors derived from market, industry or business specific data, changes in the underlying portfolio composition, trends relating to credit quality, delinquent and nonperforming loans and adversely-rated equipment financing agreements, and reasonable and supportable forecasts of economic conditions.
The following table reflects our allocation of the allowance for credit losses by loan category as well as the amount of loans in each loan category, including related percentages:
58
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
1.10
Nonaccrual loans to loans
0.31
Allowance for credit losses to nonaccrual loans
351.93
448.89
Balance:
Nonaccrual loans at end of period
Nonperforming loans at end of period
The allowance for credit losses was $67.7 million and $69.5 million at June 30, 2024 and December 31, 2023, respectively. The allowance attributed to individually evaluated loans was $6.8 million and $3.4 million as of June 30, 2024 and December 31, 2023, respectively. The allowance attributed to collectively evaluated loans was $60.9 million and $66.1 million as of June 30, 2024 and December 31, 2023, respectively, and considered the impact of changes in macroeconomic assumptions, normalized interest rate forecasts for the subsequent four quarters, and a net reduction in specific qualitative factors allocated to criticized hospitality loans impacted by the pandemic.
As of June 30, 2024 and December 31, 2023, the allowance for credit losses related to off-balance sheet items, primarily unfunded loan commitments, was $2.0 million and $2.5 million, respectively. The Bank closely monitors the borrower’s repayment capabilities, while funding existing commitments to ensure losses are minimized. Based on management’s evaluation and analysis of portfolio credit quality and prevailing economic conditions, we believe these allowances were adequate for current expected lifetime losses in the loan portfolio and off-balance sheet exposure as of June 30, 2024.
The following table presents a summary of gross charge-offs and recoveries for the loan portfolio:
Gross charge-offs
Gross recoveries
Net (charge-offs) recoveries
(1,790
(1,740
(3,385
(3,194
For the three months ended June 30, 2024, gross charge-offs decreased $0.4 million from the same period in 2023. Gross recoveries for the three months ended June 30, 2024 decreased $0.4 million from the same period in 2023. Gross charge-offs for the three months ended June 30, 2024 and 2023 primarily consisted of equipment financing agreements charge-offs of $2.2 million and $2.6 million, respectively.
For the six months ended June 30, 2024, gross charge-offs decreased $0.5 million from the same period in 2023. Gross recoveries for the six months ended June 30, 2024 decreased $0.7 million from the same period in 2023. Gross charge-offs for the six months ended June 30, 2024 and 2023 primarily consisted of equipment financing agreements charge-offs of $4.1 million and $4.2 million, respectively.
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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
3,853,792
3,864,615
Residential loans
959,072
(0.01
965,708
730,929
73
0.04
723,967
545,647
(1,834
(1.34
559,374
(3,379
(1.21
(0.12
(0.11
3,760,307
0.01
3,780,292
(0.02
853,704
817,469
732,086
452
746,381
0.13
594,974
(2,254
(1.52
598,584
(3,391
(1.13
Net loan charge-offs were $1.8 million, or 0.12% of average loans and $1.7 million, or 0.12% of average loans for the three months ended June 30, 2024 and 2023, respectively. Net loan charge-offs were $3.4 million, or 0.11% of average loans, and $3.2 million, or 0.11% of average loans, for the six months ended June 30, 2024 and 2023, respectively.
The following table shows the composition of deposits by type as of the dates indicated:
Demand – noninterest-bearing
31.0
31.9
Interest-bearing:
Demand
82,981
1.3
87,452
1.4
1,834,797
29.0
1,734,659
Uninsured amount of time deposits more than $250,000:
Three months or less
74,459
1.2
186,321
3.0
Over three months through six months
302,767
4.8
201,085
3.2
Over six months through twelve months
276,048
222,683
3.6
Over twelve months
16,728
0.3
70,932
1.1
All other insured time deposits
1,781,597
28.0
1,773,846
28.2
Total deposits were $6.33 billion and $6.28 billion as of June 30, 2024 and December 31, 2023, respectively, representing an increase of $48.8 million, or 0.8%. The increase in deposits was primarily driven by a $100.1 million increase in money market and savings deposits and a $3.3 million increase in time deposits, partially offset by a $43.6 million decline in noninterest-bearing demand deposits. The changes in deposit composition were primarily due to the increase in deposit rates. At June 30, 2024, the loan-to-deposit ratio was 97.6% compared to 98.4% at December 31, 2023.
As of June 30, 2024, the aggregate amount of uninsured deposits (deposits in amounts greater than $250,000, which is the maximum amount for federal deposit insurance) was $2.58 billion. The aggregate amount of uninsured time deposits was $670.0 million. Other uninsured deposits, such as demand and money market and savings deposits were $1.91 billion. In addition, $1.16 billion of total uninsured deposits were in accounts with balances of $5.0 million or more at June 30, 2024. As of December 31, 2023, the aggregate amount of uninsured deposits was $2.52 billion. The aggregate amount of uninsured time deposits was $681.0 million.
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Other uninsured deposits, such as demand, money market and savings deposits were $1.84 billion. In addition, $1.09 billion of total uninsured deposits were in accounts with balances of $5.0 million or more at December 31, 2023.
The Bank’s wholesale funds historically consisted of FHLB advances, brokered deposits as well as State of California time deposits. As of June 30, 2024 and December 31, 2023, the Bank had $292.5 million and $325.0 million of FHLB advances, and $28.2 million and $58.3 million of brokered deposits, respectively, and $120.0 million of State of California time deposits, as of June 30, 2024 and December 31, 2023.
Borrowings and Subordinated Debentures
Borrowings mostly take the form of FHLB advances. At June 30, 2024 and December 31, 2023, FHLB advances were $292.5 million and $325.0 million, respectively. FHLB open advances were $180.0 million and $212.5 million at June 30, 2024 and December 31, 2023, respectively. For the same periods, term advances were $112.5 million and $112.5 million, respectively. Funds from deposit growth not used to fund loan production were used to pay off borrowings.
The weighted-average interest rate of all FHLB advances at June 30, 2024 and December 31, 2023 was 4.98% and 4.69%, respectively.
The FHLB maximum amount outstanding at any month end during each of the year-to-date periods ended June 30, 2024 and December 31, 2023 was $292.5 million and $450.0 million, respectively.
The following is a summary of contractual maturities of FHLB advances greater than twelve months:
FHLB of San Francisco
WeightedAverageRate
Outstanding advances over 12 months
75,000
3.96
Subordinated debentures were $130.3 million and $130.0 million as of June 30, 2024 and December 31, 2023, respectively. Subordinated debentures are comprised of fixed-to-floating subordinated notes of $108.4 million and $108.3 million as of June 30, 2024 and December 31, 2023, respectively, and junior subordinated deferrable interest debentures of $21.9 million and $21.7 million as of June 30, 2024 and December 31, 2023, respectively. See “Note 8 – Borrowings and Subordinated Debentures” to the consolidated financial statements for more details.
Stockholders’ equity was $707.1 million and $701.9 million as of June 30, 2024 and December 31, 2023, respectively. Net income, net of $15.3 million of dividends paid, added $14.3 million to stockholders' equity for the period as did $1.7 million of share-based compensation, which was partially offset by a $4.3 million increase in unrealized after-tax losses on securities available for sale due to changes in interest rates, and a $1.8 million increase in unrealized after-tax losses on cash flow hedges. In addition, the Company repurchased 270,000 shares of common stock during the period at an average share price of $16.00 for a total cost of $4.3 million. At June 30, 2024, 1,330,000 shares remain under the Company's share repurchase program.
Interest Rate Risk Management
The spread between interest income on interest-earning assets and interest expense on interest-bearing liabilities is the principal component of net interest income, and interest rate changes substantially affect our financial performance. We emphasize capital protection through stable earnings. In order to achieve stable earnings, we prudently manage our assets and liabilities and closely monitor the percentage changes in net interest income and equity value in relation to limits established within our guidelines.
The Company performs simulation modeling to estimate the potential effects of interest rate changes. The following table summarizes one of the stress simulations performed to forecast the impact of changing interest rates on net interest income and the value of interest-earning assets and interest-bearing liabilities reflected on our balance sheet (i.e., an instantaneous parallel shift in the yield curve of the magnitude indicated below) as of June 30, 2024. The Company compares this stress simulation to policy limits,
which specify the maximum tolerance level for net interest income exposure over a 1- to 12-month and a 13- to 24- month horizon, given the basis point adjustment in interest rates reflected below.
Net Interest Income Simulation
1- to 12-Month Horizon
13- to 24-Month Horizon
Change in Interest
Dollar
Percentage
Rates (Basis Points)
Change
300
(1,163
(0.51
%)
10,152
3.74
(1,231
(0.54
5,522
2.03
100
(27
-100
(1,190
(0.52
(7,130
(2.63
-200
(3,849
(1.68
(17,876
(6.59
-300
(6,800
(2.97
(30,830
(11.36
Economic Value of Equity (EVE)
(16,030
(2.27
(7,758
(1.10
2,812
(19,226
(2.73
(57,958
(8.21
(113,030
(16.02
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
75
* Balance-weighted average
While the assumptions used are based on current economic and local market conditions, there is no assurance as to the predictive nature of these conditions, including how customer preferences or competitor influences might change.
Capital Resources and Liquidity
Capital Resources
Historically, our primary source of capital has been the retention of operating earnings. In order to ensure adequate capital levels, the Board regularly assesses projected sources and uses of capital, expected loan growth, anticipated strategic actions (such as stock repurchases and dividends), and projected capital thresholds under adverse and severely adverse economic conditions. In addition, the Board considers the Company’s access to capital from financial markets through the issuance of additional debt and securities, including common stock or notes, to meet its capital needs.
The Company’s ability to pay dividends to stockholders 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 stockholders made during such period). Where the above test is not met, cash dividends may still be paid, with the prior approval of the Department of Financial Protection and Innovation (“DFPI”), in an amount not exceeding the
greater of: (1) retained earnings of the Bank; (2) net income of the Bank for its last fiscal year; or (3) the net income of the Bank for its current fiscal year. The Company paid dividends of $15.3 million ($0.50 per share) for the six months ended June 30, 2024 and $30.5 million ($1.00 per share) for the year 2023. As of July 1, 2024, the Bank has the ability to pay dividends of approximately $147.5 million, after giving effect to the $0.25 dividend declared on July 25, 2024, for the third quarter of 2024, without the prior approval of the Commissioner of the DFPI.
At June 30, 2024, the Bank’s total risk-based capital ratio of 14.51%, Tier 1 risk-based capital ratio of 13.47%, common equity Tier 1 capital ratio of 13.47% and Tier 1 leverage capital ratio of 11.41% 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 June 30, 2024, the Company's total risk-based capital ratio was 15.24%, Tier 1 risk-based capital ratio was 12.46%, common equity Tier 1 capital ratio was 12.11% and Tier 1 leverage capital ratio was 10.51%.
For a discussion of implemented changes to the capital adequacy framework prompted by Basel III and the Dodd- Frank Wall Street Reform and Consumer Protection Act, see our 2023 Annual Report on Form 10-K.
Liquidity
For a discussion of liquidity for the Company, see Note 14 - Liquidity included in the notes to unaudited consolidated financial statements in this Report and Note 22 – Liquidity in our 2023 Annual Report on Form 10-K.
Off-Balance Sheet Arrangements
For a discussion of off-balance sheet arrangements, see Note 12 - Off-Balance Sheet Commitments included in the notes to unaudited consolidated financial statements in this Report and “Item 1. Business - Off-Balance Sheet Commitments” in our 2023 Annual Report on Form 10-K.
Contractual Obligations
There have been no material changes to the contractual obligations described in our 2023 Annual Report on Form 10-K.
63
Item 3. Quantitative and Qualitative Disclosures about Market Risk
For quantitative and qualitative disclosures regarding market risks, see “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Interest Rate Risk Management” in this Report.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Management is responsible for the disclosure controls and procedures of the Corporation. Disclosure controls and procedures are controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods required by the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of the Corporation’s management, including the Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures. Based on that evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of June 30, 2024.
Changes in Internal Control over Financial Reporting
There were no changes in the Corporation's internal control over financial reporting (as defined in Rule 13a-15(f)) during the quarter ended June 30, 2024 that materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
Part II — Other Information
Item 1. Legal Proceedings
From time to time, Hanmi Financial and its subsidiaries are parties to litigation that arises in the ordinary course of business, such as claims to enforce liens, claims involving the origination and servicing of loans, and other issues related to the business of Hanmi Financial and its subsidiaries. In the opinion of management, the resolution of any such issues would not have a material adverse impact on the financial condition, results of operations, or liquidity of Hanmi Financial or its subsidiaries.
Item 1A. Risk Factors
There have been no material changes in risk factors applicable to the Corporation from those described in “Risk Factors” in Part I, Item 1A of the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities
On April 25, 2024, the Company announced that the Board of Directors has adopted a new stock repurchase program under which the Company may repurchase up to 5% of its outstanding shares, or approximately 1.5 million shares of its common stock. As of June 30, 2024, 1,330,000 shares remained available for future purchases under that stock repurchase program. The program has no scheduled expiration date and the Board of Directors has the right to suspend or discontinue the program at any time.
The following table represents information with respect to repurchases of common stock made by the Company during the three months ended June 30, 2024:
Purchase Date:
Average Price Paid Per Share
Total Number of Shares Purchased as Part of Publicly Announced Program
Maximum Shares That May Yet Be Purchased Under the Program
April 1, 2024 - April 30, 2024
15.77
20,000
1,480,000
May 1, 2024 - May 31, 2024
16.09
150,000
1,330,000
June 1, 2024 - June 30, 2024
16.05
170,000
The Company acquired 1,874 shares from employees in connection with the satisfaction of employee tax withholding obligations incurred through the vesting of Company stock awards for the three months ended June 30, 2024. Shares withheld to cover income taxes upon the vesting of stock awards are repurchased pursuant to the terms of the applicable plan and not under the Company's repurchase program.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Securities Trading Plans of Directors and Executive Officers
During the three months ended June 30, 2024, none of our directors or executive officers adopted or terminated any contract, instruction or written plan for the purchase or sale of Hanmi securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement.”
Item 6. Exhibits
Exhibit
Document
31.1
Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
Inline XBRL Instance Document *
101.SCH
Inline XBRL Taxonomy Extension Schema With Embedded Linkbase Documents *
The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2024, formatted in Inline XBRL
* Attached as Exhibit 101 to this report are documents formatted in Inline XBRL (Extensible Business Reporting Language).
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
Hanmi Financial Corporation
Date:
August 6, 2024
By:
/s/ Bonita I. Lee
Bonita I. Lee
President and Chief Executive Officer (Principal Executive Officer)
/s/ Romolo C. Santarosa
Romolo C. Santarosa
Senior Executive Vice President and Chief Financial Officer (Principal Financial Officer)