UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2020
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
(State or Other Jurisdiction of
Incorporation or Organization)
900 Wilshire Boulevard, Suite 1250
Los Angeles, California
(Address of Principal Executive Offices)
95-4788120
(I.R.S. Employer
Identification No.)
90017
(Zip Code)
(213) 382-2200
(Registrant’s Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, $0.001 Par Value
Trading Symbol
HAFC
Name of Each Exchange on Which Registered
Nasdaq Global Select Market
Securities Registered Pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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 (§ 232.405 of this chapter)
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 or a smaller reporting company. See 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
Non-Accelerated Filer
Emerging Growth Company
☐
☐
☐
Accelerated Filer
Smaller Reporting 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section
404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of April 28, 2020, the aggregate market value of the common stock held by non-affiliates of the Registrant was approximately $ 352,978,609. For purposes of the foregoing calculation only, in
addition to affiliated companies, all directors and officers of the Registrant have been deemed affiliates.
Number of shares of common stock of the Registrant outstanding as of February 22, 2021 was 30,716,567 shares.
Documents Incorporated By Reference Herein: Sections of the Registrant’s Definitive Proxy Statement for its 2021 Annual Meeting of Stockholders, which will be filed within 120 days of the
fiscal year ended December 31, 2020, are incorporated by reference into Part III of this report (or information will be provided by amendment to this Form 10-K), as noted therein.
Hanmi Financial Corporation
Annual Report on Form 10-K for the Fiscal Year ended December 31, 2020
Table of Contents
Cautionary Note Regarding Forward-Looking Statements
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Part I
Part II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
[RESERVED]
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Part III
Part IV
Exhibits, Financial Statement Schedules
Form 10-K Summary
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2020 and 2019
Consolidated Statements of Income for the Years Ended December 31, 2020, 2019 and 2018
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2020, 2019 and 2018
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2020, 2019 and 2018
Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2019 and 2018
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Item 16.
Exhibit Index
Signatures
1
2
3
16
25
25
25
25
26
27
28
43
43
43
43
44
45
45
45
45
45
46
46
47
48
53
54
55
56
57
107
109
Cautionary Note Regarding Forward-Looking Statements
Some of the statements contained in this Annual Report on Form 10-K (this “Report”) are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements in this
Report other than statements of historical fact are “forward–looking statements” for purposes of federal and state securities laws, including, but not limited to, statements about
anticipated future operating and financial performance, financial position and liquidity, business strategies, regulatory and competitive outlook, investment and expenditure
plans, capital and financing needs, plans and objectives of management for future operations, and other similar forecasts and statements of expectations and 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. These
forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance, strategies,
outlook, needs, plans, objectives or achievements to differ from those expressed or implied by the forward-looking statement. These factors include the following: failure to
maintain adequate levels of capital and liquidity to support our operations; the effect of potential future supervisory action against us or Hanmi Bank; our ability to remediate
any material weakness in our internal controls over financial reporting; general economic and business conditions internationally, nationally and in those areas in which we
operate; volatility and deterioration in the credit and equity markets; changes in consumer spending, borrowing and savings habits; availability of capital; demographic changes;
competition for loans and deposits and failure to attract or retain loans and deposits; fluctuations in interest rates and a decline in the level of our interest rate spread or net
interest margin; risks of natural disasters; disruption due to pandemic or other public health emergency; a failure in or breach of our operational or security systems or
infrastructure, including cyberattacks; the failure to maintain current technologies; the inability to successfully implement future information technology enhancements; difficult
business and economic conditions that can adversely affect our industry and business, including competition and lack of soundness of other financial institutions, fraudulent
activity and negative publicity; risks associated with Small Business Administration loans; failure to attract or retain key employees; our ability to access cost-effective funding;
fluctuations in real estate values; changes in accounting policies and practices; the imposition of tariffs or other domestic or international governmental policies impacting the
value of the products of our borrowers; changes in governmental regulation, including, but not limited to, any increase in Federal Deposit Insurance Corporation insurance
premiums; the ability of Hanmi Bank to make distributions to Hanmi Financial Corporation, which is restricted by certain factors, including Hanmi Bank’s retained earnings,
net income, prior distributions made, and certain other financial tests; the adequacy of our allowance for credit losses; credit quality and the effect of credit quality on our
provision for loan losses and allowance for credit losses; changes in the financial performance and/or condition of our borrowers and the ability of our borrowers to perform
under the terms of their loans and other terms of credit agreements; our ability to control expenses; risks as it relates to cyber security against our information technology and
those of our third party providers and vendors; and changes in securities markets. For additional information concerning risks we face, see “Item 1A. Risk Factors” in Part I of
this Report.
Further, given its ongoing and dynamic nature, it is difficult to predict what continued effects the COVID-19 pandemic will have on our business and results of
operations. The pandemic and the related local and national economic disruption may result in a decline in demand for our products and services; increased levels of loan
delinquencies, problem assets and foreclosures; an increase in our allowance for loan losses; a decline in the value of loan collateral, including real estate; a greater decline in
the yield on our interest-earning assets than the decline in the cost of our interest-bearing liabilities; and increased cybersecurity risks, as employees increasingly work remotely.
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.
2
Item 1.
General
Business
Part I
Hanmi Financial Corporation (“Hanmi Financial,” the “Company,” “we,” “us” or “our”) is a Delaware corporation incorporated on March 14, 2000 to be the holding
company for Hanmi Bank (the “Bank”) and is subject to the Bank Holding Company Act of 1956, as amended (the “BHCA”). Our principal office is located at 900 Wilshire
Boulevard, Suite 1250, Los Angeles, California 90017, and our telephone number is (213) 382-2200.
Hanmi Bank, the primary subsidiary of Hanmi Financial, is a state chartered bank incorporated under the laws of the State of California on August 24, 1981, and
licensed pursuant to the California Financial Code (“California Financial Code”) on December 15, 1982. The Bank’s deposit accounts are insured under the Federal Deposit
Insurance Act up to applicable limits thereof. The Department of Financial Protection and Innovation (the “DFPI”) is the Bank’s primary state bank regulator and the Federal
Deposit Insurance Corporation (the “FDIC”) is its primary federal regulator. The Bank’s headquarters are located at 3660 Wilshire Boulevard, Penthouse Suite A, Los Angeles,
California 90010.
The Bank is a community bank conducting general business banking, with its primary market encompassing the Korean-American community as well as other ethnic
communities across California, Colorado, Georgia, Illinois, New Jersey, New York, Texas, Virginia and Washington. The Bank’s full-service offices are located in markets
where many of the businesses are run by immigrants and other minority groups. The Bank’s client base reflects the multi-ethnic composition of these communities.
The Bank’s revenues are derived primarily from interest and fees on loans, interest and dividends on the securities portfolio, and service charges on deposit accounts.
A summary of revenues for the periods indicated follows:
Interest and fees on loans receivable
Interest and dividends on securities
Other interest income
Service charges, fees and other income
Gain on sale of SBA loans
Subtotal
Net gain (loss) on sale of securities
Total revenues
Market Area
2020
211,836
11,438
592
22,145
5,247
251,258
15,712
266,970
$
$
Year Ended December 31,
2019
(dollars in thousands)
229,402
15,808
1,562
21,006
5,251
273,029
1,295
274,324
83.6 % $
5.8 %
0.6 %
7.7 %
1.9 %
99.5 %
0.5 %
100.0 % $
$
$
79.3 %
4.3 %
0.2 %
8.3 %
2.0 %
94.1 %
5.9 %
100.0 %
2018
219,590
14,230
577
19,907
4,954
259,258
(341 )
258,917
84.8 %
5.5 %
0.2 %
7.7 %
1.9 %
100.1 %
(0.1 )%
100.0 %
The Bank historically has provided its banking services through its branch network to a wide variety of small- to medium-sized businesses. Throughout the Bank’s
service areas, competition is intense for both loans and deposits. While the market for banking services is dominated by a few nationwide banks with many offices operating
over wide geographic areas, the Bank’s primary competitors are other community banks that focus their marketing efforts on Korean-American and other Asian-American
businesses in the Bank’s service areas.
Lending Activities
The Bank originates loans for its own portfolio and for sale in the secondary market. Lending activities include real estate loans (commercial property, construction and
residential property), commercial and industrial loans (commercial term, commercial lines of credit and international), equipment lease financing and Small Business
Administration (“SBA”) loans.
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Real Estate Loans
Real estate lending involves risks associated with the potential decline in the value of the underlying real estate collateral and the cash flows from income-producing
properties. Declines in real estate values and cash flows can be caused by a number of factors, including a decline in general economic conditions, rising interest rates, changes
in tax and other laws and regulations affecting the holding of real estate, environmental conditions, governmental and other use restrictions, development of competitive
properties and increasing vacancy rates. When real estate values decline, the Bank’s real estate dependence increases the risk of loss both in the Bank’s loan portfolio and the
Bank’s holdings of other real estate owned (“OREO”), which are the result of foreclosures on real property due to default by borrowers who use the property as collateral for
loans. OREO properties are categorized as real property that is owned by the Bank but which is not directly related to the Bank’s business.
Commercial Property
The Bank offers commercial real estate loans, which are usually collateralized by first deeds of trust. The Bank obtains formal appraisals in accordance with applicable
regulations to support the value of the real estate collateral. All appraisal reports on commercial mortgage loans are reviewed by an appraisal review officer. The review
generally covers an examination of the appraiser’s assumptions and methods, as well as compliance with the Uniform Standards of Professional Appraisal Practice (the
“USPAP”). The Bank determines creditworthiness of a borrower by evaluating cash flow ability, asset and debt structure, as well as credit history. The purpose of the loan is
also an important consideration that dictates loan structure and the credit decision.
The Bank’s commercial real estate loans are principally secured by investor-owned or owner-occupied commercial and industrial buildings. Generally, these types of
loans are made with a maturity date of up to seven years, with longer amortization periods. Typically, the Bank’s commercial real estate loans have a debt-coverage ratio at time
of origination of 1.25 or more and a loan-to-value ratio of 70 percent or less. The Bank offers fixed-rate commercial real estate loans, including hybrid-fixed rate loans that are
fixed for one to five years and then convert to adjustable rate loans for the remaining term. In addition, the Bank originates loans with an adjustable rate of interest indexed to
the prime rate appearing in The Wall Street Journal (the “WSJ Prime Rate”) or the Bank’s prime rate (the “Bank Prime Rate”), as adjusted from time to time. Amortization
schedules for commercial real estate loans generally do not exceed 25 years.
Payments on loans secured by investor-owned and owner-occupied properties are often dependent upon successful operation or management of the properties.
Repayment of such loans may be subject to the risk from adverse conditions in the real estate market or the economy. The Bank seeks to minimize these risks in a variety of
ways, including limiting the size of such loans in relation to the market value of the property and strictly scrutinizing the property securing the loan. At the time of loan
origination, a sensitivity analysis is performed for potential increases in vacancy and interest rates. Additionally, an annual risk assessment is also performed for the commercial
real estate secured loan portfolio, which involves evaluating recent industry trends. When possible, the Bank also obtains corporate or individual guarantees. Representatives of
the Bank conduct site visits of most commercial properties securing the Bank’s real estate loans before the loans are approved.
The Bank generally requires the borrower to provide, at least annually, current cash flow information in order for the Bank to re-assess the debt-coverage ratio. In
addition, the Bank requires title insurance to insure the status of its lien on real estate secured loans when a trust deed on the real estate is taken as collateral. The Bank also
requires the borrower to maintain fire insurance, extended coverage casualty insurance and, if the property is in a flood zone, flood insurance, in an amount equal to the
outstanding loan balance, subject to applicable laws that may limit the amount of hazard insurance a lender can require to replace such improvements. We cannot assure that
these procedures will protect against losses on loans secured by real property.
Construction
The Bank maintains a small construction portfolio for multifamily and commercial and industrial properties within its market areas. The future condition of the local
economy could negatively affect the collateral values of such loans. The Bank’s construction loans typically have the following structure:
•
•
•
•
maturities of two years or less;
a floating rate of interest based on the WSJ Prime Rate or the Bank Prime Rate;
minimum cash equity consistent with high volatility commercial real estate guidelines;
third party fund control monitoring;
4
•
•
•
•
a reserve of anticipated interest costs during construction or an advance of fees;
a first lien position on the underlying real estate;
advance rates at time of origination that do not exceed the lesser of 75 percent loan of the value of the property or costs of construction; and
recourse against a guarantor in the event of default.
On a case-by-case basis, the Bank originates permanent loans on the property under loan conditions that require strong project stability and debt service coverage.
Construction loans involve additional risks compared to loans secured by existing improved real property. Such risks include:
•
•
•
•
•
the uncertain value of the project prior to completion;
the uncertainty in estimating construction costs;
construction delays and cost overruns;
possible difficulties encountered in connection with municipal, state or other governmental ordinances or regulations during construction; and
the difficulty in accurately evaluating the market value of the completed project.
Because of these uncertainties, construction lending often involves the disbursement of substantial funds where repayment of the loan is dependent on the success of the
final project rather than the ability of the borrower or guarantor to repay principal and interest on the loan. If the Bank is forced to foreclose on a construction project prior to, or
at completion, due to a default under the terms of a loan, there can be no assurance that the Bank will be able to recover all of the unpaid balance of, or accrued interest on, the
loan as well as the related foreclosure and holding costs. In addition, the Bank may be required to fund additional amounts in order to complete a pending construction project
and may have to hold the property for an indeterminable period of time. The Bank has underwriting procedures designed to identify factors that it believes to maintain
acceptable levels of risk in construction lending, including, among other procedures, engaging qualified and bonded third parties to provide progress reports and
recommendations for construction loan disbursements. No assurance can be given that these procedures will prevent losses arising from the risks associated with construction
loans described above.
Residential Property
The Bank purchases and originates fixed-rate and variable-rate mortgage loans secured by one- to four-family properties with amortization schedules of 15 to 30 years
and maturity schedules of up to 30 years. The loan fees, interest rates and other provisions of the Bank’s residential loans are determined by an analysis of the Bank’s cost of
funds, cost of origination, cost of servicing, risk factors and portfolio needs.
Commercial and Industrial Loans
The Bank offers commercial loans for intermediate and short-term credit. Commercial loans may be unsecured, partially secured or fully secured. The majority of the
commercial loans that the Bank originates are for businesses located primarily in California, Illinois and Texas, and the maturity schedules range from 12 to 60 months. The
Bank finances primarily small- and middle-market businesses in a wide spectrum of industries. Commercial and industrial loans consist of credit lines for operating needs, loans
for equipment purchases and working capital, and various other business purposes. The Bank requires credit underwriting before considering any extension of credit.
Commercial lending entails significant risks. Commercial loans typically involve larger loan balances, are generally dependent on the cash flows of the business, and
may be subject to adverse conditions in the general economy or in a specific industry. Short-term business loans are customarily intended to finance current operations and
typically provide for principal payment at maturity, with interest payable monthly. Term loans typically provide for floating interest rates, with monthly payments of both
principal and interest.
5
In general, it is the intent of the Bank to take collateral whenever possible, regardless of the loan purpose(s). Collateral may include, but is not limited to, liens on
inventory, accounts receivable, fixtures and equipment, leasehold improvements and real estate. Where real estate is the primary collateral, the Bank obtains formal appraisals
in accordance with applicable regulations to support the value of the real estate collateral. Typically, the Bank requires all principals and significant stockholders of a business to
be guarantors on all loan instruments. All borrowers must demonstrate the ability to service and repay not only their obligations to the Bank, but also any and all outstanding
business debt, without liquidating the collateral, based on historical earnings or reliable projections.
Commercial Term
The Bank offers term loans for a variety of needs, including loans for purchases of equipment, machinery or inventory, business acquisitions, tenant improvements, and
refinancing of existing business-related debts. These loans have repayment terms of up to seven years.
Commercial Lines of Credit
The Bank offers lines of credit for a variety of short-term needs, including lines of credit for working capital, accounts receivable and inventory financing, and other
purposes related to business operations. Commercial lines of credit usually have a term of 12 months.
International
The Bank offers a variety of international finance and trade services and products, including letters of credit, import financing (trust receipt financing and bankers’
acceptances) and export financing. Although most of our trade finance activities are related to trade with Asian countries, all of our loans are made to companies domiciled in
the United States, and a substantial portion of those borrowers are California-based businesses engaged in import and export activities.
Leases Receivable
Equipment finance agreements have terms ranging from one to seven years. Commercial equipment leases are secured by the business assets being financed. The Bank
generally obtains a personal guaranty of the owner(s) of the business. Equipment finance leases are similar to commercial business loans in that the leases are typically made on
the basis of the borrower’s ability to make repayment from the cash flows of the borrower’s business. As a result, the availability of funds for the repayment of commercial
equipment leases may be substantially dependent on the success of the business itself, which in turn, is often dependent in part upon general economic conditions.
SBA Loans
The Bank originates loans that are guaranteed by the SBA, an independent agency of the federal government. SBA loans are offered for business purposes such as
owner-occupied commercial real estate, business acquisitions, start-ups, franchise financing, working capital, improvements and renovations, inventory and equipment, and
debt-refinancing. SBA loans offer lower down payments and longer term financing, which helps small business that are starting out, or about to expand. The guarantees on SBA
loans and SBA express loans are generally 75 percent and 50 percent of the principal amount of the loan, respectively. The Bank typically requires that SBA loans be secured by
business assets and by a first or second deed of trust on any available real property. When the SBA loan is secured by a first deed of trust on real property, the Bank obtains
appraisals in accordance with applicable regulations. SBA loans have terms ranging from five to 25 years depending on the use of the proceeds. To qualify for a SBA loan, a
borrower must demonstrate the capacity to service and repay the loan, without liquidating the collateral, based on historical earnings or reliable projections.
The Bank normally sells to unrelated third parties a substantial amount of the guaranteed portion of the SBA loans that it originates. When the Bank sells a SBA loan, it
has an option to repurchase the loan if the loan defaults. If the Bank repurchases a defaulted loan, the Bank will make a demand for the guaranteed portion to the SBA. Even
after the sale of an SBA loan, the Bank retains the right to service the SBA loan and to receive servicing fees. The unsold portions of the SBA loans that remain owned by the
Bank are included in loans receivable on the Consolidated Balance Sheets. As of December 31, 2020, the Bank had $8.6 million of SBA loans held for sale and $473.9 million
of SBA loans in its loan portfolio, including $295.7 million of loans originated under the Paycheck Protection Program (“PPP”), and was servicing $429.4 million of SBA loans
sold to investors.
6
Off-Balance Sheet Commitments
As part of the suite of services available to its small- to medium-sized business customers, the Bank from time to time issues formal commitments and lines of credit.
These commitments can be either secured or unsecured. They may be revolving lines of credit for seasonal working capital needs, commercial letters of credit or standby letters
of credit. Commercial letters of credit facilitate import trade. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a
customer to a third party.
Lending Procedures and Lending Limits
Individual lending authority is granted to the Chief Credit Administration Officer and certain additional designated officers. Loans for which direct and indirect
borrower liability exceeds an individual’s lending authority are referred to the Bank’s Management Credit Committee.
Legal lending limits are calculated in conformance with the California Financial Code, which prohibits a bank from lending to any one individual, entity or its related
interests on an unsecured basis any amount that exceeds 15 percent of the sum of such bank’s stockholders’ equity plus the allowance for credit losses, capital notes and any
debentures, or 25 percent on a secured and unsecured basis. At December 31, 2020, the Bank’s authorized legal lending limits for loans to one borrower was $113.3 million for
unsecured loans and an additional $75.5 million for secured and unsecured loans combined.
The Bank seeks to mitigate the risks inherent in its loan portfolio by adhering to strict underwriting practices. The review of each loan application includes analysis of
the applicant’s business, experience, prior credit history, income level, cash flows, financial condition, tax returns, cash flow projections, and the value of any collateral to
secure the loan, based upon reports of independent appraisers and/or audits of accounts receivable or inventory pledged as security. In the case of real estate loans over a
specified threshold, the review of collateral value includes an appraisal report prepared by an independent Bank-approved appraiser. All appraisal reports on commercial real
property secured loans are reviewed by an appraisal review officer. The review generally covers an examination of the appraiser’s assumptions and methods, as well as
compliance with the USPAP.
Allowance for Credit Losses, Allowance for Credit Losses Related to Off-Balance Sheet Items and Provision for Loan Losses
The Bank maintains an allowance for credit losses at an appropriate level considered by management to be adequate to cover the current expected credit losses
associated with its loan portfolio under prevailing economic conditions. In addition, the Bank maintains an allowance for credit losses related to off-balance sheet items
associated with unfunded commitments and letters of credit, which is included in other liabilities on the Consolidated Balance Sheets.
The Bank assesses its allowance for credit losses for adequacy on a quarterly basis and more frequently as needed. The DFPI and the FDIC may require the Bank to
recognize additions to the allowance for credit losses through a provision for loan losses based upon their assessment of the information available to them at the time of their
examinations.
Deposits
The Bank offers a traditional array of deposit products, including noninterest-bearing checking accounts, interest-bearing checking and savings accounts, negotiable
order of withdrawal (“NOW”) accounts, money market accounts, and certificates of deposit. These accounts, except for noninterest-bearing checking accounts, earn interest at
rates established by management based on competitive market factors and management’s desire to increase certain types or maturities of deposit liabilities. Our approach is to
tailor products and bundle those that meet the customer’s needs. This approach is designed to add value for the customer, increase products per household, and produce higher
service fee income.
Available Information
We file reports with the U.S. Securities and Exchange Commission (the “SEC”), including our Proxy Statements, Annual Reports on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K and any amendments thereto. The SEC maintains a website at www.sec.gov, which contains the reports, proxy and information
statements and other information we file with the SEC.
7
We also maintain an Internet website at www.hanmi.com. We make available free of charge through our website our Proxy Statements, Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments thereto, as soon as reasonably practicable after we file such reports with the SEC. We
make our website content available for information purposes only. It should not be relied upon for investment purposes. None of the information contained in or hyperlinked
from our website is incorporated into this Annual Report on Form 10-K.
Human Capital Resources
The success of our business is dependent on our dedicated employees, who not only strive to provide value to our customers but also provide invaluable support to the
communities that we serve. We believe our ability to attract and retain employees is a key to our success.
(a) Employee Headcount
At December 31, 2020, the Bank employed 602 employees, nearly all of whom are full-time. None of the employees are represented by a union or covered by a
collective bargaining agreement. The management of the Bank believes that its employee relations are good.
(b) Hiring, Promotion & Talent Development
We strive to make Hanmi an inclusive, safe and healthy workplace, with opportunities for our employees to grow and develop in their careers. We recruit the best
people for the job regardless of gender, ethnicity or other protected traits and it is our policy to fully comply with all laws applicable to discrimination in the workplace. We are
committed to developing our staff through continuing education opportunities, internally developed training programs, and educational reimbursement programs at accredited
institutions that teach skills or knowledge relevant to our business, as well as for seminars, conferences, and other training events designed to support our employee’s job duties.
(c) Employee Benefits, Healthy & Safety
As part of our compensation philosophy, the Bank offers competitive salaries and employee benefits to attract and retain superior talent. In addition to healthy base
wages, additional programs include annual bonus opportunities, company matched 401(k) Plan, healthcare and insurance benefits, flexible spending accounts, wellness
incentives, long term disability, paid time off, and employee assistance programs. Employee retention helps us operate efficiently and offers continuity to our customers and the
community. At December 30, 2020, 42% of our current staff had been with us for at least 5 years.
We recognize that the success of our business is fundamentally connected to the well-being of our employees. We provide benefits that support their physical and
mental health by providing tools and resources to help them improve or maintain their health status; and that offer choice where possible so they can customize their benefits to
meet their needs.
In response to the COVID-19 pandemic, we implemented significant operating environment changes that we determined were in the best interest of our employees, as
well as the communities in which we operate, and which comply with health and safety standards as required by federal, state and local government agencies, taking into
consideration guidelines of the Centers for Disease Control and Prevention and other public health authorities. This includes having the vast majority of our employees work
from home, while implementing additional safety measures for employees continuing critical on-site work.
Insurance
We maintain directors and officers, financial institution bond and commercial insurance at levels deemed adequate by management to protect Hanmi Financial from
certain litigation and other losses.
Competition
The banking and financial services industry is highly competitive. The increasingly competitive environment faced by banks is primarily the result of changes in laws
and regulation, changes in technology and product delivery systems, new competitors in the market, and the accelerating pace of consolidation among financial service
providers. We compete for loans, deposits and customers with other commercial banks, savings institutions, securities and brokerage companies, mortgage companies, real
estate investment trusts, insurance companies, finance companies, money market funds, credit unions, financial technology companies, and other non-bank financial service
providers. Some of these competitors are larger in total assets and capitalization, have greater access to capital markets, including foreign-ownership, and/or offer a broader
range of financial products and services, such as more extensive and established branch networks and trust services, which the Bank does not provide.
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Other institutions, including brokerage firms, credit card companies and retail establishments, offer banking services and products to consumers that are in direct
competition with the Bank, including money market funds with check access and cash advances on credit card accounts. In addition, many non-bank competitors are not subject
to the same extensive federal or state regulations that govern bank holding companies and federally insured banks.
The Bank’s direct competitors are community banks that focus their marketing efforts on Korean-American, Asian-American and immigrant-owned businesses, while
offering the same or similar services and products as those offered by the Bank. These banks compete for loans and deposits primarily through the interest rates and fees they
charge, and the convenience and quality of service they provide to customers.
Economic, Legislative and Regulatory Developments
Future profitability, like that of most financial institutions, is primarily dependent on interest rate differentials and credit quality. In general, the difference between the
interest rates paid by us on interest-bearing liabilities, such as deposits and other borrowings, and the interest rates received by us on our interest-earning assets, such as loans
extended to our customers and securities held in our investment portfolio, will comprise the major portion of our earnings. These rates are highly sensitive to many factors that
are beyond our control, such as inflation, recession and unemployment, and the impact that future changes in domestic and foreign economic conditions might have on us.
Our business is also influenced by the monetary and fiscal policies of the Board of Governors of the Federal Reserve System (the “Federal Reserve”), the federal
government, and the policies of regulatory agencies, particularly the FDIC and the DFPI. The Federal Reserve implements national monetary policies (with objectives such as
curbing inflation and combating recession) through its open-market operations in U.S. government securities, by adjusting the required level of reserves for depository
institutions subject to its reserve requirements, and by varying the target federal funds and discount rates applicable to borrowings by depository institutions. The actions of the
Federal Reserve in these areas influence the growth of bank loans, investments and deposits, and affect interest earned on interest-earning assets and interest paid on interest-
bearing liabilities. The nature and impact on us of any future changes in monetary and fiscal policies cannot be predicted.
From time to time, federal and state legislation is enacted that may have the effect of materially increasing the cost of doing business, limiting or expanding permissible
activities, or affecting the competitive balance between banks and other financial services providers, such as federal legislation permitting affiliations among commercial banks,
insurance companies and securities firms. We cannot predict whether or when any potential legislation will be enacted, and if enacted, the effect that it, or any implementing
regulations, would have on our financial condition or results of operations. In addition, the outcome of any investigations initiated by state authorities or litigation raising issues
may result in necessary changes in our operations, additional regulation and increased compliance costs.
Regulation and Supervision
(a) General
The Company, which is a bank holding company, and the Bank, which is a California-chartered state nonmember bank, are subject to significant regulation and
restrictions by federal and state laws and regulatory agencies. The applicable statutes and regulations, among other things, restrict activities and investments in which we may
engage and our conduct of them, impose capital requirements with which we must comply, impose various reporting and information collecting obligations upon us, and subject
us to comprehensive supervision and regulation by regulatory agencies. The federal and state banking statutes and regulations and the supervision, regulation and examination of
banks and their parent companies by the regulatory agencies are intended primarily for the maintenance of the safety and soundness of banks and their depositors, the Deposit
Insurance Fund (“DIF”) of the FDIC, and the financial system as a whole, rather than for the protection of stockholders or creditors of banks or their parent companies. The
following discussion of statutes and regulations is a summary and does not purport to be complete, nor does it address all applicable statutes and regulations. This discussion is
qualified in its entirety by reference to the statutes and regulations referred to in this discussion. Banking statutes, regulations and policies are continuously under review by
federal and state legislatures and regulatory agencies, and a change in them could have a material adverse effect on our business, such as materially increasing the cost of doing
business, limiting or expanding permissible activities, or affecting the competitive balance between banks and other financial services providers.
We cannot predict whether or when other legislation or new regulations may be enacted, and if enacted, the effect that new legislation, or any implemented regulations
and supervisory policies, would have on our financial condition and results of operations. Such developments may further alter the structure, regulation, and competitive
relationship among financial institutions, and may subject us to increased regulation, disclosure, and reporting requirements.
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(b) Legislation and Regulatory Developments
Legislative and regulatory developments to date, as well as those that come in the future, have had, and are likely to continue to have, an impact on the conduct of our
business. Additional legislation, changes in rules promulgated by federal and state bank regulators, or changes in the interpretation, implementation, or enforcement of existing
laws and regulations, may directly affect the method of operation and profitability of our business. The profitability of our business may also be affected by laws and regulations
that impact the business and financial sectors in general.
In the exercise of their supervisory and examination authority, the regulatory agencies have emphasized corporate governance, stress testing, enterprise risk
management and other board responsibilities; anti-money laundering compliance and enhanced high risk customer due diligence; vendor management; cyber security and fair
lending and other consumer compliance obligations.
(c) Capital Adequacy Requirements
Bank holding companies and banks are subject to various regulatory capital requirements administered by state and federal banking regulators. The current capital rules
require banking organizations to maintain: (i) a minimum capital ratio of Common Equity Tier 1 to risk-weighted assets of 4.5 percent; (ii) a minimum capital ratio of Tier 1
capital to risk-weighted assets of 6.0 percent; (iii) a minimum capital ratio of total capital to risk-weighted assets of 8.0 percent; and (iv) a minimum leverage ratio of Tier 1
capital to adjusted average consolidated assets of 4.0 percent. In addition, the current capital rules require a capital conservation buffer of 2.5 percent above the minimum
capital ratios. Banking organizations with capital ratios above the minimum capital ratio but below the capital conservation buffer will face limitation on the payment of
dividends, common stock repurchases and discretionary cash payments to executive officers.
Capital adequacy requirements and, additionally for banks, prompt corrective action regulations (See “Prompt Corrective Action Provisions” below), involve
quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also
subject to qualitative judgments by regulators about components, risk weighting, and other factors. The risk-based capital requirements for banking organizations require capital
ratios that vary based on the perceived degree of risk associated with an organization’s operations for both transactions reported on the balance sheet as assets, such as loans,
and those recorded as off-balance sheet items, such as commitments, letters of credit and recourse arrangements. The risk-based capital ratio is determined by classifying assets
and certain off-balance sheet financial instruments into weighted categories, with higher levels of capital being required for those categories perceived as representing greater
risks and dividing its qualifying capital by its total risk-adjusted assets and off-balance sheet items. Banking organizations engaged in significant trading activity may also be
subject to the market risk capital guidelines and be required to incorporate additional market and interest rate risk components into their risk-based capital standards.
At December 31, 2020, the Company and the Bank’s total risk-based capital ratios were 15.21 percent and 14.86 percent, respectively; Tier 1 risk-based capital ratios
were 11.93 percent and 13.60 percent, respectively; Common Equity Tier 1 capital ratios were 11.52 percent and 13.60 percent, respectively, and the Company’s and Bank’s
Tier 1 leverage capital ratios were 9.49 percent and 10.83 percent, respectively, all of which ratios exceeded the minimum percentage requirements for the Bank to be deemed
“well-capitalized” and for the Company to meet and exceed all applicable capital ratio requirements for regulatory purposes. The Bank’s capital conservation buffer was 6.86
percent and 6.64 percent, and the Company’s capital conservation buffer was 5.93 percent and 5.78 percent as of December 31, 2020 and 2019, respectively. See
“Management’s Discussion and Analysis of Financial Condition and Results of Operations-Capital Resources.” The federal banking regulators may require banks and bank
holding companies subject to enforcement actions to maintain capital ratios in excess of the minimum ratios otherwise required to be deemed well capitalized, in which case
institutions may no longer be deemed to be well capitalized and may therefore be subject to restrictions on taking brokered deposits.
Bank regulators may also continue their past policies of expecting banks to maintain additional capital beyond the new minimum requirements. The implementation of
more stringent requirements to maintain higher levels of capital, or to maintain higher levels of liquid assets, could adversely impact the Company’s net income and return on
equity, restrict the ability to pay dividends or executive bonuses, and require the raising of additional capital.
Management believes that, as of December 31, 2020, the Company and the Bank met all applicable capital requirements to which it was subject.
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(d) Final Volcker Rule
Under the Volcker Rule, and subject to certain exceptions, banking entities, including the Company and the Bank, are restricted in their ability to engage in activities
that are considered short-term proprietary trading and their ability to invest in, and have relationships with, certain private investment funds, including hedge or private equity
funds that are considered “covered funds.” The Company and the Bank held no investment positions at December 31, 2020 and 2019 that were subject to the Volcker Rule.
Therefore, while the Volcker Rule, including its implementing regulations, requires us to conduct certain internal analysis and reporting, it did not require any material changes
in our operations or business. Bank holding companies with less than $10 billion in consolidated assets are exempt if its total trading assets or liabilities do not exceed 5.0
percent of total consolidated assets.
(e) Bank Holding Company Regulation
The Company is a bank holding company that is subject to comprehensive supervision, regulation, examination and enforcement by the Federal Reserve.
Bank holding companies and their subsidiaries are subject to significant regulation and restrictions by Federal and State laws and regulatory agencies, which may affect
the cost of doing business, and may limit permissible activities and expansion or impact the competitive balance between banks and other financial services providers. Federal
and state banking laws and regulations, among other things:
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Require periodic reports and such additional reports of information as the Federal Reserve may require;
Limit the scope of bank holding companies’ activities and investments;
Require bank holding companies to meet or exceed certain levels of capital (See “Capital Adequacy Requirements” above);
Require that bank holding companies serve as a source of financial and managerial strength to subsidiary banks and commit resources as necessary to support
each subsidiary bank;
Limit dividends payable to shareholders and restrict the ability of bank holding companies to obtain dividends or other distributions from their subsidiary
banks. The Company’s ability to pay dividends on both its common and preferred stock is subject to legal and regulatory restrictions. Substantially all of the
Company’s funds to pay dividends or to pay principal and interest on our debt obligations are derived from dividends paid by the Bank;
Require a bank holding company to terminate an activity or terminate control of or liquidate or divest certain subsidiaries, affiliates or investments if the Federal
Reserve believes the activity or the control of the subsidiary or affiliate constitutes a significant risk to the financial safety, soundness or stability of any bank
subsidiary;
Require the prior approval of senior executive officer or director changes and prohibit golden parachute payments, including change in control agreements, or
new employment agreements with such payment terms, which are contingent upon termination if an institution is in “troubled condition;”
Regulate provisions of certain bank holding company debt, including the authority to impose interest ceilings and reserve requirements on such debt and require
prior approval to purchase or redeem securities; and
Require prior Federal Reserve approval to acquire substantially all the assets of a bank, to acquire more than 5.0 percent of a class of voting shares of a bank, or
to merge with another bank holding company and consider certain competitive, management, financial, anti-money-laundering compliance, potential impact on
U.S. financial stability or other factors in granting these approvals, in addition to similar California or other state banking agency approvals which may also be
required.
A bank holding company is subject to supervision and examination by the Federal Reserve. Examinations are designed to inform the Federal Reserve of the financial
condition and nature of the operations of the bank holding company and its subsidiaries and to monitor compliance with the BHCA and other laws affecting the operations of
bank holding companies. To determine whether potential weaknesses in the condition or operations of bank holding companies might pose a risk to the safety and soundness of
their subsidiary banks, examinations focus on whether a bank holding company has adequate systems and internal controls in place to manage the risks inherent in its business,
including credit risk, interest rate risk, market risk, liquidity risk, operational risk, legal risk and reputation risk. Bank holding companies may be subject to potential
enforcement actions by the Federal Reserve for unsafe or unsound practices in conducting their businesses or for violations of any law, rule, regulation or any condition imposed
in writing by the Federal Reserve. Enforcement actions may include the issuance of cease and desist orders, the imposition of civil money penalties, the requirement to meet and
maintain specific capital levels for any capital measure, the issuance of directives to increase capital, formal and informal agreements, or removal and prohibition orders against
officers or directors and other institution-affiliated parties. The Company is a bank holding company within the meaning of Section 3700 of the California Financial Code.
Therefore, the Company and any of its subsidiaries are subject to examination by, and may be required to file reports with, the DFPI. The DFPI approvals may also be required
for certain mergers and acquisitions.
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(f) Bank Regulation
The Bank is a California state-chartered commercial bank whose deposits are insured by the FDIC. The FDIC is its primary federal bank regulator and the DFPI is the
Bank’s primary state bank regulator. The Bank is subject to comprehensive supervision, regulation, examination and enforcement by the FDIC and the DFPI. Specific federal
and state laws and regulations which are applicable to banks regulate, among other things, the scope of their business, their investments, their reserves against deposits, the
timing of the availability of deposited funds, their activities relating to dividends, investments, loans, the nature and amount of and collateral for certain loans, servicing and
foreclosing on loans, borrowings, capital requirements, certain check-clearing activities, branching, and mergers and acquisitions.
Banks are also subject to restrictions on their ability to conduct transactions with affiliates and other related parties. The Federal Reserve Regulation O imposes
limitations on loans or extensions of credit to “insiders”, including officers, directors, and principal shareholders. The Federal Reserve Act Section 23A and Regulation W
impose quantitative limits, qualitative requirements, and collateral requirements on certain transactions with, or for the benefit of, its affiliates. Transactions covered generally
include loans, extensions of credit, investments in securities issued by an affiliate, and acquisitions of assets from an affiliate. Section 23B of the Federal Reserve Act and
Regulation W require that most types of transactions by a bank with, or for the benefit of, an affiliate be on terms and conditions at least as favorable to the bank as those
prevailing for comparable transactions with unaffiliated parties. The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) expanded definitions and
restrictions on transactions with affiliates and insiders under Sections 23A and 23B, and also lending limits for derivative transactions, repurchase agreements, and securities
lending and borrowing transactions.
Pursuant to the Federal Deposit Insurance Act (“FDI Act”) and the California Financial Code, California state chartered commercial banks may generally engage in
any activity permissible for national banks. Therefore, the Bank may form subsidiaries to engage in the activities commonly conducted by national banks in operating
subsidiaries. Further, the Bank may conduct certain “financial” activities permitted under the Gramm Leach Bliley Act of 1999 (“GLBA”) in a “financial subsidiary” to the
same extent as may a national bank, provided the Bank is and remains “well-capitalized,” “well-managed” and in satisfactory compliance with the Community Reinvestment
Act (“CRA”). The Bank currently has no financial subsidiaries.
(g) Enforcement Authority
The federal and California regulatory structure gives the bank regulatory agencies extensive discretion in connection with their supervisory and enforcement activities
and examination policies, including policies with respect to the classification of assets and the establishment of appropriate loan loss reserves for regulatory purposes. The
regulatory agencies have adopted guidelines to assist in identifying and addressing potential safety and soundness concerns before an institution’s capital becomes impaired. The
guidelines establish operational and managerial standards generally relating to: (1) internal controls, information systems and security, and internal audit systems; (2) loan
documentation; (3) credit underwriting; (4) interest-rate exposure; (5) asset growth and asset quality; and (6) compensation, fees, and benefits. Further, the regulatory agencies
have adopted safety and soundness guidelines for asset quality and for evaluating and monitoring earnings to ensure that earnings are sufficient for the maintenance of adequate
capital and reserves. If, as a result of an examination, the DFPI or FDIC, as applicable, determines that the financial condition, capital resources, asset quality, earnings
prospects, management, liquidity, or other aspects of the Bank’s operations are unsatisfactory or that the Bank or its management is violating or has violated any law or
regulation, the DFPI and the FDIC have residual authority to:
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Require affirmative action to correct any conditions resulting from any violation or practice;
Direct an increase in capital and the maintenance of higher specific minimum capital ratios, which could preclude the Bank from being deemed well capitalized
and restrict its ability to accept certain brokered deposits;
Restrict the Bank’s growth geographically, by products and services, or by mergers and acquisitions, including bidding in FDIC receiverships for failed banks;
Enter into or issue informal or formal enforcement actions, including required Board resolutions, Matters Requiring Board Attention, written agreements, and
consent or cease and desist orders, or prompt corrective action orders to take corrective action and cease unsafe and unsound practices;
Require the sale of subsidiaries or assets;
Limit dividend and distributions;
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Require prior approval of senior executive officer or director changes, or remove officers and directors;
Assess civil monetary penalties; and
Terminate FDIC insurance, revoke the charter and/or take possession of and close and liquidate the Bank or appoint the FDIC as receiver.
(h) Deposit Insurance
The FDIC is an independent federal agency that insures deposits, up to prescribed statutory limits, of federally insured banks and savings institutions, and safeguards
the safety and soundness of the banking and savings industries. The FDIC insures our customer deposits through the DIF up to prescribed limits for each depositor. As a general
matter, the maximum deposit insurance amount is $250,000 per depositor, per FDIC-insured bank, per ownership category. The amount of FDIC assessments paid by each DIF
member institution is based on its relative risk of default as measured by FDIC modeling, based on regulatory capital and other financial ratios as well as supervisory factors.
The FDIC may terminate a depository institution’s deposit insurance upon a finding that the institution’s financial condition is unsafe or unsound, or that the institution has
engaged in unsafe or unsound practices that pose a risk to the DIF or that may prejudice the interest of the bank’s depositors. The termination of deposit insurance for a bank
would also result in the revocation of the bank’s charter by the DFPI.
We are generally unable to control the amount of premiums that we are required to pay for FDIC insurance, which can be affected by the cost of bank failures to the
FDIC among other factors. Any future increases in FDIC insurance premiums may have a material and adverse effect on our earnings and could have a material adverse effect
on the value of, or market for, our common stock.
(i) Prompt Corrective Action Provisions
The FDI Act requires the federal bank regulatory agencies to take “prompt corrective action” with respect to a depository institution if that institution does not meet
certain capital adequacy requirements, including requiring the prompt submission of an acceptable capital restoration plan. Depending on the bank’s capital ratios, the agencies’
regulations define five categories in which an insured depository institution will be placed: well-capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized. At each successive lower capital category, an insured bank is subject to more restrictions, including restrictions on the bank’s
activities, operational practices or the ability to pay dividends. Based upon its capital levels, a bank that is classified as well-capitalized, adequately capitalized or
undercapitalized may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing,
determines that an unsafe or unsound condition, or an unsafe or unsound practice, warrants such treatment.
To be considered well-capitalized under the prompt corrective action standards, the Bank is required to maintain a Common Equity Tier 1 ratio of 6.5 percent, a Tier 1
capital ratio of 8.0 percent (increased from 6.0 percent), a total capital ratio of 10.0 percent (unchanged), and a Tier 1 leverage ratio of 5.0 percent (unchanged). An institution
that complies with the community bank leverage ratio, if elected by a qualifying institution, is considered to be “well capitalized.”
(j) Dividends
The Company depends in part upon dividends received from the Bank to fund its activities, including the payment of dividends. The Company and the Bank are subject
to various federal and state restrictions on their ability to pay dividends. It is the Federal Reserve’s policy that bank holding companies should generally pay dividends on
common stock only out of income available over the past year, and only if prospective earnings retention is consistent with the organization’s expected future needs and
financial condition. It is also the Federal Reserve’s policy that bank holding companies should not maintain dividend levels that undermine their ability to be a source of
strength to its banking subsidiaries. The Federal Reserve also discourages dividend payment ratios that are at maximum allowable levels unless both asset quality and capital are
very strong. In addition, the federal bank regulators are authorized to prohibit a bank or bank holding company from engaging in unsafe or unsound banking practices and,
depending upon the circumstances, could find that paying a dividend or making a capital distribution would constitute an unsafe or unsound banking practice.
The Bank is a legal entity that is separate and distinct from its holding company. The Company is dependent on the performance of the Bank for funds which may be
received as dividends from the Bank for use in the operation of the Company and for the ability of the Company to pay dividends to shareholders. Future cash dividends by the
Bank will also depend upon management’s assessment of future capital requirements, contractual restrictions, and other factors. The current capital rules may restrict dividends
by the Bank if the additional capital conservation buffer is not achieved.
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The power of the board of directors of the Bank to declare a cash dividend to the Company is subject to California law, which restricts the amount available for cash
dividends to the lesser of a bank’s retained earnings or net income for its last three fiscal years (less any distributions to shareholders made during such period). Where the above
test is not met, cash dividends may still be paid, with the prior approval of the DFPI, in an amount not exceeding the greatest of: (1) retained earnings of the bank; (2) the net
income of the bank for its last fiscal year; or (3) the net income of the bank for its current fiscal year.
(k) Operations and Consumer Compliance Laws
The Bank must comply with numerous federal and state anti-money laundering and consumer protection statutes and implementing regulations, including the USA
PATRIOT Act of 2001, the Bank Secrecy Act, the Foreign Account Tax Compliance Act, the CRA, the Fair Credit Reporting Act, as amended by the Fair and Accurate Credit
Transactions Act, the Equal Credit Opportunity Act, the Truth in Lending Act, the Fair Housing Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures
Act, the National Flood Insurance Act, the California Homeowner Bill of Rights, and various federal and state privacy protection laws. Noncompliance with any of these laws
could subject the Bank to compliance enforcement actions as well as lawsuits, and could also result in administrative penalties, including, fines and reimbursements. The Bank
and the Company are also subject to federal and state laws prohibiting unfair or fraudulent business practices, untrue or misleading advertising, and unfair competition.
These laws and regulations mandate certain disclosure and reporting requirements, and regulate the manner in which financial institutions must deal with customers
when taking deposits, making loans, servicing, collecting and foreclosure of loans, and providing other services. Failure to comply with these laws and regulations can subject
the Bank to various penalties, including but not limited to enforcement actions, injunctions, fines or criminal penalties, punitive damages to consumers, and the loss of certain
contractual rights. The CRA is intended to encourage banks to help meet the credit needs of the communities in which they operate, including low and moderate-income
neighborhoods, consistent with safe and sound operations. The bank regulators examine and assign each bank a public CRA rating. The CRA requires the bank regulators to
take into account the bank’s record in meeting the needs of its communities when considering an application by a bank to establish or relocate a branch or to conduct certain
mergers or acquisitions, or an application by the parent holding company to merge with another bank holding company or acquire a banking organization. An unsatisfactory
CRA record could substantially delay approval or result in denial of an application. The Bank was rated “Satisfactory” in meeting community credit needs under the CRA at its
most recent examination for CRA performance.
Dodd-Frank provided for the creation of the Consumer Protection Financial Bureau (the “CFPB”), which has broad rulemaking, supervisory and enforcement authority
over consumer financial products and services, including deposit products, residential mortgages, home-equity loans and credit cards. The CFPB’s functions include
investigating consumer complaints, conducting market research, rulemaking, supervising and examining bank consumer transactions, and enforcing rules related to consumer
financial products and services. CFPB regulations and guidance apply to banks, and banks with $10 billion or more in assets are subject to examination by the CFPB. Banks
with less than $10 billion in assets, including the Bank, continue to be examined for compliance by their primary federal banking agency.
(l) Federal Home Loan Bank System
The Bank is a member and holder of the capital stock of the Federal Home Loan Bank of San Francisco (“FHLBSF”). There are a total of twelve Federal Home Loan
Banks (each, an “FHLB”) across the U.S. owned by their members who are more than 7,300 community financial institutions of all sizes and types. Each FHLB serves as a
reserve or central bank for its members within its assigned region and makes available loans or advances to its members. Each FHLB is financed primarily from the sale of
consolidated obligations of the FHLB system. Each FHLB makes available loans or advances to its members in compliance with the policies and procedures established by the
Board of Directors of the individual FHLB. Each member of FHLBSF is currently required to own stock in an amount equal to the greater of: (i) a membership stock
requirement of 1.0 percent of an institution’s “membership asset value” which is determined by multiplying the amount of the member’s membership assets by the applicable
membership asset factors and is capped at $15.0 million; or (ii) an activity based stock requirement (2.7 percent of the member’s outstanding advances). At December 31, 2020,
the Bank was in compliance with the FHLBSF’s stock ownership requirement, and our investment in FHLBSF capital stock was $16.4 million. The total borrowing capacity
available based on pledged collateral and the remaining available borrowing capacity as of December 31, 2020 were $1.73 billion and $1.44 billion, respectively.
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(m) Impact of Monetary Policies
The earnings and growth of the Bank are largely dependent on its ability to maintain a favorable differential or spread between the yield on its interest-earning assets
and the rates paid on its deposits and other interest-bearing liabilities. As a result, the Bank’s performance is influenced by general economic conditions, both domestic and
foreign, the monetary and fiscal policies of the federal government, and the policies of the regulatory agencies. The Federal Reserve implements national monetary policies
(such as seeking to curb inflation and combat recession) by its open-market operations in U.S. government securities, by adjusting the required level of reserves for financial
institutions subject to its reserve requirements, and by varying the discount rate applicable to borrowings by banks from the Federal Reserve Banks. The actions of the Federal
Reserve in these areas influence the growth of bank loans, investments, and deposits, and also affect interest rates charged on loans, and deposits. The nature and impact of any
future changes in monetary policies cannot be predicted.
(n) Regulation of Non-Bank Subsidiaries
Non-bank subsidiaries are subject to additional or separate regulation and supervision by other state, federal and self-regulatory bodies. Additionally, any foreign-based
subsidiaries would also be subject to foreign laws and regulations.
(o) Federal Securities Law
The Company’s common stock is registered with the SEC under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Company is subject to the
information and proxy solicitation requirements, insider trading restrictions and other requirements under the Exchange Act.
(p) The Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”)
The CARES Act, which became law on March 27, 2020, provided over $2 trillion to combat the coronavirus (COVID-19) and stimulate the economy. The law had
several provisions relevant to depository institutions, including:
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Allowing institutions not to characterize loan modifications relating to the COVID-19 pandemic as a troubled debt restructuring and also allowing them to
suspend the corresponding impairment determination for accounting purposes;
As previously noted, temporarily reducing the community bank leverage ratio alternative available to institutions of less than $10 billion of assets to 8%.
The ability of a borrower of a federally-backed mortgage loan experiencing financial hardship due to the COVID-19 pandemic, to request forbearance from
paying their mortgage for up to 180 days, subject to extension for an additional 180-day period. During that time, no fees, penalties or interest beyond the
amounts scheduled or calculated as if the borrower made all contractual payments on time and in full under the mortgage contract could accrue on the
borrower’s account. Except for vacant or abandoned property, the servicer of a federally-backed mortgage was prohibited from taking any foreclosure action,
including any eviction or sale action, for not less than the 60-day period beginning March 18, 2020, extended by federal mortgage-backing agencies to at least
December 31, 2020.
The ability of a borrower of a multi-family federally-backed mortgage loan that was current as of February 1, 2020, to submit a request for forbearance for up to
30 days, which could be extended for up to two additional 30-day periods upon the request of the borrower. Later extensions were made available, for a total of
six months, for certain federally-backed multi-family mortgage loans. During the time of the forbearance, the multi-family borrower could not evict or initiate
the eviction of a tenant or charge any late fees, penalties or other charges to a tenant for late payment of rent. Additionally, a multi-family borrower that
received a forbearance could not require a tenant to vacate a dwelling unit before a date that is 30 days after the date on which the borrower provided the tenant
notice to vacate and may not issue a notice to vacate until after the expiration of the forbearance.
(q) The Paycheck Protection Program
The CARES Act and the Paycheck Protection Program and Health Care Enhancement Act provided $659 billion to fund loans by depository institutions to eligible
small businesses through the Small Business Administration’s (“SBA”) 7(a) loan guaranty program. The Consolidated Appropriations Bill, 2021 included an additional $284
billion in funds for the Paycheck Protection Program (“PPP”). These loans are 100% federally guaranteed (principal and interest). An eligible business could apply under the
PPP during the applicable covered period and receive a loan up to 2.5 times its average monthly “payroll costs” limited to a loan amount of $10.0 million. The proceeds of the
loan could be used for payroll (excluding individual employee compensation over $100,000 per year), mortgage, interest, rent, insurance, utilities and other qualifying
expenses. PPP loans have: (a) an interest rate of 1.0%, (b) a two-year loan term (or five-year loan term for loans
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made after June 5, 2020); and (c) principal and interest payments deferred until the date on which the SBA remits the loan forgiveness amount to the borrower’s lender or,
alternatively, notifies the lender no loan forgiveness is allowed. The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be fully
reduced by the loan forgiveness amount under the PPP so long as, during the applicable loan forgiveness covered period, employee and compensation levels of the business are
maintained and 60% of the loan proceeds are used for payroll expenses, with the remaining 40% of the loan proceeds used for other qualifying expenses. The Federal Reserve
Board established, though the federal reserve banks, a PPP lending facility to provide liquidity to institutions making PPP loans. In addition, the federal bank regulatory
agencies adopted certain changes to their regulations in recognition that an institution’s participation in the PPP may lead to rapid, but temporary, asset growth. For example,
institutions and holding companies of under $10 billion in total assets of December 31, 2019 may use asset data on that date to determine the applicability of various regulatory
asset thresholds through year-end 2021. The FDIC has also issued a final rule designed to mitigate the deposit insurance assessment effects of an institution’s participation in
the PPP.
(r) Board Diversity
On September 30, 2020, a law was passed in California requiring all public companies (defined as companies with outstanding shares listed on a major United States
stock exchange) that are headquartered in California to have at least three female directors (assuming a board size of at least six directors) by the end of 2021. Further, such
legislation requires that by the end of 2021, California-headquartered public companies have at least one director on their boards who is from an underrepresented community,
defined as “an individual who self identifies as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaska Native, or
who self identifies as gay, lesbian, bisexual, or transgender”. In addition to that initial 2021 requirement, the law mandates that the number of directors from underrepresented
communities be increased by the end of calendar year 2022, depending on the size of the board, up to three members of the board, assuming the board size of at least nine
directors.
In December 2020, Nasdaq filed a proposal with the Securities and Exchange Commission (the “SEC”) to adopt new listing rules that would require each company (1)
to have at least one director who self-identifies as a female, and (2) to have at least one director who self-identifies as Black or African American, Hispanic or Latino, Asian,
Native American or Alaska Native, Native Hawaiian or Pacific Islander, two or more races or ethnicities, or as LGBTQ+, or (3) to explain why the company does not have at
least two directors on its board who self-identify in the categories listed above. The proposed rules also required Nasdaq-listed companies to provide statistical information in a
proposed uniform format on the company’s board of directors related to a director’s self-identified gender, race, and self-identification as LGBTQ+. Each Nasdaq-listed
company would have one year from the date the SEC approves the Nasdaq rules to comply with requirement for statistical information regarding diversity. Nasdaq-listed
companies would have two years from the date the SEC approves the Nasdaq rules have, or explain why it does not have, one diverse director and four years after the SEC
approves the Nasdaq rules to have, or explain why it does not have, two diverse directors.
Item 1A.
Risk Factors
You should carefully consider the risks and uncertainties described below, together with the information included elsewhere in this Report and other documents we file
with the SEC. The following risks and uncertainties described below are those that we have identified as material. Events or circumstances arising from one or more of these
risks could adversely affect our business, financial condition, operating results and prospects and the price of our common stock could decline. The risks identified below are
not intended to be a comprehensive list of all risks we face. Additional risks and uncertainties not presently known to us, or that we may currently view as not material, may
also adversely impact our financial condition, business operations and results of operations.
Risks Related to the COVID-19 Outbreak
The economic impact of the COVID-19 outbreak could adversely affect our financial condition and results of operations. The economic impact of the COVID-19
outbreak has and is expected to continue to adversely affect our financial condition and results of operations. The COVID-19 pandemic has caused significant economic
dislocation in the United States as many state and local governments have placed restrictions on businesses. This resulted in a slow-down in economic activity, an increase in
unemployment and extreme volatility in the stock market, and in particular, bank stocks, have significantly declined in value. In response to the COVID-19 outbreak, the
Federal Reserve reduced the benchmark Federal funds rate to a target range of 0 percent to 0.25 percent, and the yields on 10- and 30-year treasury notes have declined to
historic lows. Various state governments and federal agencies required lenders to provide forbearance and other relief to borrowers (e.g., waiving late payment and other
fees). The federal banking agencies have encouraged financial institutions to prudently work with affected borrowers and legislation has provided relief from reporting loan
classifications due to modifications related to the COVID-19 outbreak. Certain industries have been particularly hard-hit, including the travel and hospitality industry, the
restaurant industry and the retail industry. Finally, the spread of the coronavirus has caused us to modify our business practices, including employee travel, employee work
locations, and cancellation of physical participation in meetings, events and conferences. We have many employees working remotely and we may take further actions as may
be required by government authorities or that we determine are in the best interests of our employees, customers and business partners.
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Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 outbreak on our business. The extent of such
impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and whether the gradual reopening of
businesses will result in a meaningful increase in economic activity. As the result of the COVID-19 pandemic and the related adverse local and national economic
consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of
operations:
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•
•
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•
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•
•
•
•
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demand for our products and services may decline, making it difficult to grow assets and income;
if the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets,
and foreclosures may increase, resulting in increased charges and reduced income;
collateral for loans, especially real estate, may decline in value, which could cause credit loss expense to increase;
our allowance for credit losses may have to be increased if borrowers experience financial difficulties, which will adversely affect our net income;
the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us;
as the result of the decline in the Federal Reserve Board’s target federal funds rate, the yield on our assets may decline to a greater extent than the decline in our
cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income;
a material decrease in net income or a net loss over several quarters could result in a further decrease of our quarterly cash dividend;
our cyber security risks are increased as the result of an increase in the number of employees working remotely;
we rely on third party vendors for certain services and the unavailability of a critical service due to the COVID-19 outbreak could have an adverse effect on us;
Federal Deposit Insurance Corporation premiums may increase if the agency experiences additional resolution costs;
potential goodwill impairment charges could result if acquired assets and operations are adversely affected and remain at reduced levels;
due to legislation and government action limiting foreclosure of real property and reduced governmental capacity to effect business transactions and property
transfers, we may have more difficulty taking possession of collateral supporting our loans, which may negatively impact our ability to minimize our losses,
which could adversely impact our financial results; and
we face litigation, regulatory enforcement and reputation risk as a result of our participation in the Paycheck Participation Program (“PPP”) and the risk that the
Small Business Administration may not fund some or all PPP loan guaranties.
Moreover, our future success and profitability substantially depends on the management skills of our executive officers and directors, many of whom have held officer
and director positions with us for many years. The unanticipated loss or unavailability of key employees due to the outbreak could harm our ability to operate our business or
execute our business strategy. We may not be successful in finding and integrating suitable successors in the event of key employee loss or unavailability.
Any one or a combination of the factors identified above could negatively impact our business, financial condition and results of operations and prospects.
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Risks Related to our Lending Activities
Our concentrations of loans in certain industries could have adverse effects on credit quality. As of December 31, 2020, the Bank’s loan portfolio included loans to:
(i) lessors of non-residential buildings of $1.45 billion, or 29.7 percent of total loans; (ii) borrowers in the hospitality industry of $915.3 million, or 18.8 percent of total loans;
and (iii) borrowers in the retail industry of $303.7 million, or 6.2 percent of total loans. Because of these concentrations of loans in specific industries, a deterioration within
these industries, especially those that have been particularly adversely impacted by the COVID outbreak, could affect the ability of borrowers, guarantors and related parties to
perform in accordance with the terms of their loans, which could have material and adverse consequences on our financial condition and results of operations.
Our focus on lending to small to mid-sized community-based businesses may increase our credit risk. Most of our commercial business and commercial real estate
loans are made to small or middle market businesses. These businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities and
have a heightened vulnerability to economic conditions. If general economic conditions in the markets in which we operate negatively impact this customer sector, our results of
operations and financial condition may be adversely affected. Moreover, a portion of these loans have been made by us in recent years, thus we do not have a significant
payment history from which to judge future collectability. As a result, it may be difficult to predict the future performance of this part of our loan portfolio. Furthermore, the
deterioration of our borrowers’ businesses may hinder their ability to repay their loans with us, which could have a material adverse effect on our business, financial condition,
results of operations, and cash flows.
Our loan portfolio is predominantly secured by real estate and thus we have a higher degree of risk from a downturn in our real estate markets, especially a
downturn in the Southern California real estate market. A downturn in the real estate markets could hurt our business because many of our loans are secured by real estate,
predominantly in California. Real estate values and real estate markets are generally affected by changes in national, regional or local economic conditions, fluctuations in
interest rates and the availability of loans to potential purchasers, changes in tax laws and other governmental statutes, regulations and policies, and acts of nature, such as
earthquakes and natural disasters and pandemic disease. If real estate values decline, the value of real estate collateral securing our loans could be significantly reduced. Our
ability to recover on defaulted loans by foreclosing and selling the real estate collateral would then be diminished, and we would be more likely to suffer material losses on
defaulted loans.
We are exposed to risk of environmental liabilities with respect to properties to which we take title. In the course of our business, we may foreclose and take title to
real estate, and could be subject to environmental liabilities with respect to these properties. We may be held liable to a governmental entity or to third parties for property
damage, personal injury or investigation and clean-up costs incurred by these parties in connection with environmental contamination or the release of hazardous or toxic
substances at a property. The costs associated with investigation or remediation activities could be substantial. In addition, if we are the owner or former owner of a
contaminated site, we may be subject to claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. In
addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability. Although we
have policies and procedures to perform an environmental review before initiating any foreclosure on nonresidential real property, these reviews may not be sufficient to detect
all potential environmental hazards. If we become subject to significant environmental liabilities, our business, financial condition, results of operations and prospects could be
materially and adversely affected.
Risks Related to Local and International Economic Conditions
Deteriorating business and economic conditions can adversely affect our industry and business. Our financial performance generally, and the ability of borrowers to
make payments on outstanding loans and the value of the collateral securing those loans, is highly dependent upon the business and economic conditions in the markets in which
we operate and in the United States as a whole. In addition, rising geopolitical risks nationally and abroad may adversely impact the economy and financial markets in the
United States. These economic pressures may adversely affect our business, financial condition, results of operations, and stock price. In particular, we may face the following
risks in connection with deterioration in economic conditions:
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Problem assets and foreclosures may increase;
Demand for our products and services may decline;
Low cost or non-interest-bearing deposits may decrease;
The value of our securities portfolio may decrease; and
Collateral for loans made by us, especially real estate, may decline in value.
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Our banking operations are concentrated primarily in California, Illinois and Texas. Adverse economic conditions in these states in particular could impair borrowers’
ability to repay their loans, decrease the level and duration of deposits by customers, and erode the value of loan collateral. Adverse economic conditions can potentially cause a
decline in real estate sales and prices in many markets across the United States, the recurrence of an economic recession, and higher rates of unemployment. These conditions
could increase the amount of our non-performing assets and have an adverse effect on our ability to collect on our non-performing loans or otherwise liquidate our non-
performing assets (including other real estate owned) on terms favorable to us, if at all, any of which may cause us to incur losses, adversely affect our capital, and hurt our
business.
Our Southern California concentration means economic conditions in Southern California could adversely affect our operations. Though the Bank’s operations
have expanded outside of our original Southern California focus, the majority of our loan and deposit concentration is still primarily in Los Angeles County and Orange County
in Southern California. Because of this geographic concentration, our results depend largely upon economic conditions in these areas. A deterioration in the economic
conditions or a significant natural or man-made disaster, pandemics or disease in these market areas, could have a material adverse effect on the quality of the Bank’s loan
portfolio, the demand for our products and services, and on our overall financial condition and results of operations.
Changing conditions in South Korea could adversely affect our business. A substantial number of our customers have economic and cultural ties to South Korea and,
as a result, we are likely to feel the effects of adverse economic and political conditions in South Korea. U.S. and global economic policies, political or political tension, and
global economic conditions may adversely impact the South Korean economy.
Management closely monitors our exposure to the South Korean economy and, to date, we have not experienced any significant loss attributable to our exposure to
South Korea. Nevertheless, our efforts to minimize exposure to downturns in the South Korean economy may not be successful in the future, and a significant downturn in the
South Korean economy could possibly have a material adverse effect on our financial condition and results of operations. If economic conditions in South Korea change, we
could experience an outflow of deposits from our customers with connections to South Korea, which could have a material adverse effect on our financial condition and results
of operations.
Risk Related to Laws and Regulation and Their Enforcement
Changes in laws and regulations and the cost of regulatory compliance with new laws and regulations may adversely affect our operations and/or increase our
costs of operations. We are subject to extensive regulation, supervision and examination by our banking regulators. Such regulation and supervision govern the activities in
which a financial institution and its holding company may engage and are intended primarily for the protection of insurance funds and the depositors and borrowers of Hanmi
Bank rather than for the protection of our stockholders. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the ability to
impose restrictions on our operations, comments on the classification of our assets, and determine the level of our allowance for credit losses. These regulations, along with the
currently existing tax, accounting, securities, deposit insurance and monetary laws, rules, standards, policies, and interpretations, control the ways financial institutions conduct
business, implement strategic initiatives, and prepare financial reporting and disclosures. Changes in such regulation and oversight, whether in the form of regulatory policy,
new regulations, legislation or supervisory action, may have a material impact on our operations. Further, compliance with such regulation may increase our costs and limit our
ability to pursue business opportunities.
Additional requirements imposed by Dodd-Frank and other regulations, including additional requirements imposed by the CFPB, could adversely affect us. Dodd-
Frank and related regulations subject us and other financial institutions to more restrictions, oversight, reporting obligations and costs. In addition, this increased regulation of
the financial services industry restricts the ability of institutions within the industry to conduct business consistent with historical practices, including aspects such as
compensation practices and interest rates for customers. Federal and state regulatory agencies also frequently adopt changes to their regulations or change the manner in which
existing regulations are applied.
Dodd-Frank created the CFPB, which is tasked with establishing and implementing rules and regulations under certain federal consumer protection laws with respect to
the conduct of providers of certain consumer financial products and services. The CFPB has rulemaking authority over many of the statutes governing products and services
offered to bank consumers.
Current and future legal and regulatory requirements, restrictions and regulations, including those imposed under Dodd-Frank, may adversely impact our business,
financial condition, and results of operations, may require us to invest significant management attention and resources to evaluate and make any changes required by the
legislation and accompanying rules. If we fail to comply with applicable consumer rules and regulations, we may be subject to adverse enforcement actions, fines or penalties.
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We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations. The Bank Secrecy
Act, the USA PATRIOT Act of 2001, and other laws and regulations require financial institutions, among other duties, to institute and maintain an effective anti-money
laundering program and file suspicious activity and currency transaction reports as appropriate. The federal Financial Crimes Enforcement Network is authorized to impose
significant civil money penalties for violations of those requirements and has engaged in coordinated enforcement efforts with the individual federal banking regulators, as well
as the U.S. Department of Justice, Drug Enforcement Administration, and Internal Revenue Service. We are also subject to increased scrutiny of our compliance with the rules
enforced by the Office of Foreign Assets Control and compliance with the Foreign Corrupt Practices Act. If our policies, procedures and systems are deemed deficient, we could
be subject to liability, including fines and regulatory actions, which may include restrictions on our ability to pay dividends and to obtain regulatory approvals to proceed with
certain transactions, including conducting acquisitions or establishing new branches. Failure to maintain and implement adequate programs to combat money laundering and
terrorist financing could also have serious reputational consequences for us.
Future changes to the FDIC assessment rate could adversely affect our earnings. The amount of premiums that we are required to pay for FDIC insurance is
generally beyond our control. If there are additional bank or financial institution failures, if our risk classification changes, or the method for calculating premiums change, this
may impact assessment rates, which may have a material and adverse effect on our earnings.
Risks Related to Our Operations
Liquidity risk could impair our ability to fund operations and jeopardize our financial condition. Liquidity is essential to our business. An inability to raise funds
through deposits, including brokered deposits, borrowings, the sale of loans, and other sources could have a material adverse effect on our liquidity. Our access to funding
sources in amounts adequate to finance our activities could be impaired by factors that affect us specifically or the financial services industry in general. Factors that could
detrimentally impact our access to liquidity sources include a decrease in the level of our business activity due to a market downturn or adverse regulatory action against us.
Furthermore, if certain funding sources become unavailable, we may need to seek alternatives at higher costs, which would negatively impact our results of operations.
Our ability to acquire deposits or borrow could also be impaired by factors that are not specific to us, such as a severe disruption of the financial markets or negative
views and expectations about the prospects for the financial services industry as a whole.
The soundness of other financial institutions could adversely affect us. Financial services institutions are interrelated as a result of trading, clearing, counterparty or
other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial industry,
including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other institutional clients. Many of these transactions expose us to credit risk
in the event of default of our counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized upon or is liquidated at
prices not sufficient to recover the full amount of the financial instrument exposure due us. Any such losses could have a material adverse effect on our financial condition and
results of operations.
A failure in or breach of our operational or security systems or infrastructure, including as a result of cyber attacks or data breaches, could disrupt our businesses,
result in the disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs and cause losses. As a financial institution, we
depend on our ability to process, record and monitor a large number of customer transactions. As our customer base and locations have expanded throughout the U.S. and as
customer, public, legislative and regulatory expectations regarding operational and information security have increased, our operational systems and infrastructure must
continue to be safeguarded and monitored for potential failures, disruptions and breakdowns.
Our business, financial, accounting, data processing and other operating systems and facilities may stop operating properly or become disabled or damaged as a result
of a number of factors, including events that are wholly or partially beyond our control. For example, there could be sudden increases in customer transaction volume; electrical
or telecommunications outages; degradation or loss of public internet domain; climate change-related impacts and natural disasters such as earthquakes, tornados, and
hurricanes; disease pandemics; events arising from local or larger scale political or social matters, including terrorist acts; building emergencies such as water leakage, fires and
structural issues; and cyber attacks. Although we have business continuity plans and other safeguards in place, our business operations may be adversely affected by significant
and widespread disruption to our physical infrastructure or operating systems that support our businesses and customers.
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As a financial institution, we are susceptible to information security breaches and cybersecurity-related incidents that may be committed against us, our clients or our
vendors, which may result in financial losses or increased costs to us, our clients or our vendors, disclosure or misuse of our information or our client or vendor information,
misappropriation of assets, privacy breaches against our clients or our vendors, litigation or damage to our reputation. Information security breaches and cybersecurity-related
incidents may include fraudulent or unauthorized access to systems used by us, our clients or our vendors, denial or degradation of service attacks, and malware or other cyber
attacks. We also may become subject to governmental enforcement actions or litigation in the event we do not comply with data privacy requirements or experience a data
breach.
Our business relies on our digital technologies, computer and email systems, software, and networks to conduct our operations. In addition, to access our products and
services, our customers may use personal smart-phones, tablet PCs, and other mobile devices that are beyond our control systems. Although we believe we have strong
information security procedures and controls, our technologies, systems, networks, and our customers’ devices may become the target of cyber attacks or information security
breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of the Bank’s or our customers’ confidential, proprietary and other
information, or otherwise disrupt the Bank’s or its customers’ or other third parties’ business operations.
Our risk and exposure to cyber attacks or other information security breaches remains heightened because of, among other things, the evolving nature of these threats,
our plans to continue to enhance our internet banking and mobile banking channel strategies and our expanded geographic footprint. There continues to be a rise in security
breaches and cyber attacks within the financial services industry, especially in the commercial banking sector. Consistent with industry trends, we are exposed to an increase in
attempted security breaches and cybersecurity-related. As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify
or enhance our protective measures or to investigate and remediate any information security vulnerabilities.
Disruptions or failures in the physical infrastructure or operating systems that support our businesses, customers or third parties, or cyber attacks or security breaches of
the networks, systems or devices that our customers or third parties use to access our products and services could result in customer attrition, financial losses, the inability of
our customers or vendors to transact business with us, violations of applicable privacy and other laws, regulatory fines, penalties or intervention, reputational damage,
reimbursement or other compensation costs, and/or additional compliance costs, any of which could materially adversely affect our results of operations or financial condition.
The failure to maintain current technologies and the costs to update technology could negatively impact our business and financial results. Our future success
depends, in part, on our ability to effectively embrace technology to better serve customers and reduce costs. We may be required to expand additional resources to employ this
technology. Failure to keep pace with technological change could potentially have an adverse effect on our business operations and financial condition and results of operations.
We may not be able to successfully implement future information technology system enhancements, which could adversely affect our business operations and
profitability. We invest significant resources in information technology system enhancements to improve functionality and security. We may not be able to successfully
implement and integrate future system enhancements, which could adversely impact the ability to provide timely and accurate financial information in compliance with legal
and regulatory requirements, which could result in sanctions from regulatory authorities. In addition, future system enhancements could have higher than expected costs and/or
result in operating inefficiencies.
Failure to properly utilize system enhancements that are implemented in the future could result in impairment charges that adversely impact our financial condition and
results of operations and could result in significant costs to remediate or replace the defective components. In addition, we may incur significant training, licensing, maintenance,
consulting and amortization expenses during and after systems implementations, and any such costs may continue for an extended period of time.
We rely on third party vendors and other service providers, which could expose us to additional risk. We face additional risk of failure in or breach of operational or
security systems or infrastructure related to our reliance on third party vendors and other service providers. Third parties with which we do business or that facilitate our
business activities or vendors that provide services or security solutions for our operations, particularly those that are cloud-based, could be sources of operational and
information security risk to us, including from breakdowns or failures of their own systems or capacity constraints. We are subject to operational risks relating to such third
parties’ technology and information systems. The continued efficacy of our technology and information systems, related operational infrastructure and relationships with third
party vendors in our ongoing operations is integral to our performance. Failure of any of these resources, including
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operational or systems failures, interruptions of client service operations and ineffectiveness of or interruption in third party data processing or other vendor support, may cause
material disruptions in our business, impairment of customer relations and exposure to liability for our customers, as well as action by bank regulatory authorities. In addition, a
number of our vendors are large national entities, and their services could prove difficult to replace in a timely manner if a failure or other service interruption were to occur.
Failures of certain vendors to provide contracted services could adversely affect our ability to deliver products and services to our customers and cause us to incur significant
expense.
Fraudulent activity could damage our reputation, disrupt our businesses, increase our costs and cause losses. We are susceptible to fraudulent activity that may be
committed against us, our clients or our vendors, which may result in damage to our reputation, financial losses or increased costs to us or our clients or vendors, disclosure or
misuse of our information or our client or vendor information, misappropriation of assets, privacy breaches against our clients or vendors, litigation, or damage to our
reputation. Such fraudulent activity may take many forms, including check fraud (counterfeit, forgery, etc.), electronic fraud, wire fraud, phishing, social engineering and other
dishonest acts. The occurrence of fraudulent activity could have a material adverse effect on our business, financial condition and results of operations.
We are dependent on key personnel and the loss of one or more of those key personnel may materially and adversely affect our prospects. Our success depends in
large part on our ability to attract key people who are qualified and have knowledge and experience in the banking industry in our markets and to retain those people to
successfully implement our business objectives. Competition for qualified employees and personnel in the banking industry is intense, particularly for qualified persons with
knowledge of, and experience in, our banking space. The process of recruiting personnel with the combination of skills and attributes required to carry out our strategies is often
lengthy. Our success depends to a significant degree upon our ability to attract and retain qualified management, loan origination, finance, administrative, compliance,
marketing and technical personnel and upon the continued contributions of our management and employees. The unexpected loss of services of one or more of our key
personnel or failure to attract or retain such employees could have a material adverse effect on our financial condition and results of operations.
If we fail to maintain an effective system of internal controls and disclosure controls and procedures, we may not be able to accurately report our financial results
or prevent fraud. Effective internal controls and disclosure controls and procedures are necessary for us to provide reliable financial reports and disclosures to stockholders, to
prevent fraud and to operate successfully as a public company. If we cannot provide reliable financial reports and disclosures or prevent fraud, our business may be adversely
affected and our reputation and operating results would be harmed. Any failure to develop or maintain effective internal controls and disclosure controls and procedures or
difficulties encountered in their implementation may also result in regulatory enforcement action against us, adversely affect our operating results or cause us to fail to meet our
reporting obligations.
Risks Related to Accounting Matters
Our allowance for credit losses may not be adequate to cover actual losses. Current U.S. generally accepted accounting principles (“GAAP”) requires credit loss
recognition using a methodology that estimates current expected credit losses for the life of the loan and requires consideration of a broader range of reasonableness and
supportable information to inform credit loss estimates.
A significant source of risk arises from the possibility that we could sustain losses because borrowers, guarantors and related parties may fail to perform in accordance
with the terms of their loans. The underwriting and credit monitoring policies and procedures that we have adopted to address this risk may not prevent unexpected losses that
could have a material adverse effect on our business, financial condition, results of operations and cash flows. We maintain an allowance for credit losses to provide for losses
resulting from loan defaults and non-performance. The allowance is also increased for new loan growth. We make various assumptions and judgments about the collectability of
loans in our portfolio, including the creditworthiness of borrowers and the value of the real estate and other assets serving as collateral for the repayment of loans. In
determining the adequacy of the allowance for credit losses, we rely on our experience and our evaluation of economic conditions. If our assumptions prove to be incorrect, our
allowance for credit losses may not be sufficient to cover losses inherent in our loan portfolio, and adjustments may be necessary to address different economic conditions or
adverse developments in the loan portfolio. Consequently, a problem with one or more loans could require us to significantly increase our provision for loan losses. In
addition, the DFPI and the FDIC review our allowance for credit losses and as a result of such reviews, they may require us to adjust our allowance for credit losses or
recognize loan charge-offs. Material additions to the allowance would materially decrease our net income.
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Changes in accounting standards may affect how we record and report our financial condition and results of operations. Our accounting policies and methods are
fundamental to how we record and report our financial condition and results of operations. From time to time, the Financial Accounting Standards Board (“FASB”) and SEC
change the financial accounting and reporting standards that govern the preparation of our financial statements. Further, changes in accounting standards can be both difficult to
predict and may involve judgment and discretion in their interpretation by us and our independent accounting firm. These changes could materially impact, potentially
retroactively, how we report our financial condition and results of operations.
Risks Related to Market Interest Rates
Our earnings are affected by changing interest rates. Our profitability is dependent to a large extent on our net interest income. Like most financial institutions, we
are affected by changes in general interest rate levels and by other economic factors beyond our control. Although we believe we have implemented strategies to reduce the
potential effects of changes in interest rates on our results of operations, any substantial and prolonged change in market interest rates could adversely affect our operating
results.
Net interest income may decline in a particular period if:
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in a declining interest rate environment, more interest-earning assets than interest-bearing liabilities re-price or mature, or
in a rising interest rate environment, more interest-bearing liabilities than interest-earning assets re-price or mature.
Our net interest income may decline based on our exposure to a difference in short-term and long-term interest rates. If the difference between the short-term and long-
term interest rates shrinks or disappears, the difference between rates paid on deposits and received on loans could narrow significantly resulting in a decrease in net interest
income. In addition to these factors, if market interest rates rise rapidly, interest rate adjustment caps may limit increases in the interest rates on adjustable rate loans, thus
reducing our net interest income. Also, certain adjustable rate loans re-price based on lagging interest rate indices. This lagging effect may also negatively impact our net
interest income when general interest rates continue to rise periodically. Increasing interest rates may also reduce the fair value of our fixed rate available-for-sale investment
securities negatively impacting shareholders’ equity.
Any substantial, unexpected or prolonged change in market interest rates could have a material adverse effect on our financial condition, liquidity and results of
operations. While we pursue an asset/liability strategy designed to mitigate our risk from changes in interest rates, changes in interest rates can still have a material adverse
effect on our financial condition and results of operations. Changes in interest rates also may negatively affect our ability to originate real estate loans, the value of our assets
and our ability to realize gains from the sale of our assets, all of which affects our earnings. Also, our interest rate risk modeling techniques and assumptions cannot fully
predict or capture the impact of actual interest rate changes on our balance sheet or projected operating results.
Risks Related to Competitive Matters
Competition may adversely affect our performance. The banking and financial services businesses in our market areas are highly competitive. We face competition in
attracting deposits, making loans, and attracting and retaining employees, particularly in the Korean-American community. Price competition for loans and deposits sometimes
requires us to charge lower interest rates on our loans and pay higher interest rates on our deposits, which may reduce our net interest income. Many of our competitors have
substantially greater resources and lending limits than we have and may offer services that we do not provide. The greater resources and broader offering of deposit and loan
products of some of our competitors may also limit our ability to increase our interest-earning assets. The increasingly competitive environment is a result of changes in
regulation, changes in technology and product delivery systems, new competitors in the market, and the pace of consolidation among financial services providers. Our results in
the future may be materially and adversely impacted depending upon the nature and level of competition.
Risks Related to Tax Matters
If our deferred tax assets are determined not to be recoverable, it would negatively impact our earnings. Deferred tax assets are evaluated on a quarterly basis to
determine if they are expected to be recoverable in the future. Our evaluation considers positive and negative evidence to assess whether it is more likely than not that a portion
of the asset will not be realized. Future negative operating performance or other negative evidence may result in a valuation allowance being recorded against some or the entire
amount.
23
Changes to tax regulations could negatively impact our earnings. Our future earnings could be negatively impacted by changes in tax legislation including changing
tax rates and tax base such as limiting, phasing-out or eliminating deductions or tax credits, taxing certain excess income from intellectual property and changing other tax laws
in the U.S.
Other Risks Related to Our Business
Uncertainty surrounding the future of LIBOR (London Interbank Offer Rate) may affect the fair value and return on our financial instruments that use LIBOR as
a reference rate. We hold assets, liabilities, and derivatives that are indexed to the various tenors of LIBOR. LIBOR will not be supported in its current form after the end of
2021. We believe the U.S. financial sector will maintain an orderly and smooth transition to new interest rate benchmarks, which we will evaluate and adopt if appropriate.
While in the U.S., the Alternative Rates Reference Committee of the Board of Governors of the Federal Reserve System (the “FRB”) and Federal Reserve Bank of New York
have identified the Secured Overnight Financing Rate (“SOFR”) as an alternative U.S. dollar reference interest rate, it is too early to predict the financial impact this rate index
replacement may have, if at all.
We are exposed to the risks of natural disasters and global market disruptions. A significant portion of our operations is concentrated in Southern California.
California is in an earthquake-prone region. A major earthquake may result in material loss to us. A significant percentage of our loans are and will be secured by real estate.
Many of our borrowers may suffer uninsured property damage, experience interruption of their businesses or lose their jobs after an earthquake. Those borrowers might not be
able to repay their loans, and the collateral for such loans may decline significantly in value. We are vulnerable to losses if an earthquake, fire, flood or other natural catastrophe
occurs in Southern California.
Additionally, global markets may be adversely affected by natural disasters, the emergence of widespread health emergencies or pandemics, cyber attacks or
campaigns, military conflict, terrorism or other geopolitical events. Also, any sudden or prolonged market downturn in the U.S. or abroad, as a result of the above factors or
otherwise could result in a decline in revenue and adversely affect our results of operations and financial condition, including capital and liquidity levels.
Risks Relating to Ownership of Our Common Stock
The Bank could be restricted from paying dividends to us, its sole shareholder, and, thus, we would be restricted from paying dividends to our stockholders in the
future. The primary source of our income from which we pay our obligations and distribute dividends to our stockholders is from the receipt of dividends from the Bank. The
availability of dividends from the Bank is limited by various statutes and regulations. As of January 1, 2021, the Bank had the ability to pay $17.8 million of dividends without
the prior approval of the Commissioner of DFPI.
The price of our common stock may be volatile or may decline. The trading price of our common stock may fluctuate significantly due to a number of factors, many
of which are outside our control. In addition, the stock market is subject to fluctuations. These broad market fluctuations could adversely affect the market price of our common
stock. Among the factors that could affect our stock price are:
•
•
•
•
•
•
•
•
•
actual or anticipated fluctuations in our operating results and financial condition;
changes in revenue or earnings estimates or publication of research reports and recommendations by financial analysts;
failure to meet analysts’ revenue or earnings estimates;
speculation in the press or investment community;
strategic actions by us or our competitors, such as acquisitions or restructurings;
general market conditions and, in particular, developments related to market conditions for the financial services industry;
proposed or adopted legislative or regulatory or accounting changes or developments;
anticipated or pending investigations, proceedings or litigation that involve or affect us; or
domestic and international economic factors unrelated to our performance.
The stock market and, in particular, the market for financial institution stocks, has experienced significant volatility. The trading price of the shares of our common
stock will depend on many factors, which may change from time to time, including, without limitation, our financial condition, performance, creditworthiness and prospects,
future sales of our equity or equity-related securities, and other factors identified above in the section captioned “Cautionary Note Regarding Forward-Looking Statements.” A
significant decline in our stock price could result in substantial losses for individual stockholders and could lead to costly and disruptive securities litigation and potential
delisting from Nasdaq.
24
Your share ownership may be diluted by the issuance of additional shares of our common stock in the future. Your share ownership may be diluted by the issuance
of additional shares of our common stock in the future. We may decide to raise additional funds for many reasons, including in response to regulatory or other requirements to
meet our liquidity and capital needs, to finance our operations and business strategy or for other reasons. If we raise funds by issuing equity securities or instruments that are
convertible into equity securities, the percentage ownership of our existing stockholders will be reduced, the new equity securities may have rights, preferences and privileges
superior to those of our common stock.
Anti-takeover provisions and state and federal law may limit the ability of another party to acquire us, which could cause our stock price to decline. Various
provisions of our Amended and Restated Certificate of Incorporation and By-laws could delay or prevent a third-party from acquiring us, even if doing so might be beneficial to
our stockholders. These provisions provide for, among other things, supermajority approval for certain actions, limitation on large stockholders taking certain actions and
authorization to issue “blank check” preferred stock by action of the Board of Directors without stockholder approval. In addition, the BHCA, and the Change in Bank Control
Act of 1978, as amended, together with applicable federal regulations, require that, depending on the particular circumstances, either Federal Reserve approval must be obtained
or notice must be furnished to Federal Reserve and not disapproved prior to any person or entity acquiring “control” of a state nonmember bank, such as the Bank. Additional
prior approvals from other federal or state bank regulators may also be necessary depending upon the particular circumstances. These provisions may prevent a merger or
acquisition that would be attractive to stockholders and could limit the price investors would be willing to pay in the future for our common stock.
Item 1B.
Unresolved Staff Comments
None.
Item 2.
Properties
Hanmi Financial’s principal office is located at 900 Wilshire Boulevard, Suite 1250, Los Angeles, California. As of December 31, 2020, we had 44 properties
consisting of 35 branch offices and 9 loan production offices. We own 11 locations and the remaining properties are leased.
As of December 31, 2020, our consolidated investment in premises and equipment, net of accumulated depreciation and amortization, was $26.4 million. Our lease
expense was $8.5 million for the year ended December 31, 2020. We consider our present facilities to be sufficient for our current operations.
Item 3.
Legal Proceedings
Hanmi Financial and its subsidiaries are subject to lawsuits and claims that arise in the ordinary course of their businesses. Neither Hanmi Financial nor any of its
subsidiaries is currently involved in any legal proceedings, the outcome of which we believe would have a material adverse effect on the business, financial condition or results
of operations of Hanmi Financial or its subsidiaries.
Item 4.
Mine Safety Disclosures
Not applicable.
25
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Hanmi Financial’s common stock is traded on the Nasdaq Global Select Market (“Nasdaq”) under the symbol “HAFC.” As of February 22, 2021 there were
Part II
approximately 721 record holders of our common stock.
Performance Graph
The following graph shows a comparison of cumulative total stockholder return on Hanmi Financial’s common stock with the cumulative total returns for: (i) the Nasdaq
Composite Index; (ii) the Standard and Poor’s 500 Financials Index (“S&P 500 Financials”); (iii) the SNL U.S. Bank $1B-$5B Index and the SNL U.S. Bank $5B-$10B Index,
which were compiled by S&P Global, New York, New York. Beginning in the year ended December 31, 2017, the Company’s assets exceeded $5 billion. Accordingly, both the
SNL Bank $1B-$5B index and the SNL Bank $5B-$10B index are shown in the chart below. The graph assumes an initial investment of $100 and reinvestment of dividends.
The graph is historical only and may not be indicative of possible future performance. The performance graph shall not be deemed incorporated by reference to any general
statement incorporating by reference to this Annual Report on Form 10-K into any filing under the Securities Act, or under the Exchange Act, except to the extent that we
specifically incorporate this information by reference, and shall not otherwise be deemed filed under either the Securities Act or the Exchange Act.
Hanmi Financial Corporation
NASDAQ Composite
S&P 500 Financials
SNL Bank $1B-$5B
SNL Bank $5B-$10B
Source: S&P Global, New York, NY
2016
2017
$
$
$
$
$
100.00
100.00
100.00
100.00
100.00
$
$
$
$
$
December 31,
2018
86.96
128.24
120.03
105.12
98.00
$
$
$
$
$
56.45
123.26
102.42
90.76
87.21
$
$
$
$
$
2019
2020
57.31
166.68
132.30
108.17
105.72
$
$
$
$
$
32.49
239.42
126.88
89.41
93.47
26
Recent Unregistered Sales of Equity Securities
There were no unregistered sales of Hanmi Financial’s equity securities during the year ended December 31, 2020.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
During 2020, the Company acquired 31,788 shares from employees in connection with the satisfaction of income tax withholding obligations incurred through vesting
of Company stock awards. Such shares are not purchased as a part of the Company’s repurchase program.
In addition, the following table presents stock purchases made in respect of the stock repurchase program announced on January 24, 2019 that authorized the buy-back
of up to 5.0 percent, or 1,500,000 of our shares outstanding. Shortly following the federal proclamation declaring a national emergency concerning the COVID-19 outbreak,
Hanmi suspended its share repurchase program. The table below provides information on purchases made during the twelve months ended December 31, 2020:
Purchase Date:
January 1, 2020 - March 31, 2020
April 1, 2020 - June 30, 2020
July 1, 2020 - September 30, 2020
October 1, 2020 - December 31, 2020
Total
Item 6.
[RESERVED]
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
$
$
$
$
$
16.22
—
—
—
16.22
135,400
—
—
—
135,400
989,600
—
—
—
989,600
27
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
This discussion presents management’s analysis of the financial condition and results of operations as of and for the years ended December 31, 2020, 2019 and 2018.
This discussion should be read in conjunction with our Consolidated Financial Statements and the Notes related thereto presented elsewhere in this Report. See also
“Cautionary Note Regarding Forward-Looking Statements.”
Critical Accounting Policies
We have established various accounting policies that govern the application of GAAP in the preparation of our Consolidated Financial Statements. The preparation of
financial statements in conformity with GAAP requires management to make estimates and assumptions to arrive at the carrying value of assets and liabilities and amounts
reported for revenues and expenses. Our financial position and results of operations can be materially affected by these estimates and assumptions. Critical accounting policies
are those policies that are most important to the determination of our financial condition and results of operations or that require management to make assumptions and
estimates that are subjective or complex. Our significant accounting policies are discussed in the “Notes to Consolidated Financial Statements, Note 1 — Summary of
Significant Accounting Policies.” Management believes that the following policy is critical.
Allowance for credit losses and Allowance for credit losses related to off-balance sheet items
Our allowance for credit losses methodologies incorporate a variety of risk considerations, both quantitative and qualitative, in establishing an allowance for credit
losses that management believes is appropriate at each reporting date. Quantitative factors include our historical loss experiences on loan pools segmented by type, and
considers risk rating, delinquency and charge-off trends, collateral values, changes in nonperforming loans, and other factors. Qualitative factors include the general economic
environment in our markets, delinquency and charge-off trends, and the change in nonperforming loans. Concentration of credit, change of lending management and staff,
quality of the loan review system, and changes in interest rates are other qualitative factors that are considered in our methodologies. See “— Allowance for Credit Losses”,
“Financial Condition — Allowance for credit losses and Allowance for credit losses related to off-balance sheet items”, “Results of Operations — Provision for Credit Losses”
and “Notes to Consolidated Financial Statements, Note 1 — Summary of Significant Accounting Policies” for additional information on methodologies used to determine the
allowance for credit losses and the allowance for credit losses related to off-balance sheet items.
Executive Overview
For the years ended December 31, 2020, 2019 and 2018, net income was $42.2 million, $32.8 million and $57.9 million, respectively. The increase of $9.4 million, or
28.7 percent, in net income for the year ended December 31, 2020 as compared with the year ended December 31, 2019, was primarily due to lower interest expense on
customer deposits of $29.1 million and higher noninterest income of $15.6 million primarily from higher gains on sale of securities. These increases were partially offset by
lower interest income on loans receivable of $17.6 million and higher credit loss provisions of $15.3 million for loans receivable, off-balance sheet items and accrued interest
receivable.
The decrease of $25.1 million, or 43.3 percent, in net income for the year ended December 31, 2019 as compared with the year ended December 31, 2018, was
primarily due to a $26.2 million increase in the provision for loan losses relating to a troubled loan relationship and impaired leases receivable.
Effective January 1, 2020, the Company adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses, which replaced the incurred
loss methodology for estimating credit losses with a forward-looking current expected credit losses (“CECL”) methodology. The adoption resulted in a $17.4 million increase to
the beginning balance of the allowance for credit losses, a $335,000 decrease to the beginning balance of the allowance for off-balance sheet-items and an after-tax charge of
$12.2 million to the beginning balance of retained earnings.
For the years ended December 31, 2020, 2019 and 2018, our earnings per diluted share were $1.38, $1.06 and $1.79, respectively.
28
Additional significant financial highlights include:
•
•
•
•
Cash and due from banks increased $270.2 million to $391.8 million as of December 31, 2020 from $121.7 million at December 31, 2019, primarily from
higher volume of non-interest bearing deposits. The increase in deposits reflects depositors placing proceeds from PPP loans and proceeds from other
government assistance programs with the Bank, as well as an increase from our marketing efforts and depositors seeking safety for their funds.
Loans receivable increased by $270.0 million, or 5.9 percent, to $4.88 billion as of December 31, 2020, compared with $4.61 billion as of December 31, 2019.
The increase includes Hanmi’s participation in the PPP where we originated $301.8 million of PPP loans in 2020.
Deposits were $5.28 billion at December 31, 2020 compared with $4.70 billion at December 31, 2019 as noninterest-bearing deposits increased $507.1 million
and interest-bearing deposits increased by $68.9 million.
Cash dividends of $0.52 per share of common stock were declared for the year ended December 31, 2020 compared with $0.96 per share of common stock for
the years ended December 31, 2019 and 2018.
Results of Operations
Net Interest Income
Our primary source of revenue is net interest income, which is the difference between interest and fees 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 are
affected principally by changes to market interest rates, the demand for such loans, 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.
29
The following table shows the average balances 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.
December 31, 2020
Interest
Income /
Expense
Average
Yield /
Rate
Average
Balance
For the Year Ended
December 31, 2019
Interest
Income /
Expense
(dollars in thousands)
Average
Balance
December 31, 2018
Average
Yield /
Rate
Average
Balance
Interest
Income /
Expense
Average
Yield /
Rate
Assets
Interest-earning assets:
Loans receivable (1)
Securities (2)
FHLB stock
Interest-bearing deposits in other banks
Total interest-earning assets
Noninterest-earning assets:
Cash and due from banks
Allowance for credit losses
Other assets
Total assets
Liabilities and stockholders' equity
Interest-bearing liabilities:
Deposits:
Demand: interest-bearing
Money market and savings
Time deposits
Total interest-bearing deposits
Borrowings
Subordinated debentures
Total interest-bearing liabilities
Noninterest-bearing liabilities and equity:
Demand deposits: noninterest-bearing
Other liabilities
Stockholders' equity
Total liabilities and stockholders' equity
$
$
$
$
$
$
4,684,512
663,700
16,385
306,668
5,671,265
72,557
(75,250 )
228,131
5,896,703
94,167
1,758,300
1,412,951
3,265,418
196,397
118,663
3,580,478
1,680,882
77,478
557,865
5,896,703
211,836
10,537
902
592
223,867
4.52 %
1.59 %
5.51 %
0.19 %
3.95 %
70
11,016
22,908
33,994
2,367
6,607
42,968
0.07 %
0.63 %
1.62 %
1.04 %
1.21 %
5.57 %
1.20 %
$
$
$
$
$
$
4,507,975
618,610
16,385
73,906
5,216,876
103,475
(41,933 )
197,517
5,475,935
83,613
1,566,403
1,752,642
3,402,658
40,374
118,079
3,561,111
1,288,301
61,209
565,314
5,475,935
229,402
14,806
1,147
1,562
246,917
5.09 %
2.39 %
7.00 %
2.11 %
4.73 %
116
23,556
39,433
63,105
763
7,032
70,900
0.14 %
1.50 %
2.25 %
1.85 %
1.89 %
5.96 %
1.99 %
$
$
$
$
$
$
4,456,202
587,916
16,385
31,478
5,091,981
122,925
(31,880 )
174,939
5,357,965
91,495
1,444,674
1,609,403
3,145,572
174,452
117,524
3,437,548
1,315,473
30,180
574,764
5,357,965
Net interest income (taxable equivalent basis)
$
180,899
$
176,017
$
181,724
Cost of deposits (3)
Net interest spread (taxable equivalent basis) (4)
Net interest margin (taxable equivalent basis)(5)
0.69 %
2.75 %
3.19 %
1.35 %
2.74 %
3.37 %
(1)
(2)
(3)
(4)
(5)
Loans receivable include loans held for sale and exclude the allowance for credit losses. Nonaccrual loans receivable are included in the average loans receivable balance.
Amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate.
Represents interest expense on deposits as a percentage of all interest-bearing and noninterest-bearing deposits.
Represents the average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities.
Represents net interest income as a percentage of average interest-earning assets.
30
219,590
13,528
1,413
577
235,108
4.93 %
2.30 %
8.62 %
1.83 %
4.62 %
106
16,182
26,792
43,080
3,379
6,925
53,384
0.12 %
1.12 %
1.66 %
1.37 %
1.94 %
5.88 %
1.55 %
0.97 %
3.07 %
3.57 %
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.
Interest and dividend income:
Loans receivable (1)
Securities (2)
FHLB stock
Interest-bearing deposits in other banks
Total interest and dividend income (taxable
equivalent) (2)
Interest expense:
Demand: interest-bearing
Money market and savings
Time
Borrowings
Subordinated debentures
Total interest expense
Change in net interest income (taxable
equivalent) (2)
2020 vs 2019
Increases (Decreases) Due to Change In
Rate
Volume
Total
2019 vs 2018
Increases (Decreases) Due to Change In
Rate
Volume
Total
Year Ended December 31,
$
$
$
$
$
8,724
1,014
—
1,450
11,188
13
2,594
(6,768 )
1,972
35
(2,154 )
13,342
$
$
$
$
$
$
(26,290 )
(5,283 )
(245 )
(2,420 )
(in thousands)
$
(17,566 )
(4,269 )
(245 )
(970 )
(34,238 )
$
(23,050 )
$
(59 )
(15,134 )
(9,757 )
(368 )
(460 )
(25,778 )
(8,460 )
$
$
$
(46 )
(12,540 )
(16,525 )
1,604
(425 )
(27,932 )
4,882
$
$
$
2,573
722
—
885
4,180
—
1,457
2,554
(2,536 )
27
1,502
2,678
$
$
$
$
$
7,239
556
(266 )
100
7,629
10
5,917
10,087
(80 )
80
16,014
(8,385 )
$
$
$
$
$
9,812
1,278
(266 )
985
11,809
10
7,374
12,641
(2,616 )
107
17,516
(5,707 )
(1)
(2)
Loans receivable include loans held for sale and exclude the allowance for credit losses. Nonaccrual loans receivable are included in the average loans receivable balance.
Amounts calculated on a fully equivalent basis using the current statutory federal tax rate.
2020 Compared to 2019
Interest income, on a taxable equivalent basis, decreased $23.1 million, or 9.3 percent, to $223.9 million for the year ended December 31, 2020 from $246.9 million for
the year ended December 31, 2019. Interest expense decreased $27.9 million or 39.4 percent, to $43.0 million in 2020 from $70.9 million in 2019. Net interest income, on a
taxable equivalent basis, was $180.9 million and $176.0 million in 2020 and 2019, respectively. The increase in net interest income was primarily due to the decrease in interest
expense on interest-bearing liabilities, partially offset by the decrease in interest income on interest-earning assets. Average loans were 82.6 percent of average interest earning
assets for 2020, down from 86.4 percent for 2019. The net interest spread and net interest margin, on a taxable equivalent basis, for the year ended December 31, 2020 were 2.75
percent and 3.19 percent, respectively, compared with 2.74 percent and 3.37 percent, respectively, for 2019.
The average balance of loans increased $176.5 million, or 3.9 percent, to $4.68 billion in 2020 from $4.51 billion in 2019. The average balance of securities increased
$45.1 million, or 7.3 percent, to $663.7 million in 2020 from $618.6 million in 2019. The average balance of interest earning assets increased $454.4 million, or 8.7 percent, to
$5.67 billion for the year ended December 31, 2020 from $5.22 billion for 2019. The increase in the average balance of loans was due mainly to new loan production driven by
PPP loans. The average balance of interest-bearing liabilities increased $19.4 million, or 0.5 percent, to $3.58 billion in 2020 compared to $3.56 billion in 2019. The increase in
average interest-bearing liabilities resulted primarily from higher money market and savings and borrowings balances, offset by a decrease in time deposits.
The average yield on loans decreased to 4.52 percent for the year ended December 31, 2020 from 5.09 percent in 2019, primarily due to a decrease in market interest
rates commencing in the first quarter of 2020 and the origination of $301.8 million of PPP loans at a rate of one percent during the second quarter of 2020, offset by the change
in composition of the loan portfolio with a greater concentration of commercial and industrial loans receivable. The average yield on securities, on a taxable equivalent basis,
decreased to 1.59 percent in 2020 from 2.39 percent in 2019, attributable primarily to the sale of securities during the second quarter of 2020 to take advantage of unrealized
gains, the proceeds of which were reinvested into lower-yielding securities. The average yield on interest-earning assets, on a taxable equivalent basis, decreased 78 basis points
to 3.95 percent in 2020 from 4.73 percent in 2019, due mainly to the decrease in the yields on the loan portfolio due to a decrease in market interest rates and the origination of
$301.8 million of PPP loans at a rate of one percent. The average cost of interest-bearing liabilities decreased by 79 basis points to 1.20 percent in 2020 from 1.99 percent in
2019. The decrease was due to lower market interest rates and a shift away from time deposits to noninterest bearing demand deposits in the composition of the deposit
accounts.
31
2019 Compared to 2018
Interest income, on a taxable equivalent basis, increased $11.8 million, or 5.0 percent, to $246.9 million for the year ended December 31, 2019 from $235.1 million for
the year ended December 31, 2018. Interest expense increased $17.5 million or 32.8 percent, to $70.9 million in 2019 from $53.4 million in 2018. Net interest income, on a
taxable equivalent basis, was $176.0 million and $181.7 million in 2019 and 2018, respectively. The decrease in net interest income was primarily due to the increase in interest
expense on interest-bearing liabilities outpacing the increase in interest income on interest-earning assets. Average loans and leases were 86.4 percent of average interest earning
assets for 2019, down from 87.5 percent for 2018. The net interest spread and net interest margin, on a taxable equivalent basis, for the year ended December 31, 2019 were 2.74
percent and 3.37 percent, respectively, compared with 3.07 percent and 3.57 percent, respectively, for the same period in 2018.
The average balance of loans increased $51.8 million, or 1.2 percent, to $4.51 billion in 2019 from $4.46 billion in 2018. The average balance of securities increased
$30.7 million, or 5.2 percent, to $618.6 million in 2019 from $587.9 million in 2018. The average balance of interest earning assets increased $124.9 million, or 2.5 percent, to
$5.22 billion for the year ended December 31, 2019 from $5.09 billion for 2018. The increase in the average balance of loans was due mainly to new loan production. The
average balance of interest-bearing liabilities increased $123.6 million, or 3.6 percent, to $3.56 billion in 2019 compared to $3.44 billion in 2018. The increase in the average
balance of interest-bearing liabilities resulted primarily from an increase in time deposits, money market and savings, offset mainly by a decrease in borrowings.
The average yield on loans and leases increased to 5.09 percent for the year ended December 31, 2019 from 4.93 percent in 2018, primarily due to an increase in market
interest rates commencing in the second-half of 2018 and change in composition of the loan portfolio with a greater concentration of commercial and industrial loans and leases
receivable, and a decrease in residential loans. The average yield on securities, on a taxable equivalent basis, increased to 2.39 percent in 2019 from 2.30 percent in 2018,
attributable primarily to the shift away from lower taxable equivalent yields of the tax-exempt municipal securities resulting from the Tax Cuts and Jobs Act. The average yield
on interest-earning assets, on a taxable equivalent basis, increased 11 basis points to 4.73 percent in 2019 from 4.62 percent in 2018, due mainly to the increase in the yields on
the loan and lease portfolio. The average cost of interest-bearing liabilities increased by 44 basis points to 1.99 percent in 2019 from 1.55 percent in 2018. The increase was due
to increases in the market interest rates and competition.
Credit Loss Expense
As a result of credit risks inherent in our lending business, we recognize an allowance for credit losses through charges to credit loss expense. These charges pertain not
only to our outstanding loan portfolio, but also to off-balance sheet items, such as letters of credit and commitments to extend credit, and the allowance for uncollectible accrued
interest receivable for loans modified under the CARES Act. Credit loss expense for our outstanding loan portfolio are recorded to the allowance for credit losses. The
allowance for off-balance sheet items is included in accrued expenses and other liabilities and the allowance for uncollectible accrued interest receivable is included in accrued
interest receivable.
2020 Compared to 2019
Credit loss expense for the full year 2020 was $45.5 million compared with $30.2 million for 2019. Credit loss expense for 2020 reflected the new accounting standard
for determining the allowance for credit losses and included a $42.5 million provision for loan losses which primarily reflected the change to life of loan current expected credit
losses, and the impact of the pandemic. Additionally, a $730,000 provision for off-balance sheet items and a $2.3 million provision for losses on accrued interest receivable for
loans currently or previously modified under the CARES Act, was recorded as credit loss expense during 2020. For the year ended December 31, 2019, under the former
accounting standard for determining the allowance for loan losses, the provision for loan losses was $30.2 million, which primarily reflected specific allowance allocations
related to a troubled loan relationship. The 2019 provision for off-balance sheet items, included in other operating expenses, was $1.0 million.
2019 Compared to 2018
A loan loss provision of $30.2 million was recorded for the year ended December 31, 2019, compared with a loan loss provision of $4.0 million for the year ended
December 31, 2018. The increased provision primarily related to an increase in specific allowance allocations of $21.8 million in 2019 related to a $39.7 million troubled loan
relationship, which was placed on non-accrual status in 2019 and was deemed impaired. The charge to other noninterest expense for losses on off-balance sheet items was
$958,000 in 2019 compared to $143,000 for the same period in 2018.
32
Noninterest Income
The following table sets forth the various components of noninterest income for the years indicated:
Service charges on deposit accounts
Trade finance and other service charges and fees
Servicing income
Bank-owned life insurance income
All other operating income
Service charges, fees and other
Gain on sale of SBA loans
Net gain (loss) on sales of securities
Gain on sale of bank premises
Legal settlement
Total noninterest income
2020 Compared to 2019
2020
Year Ended December 31,
2019
(in thousands)
2018
$
$
8,485 $
4,033
2,481
1,113
4,625
20,737
5,247
15,712
408
1,000
43,104 $
9,951 $
4,786
1,798
1,121
2,114
19,770
5,252
1,295
1,235
—
27,552 $
10,000
4,616
2,385
1,107
1,799
19,907
4,954
(341 )
—
—
24,520
For the year ended December 31, 2020 noninterest income was $43.1 million, an increase of $15.6 million, or 56.4 percent, compared with $27.6 million in 2019. The
increase was primarily attributable to a net gain of $15.7 million in the sale of securities for the year ended December 31, 2020 compared with $1.3 million in 2019 and a $1.0
million legal settlement from a failed bank acquisition, partially offset by lower service charges on deposit accounts of $1.5 million and lower gains of $827,000 in the sale of
bank premises.
2019 Compared to 2018
For the year ended December 31, 2019 noninterest income was $27.6 million, an increase of $3.0 million, or 12.4 percent, compared with $24.5 million in 2018. The
increase was primarily attributable to increases in gain on sale of securities and gain on sale of bank premises. Sales of SBA loans resulted in a net gain of $5.3 million for the
year ended December 31, 2019 compared with $5.0 million in 2018. Sale of securities resulted in a net gain of $1.3 million for the year ended December 31, 2019 compared to a
net loss of $341,000 in 2018.
Noninterest Expense
The following table sets forth various components of noninterest expense for the years indicated:
Salaries and employee benefits
Occupancy and equipment
Data processing
Professional fees
Supplies and communications
Advertising and promotion
Merger and integration costs
All other operating expenses (1)
Subtotal
Other real estate owned expense (income)
Repossessed personal property income
Impairment loss on bank premises
Total noninterest expense
2020
$
$
Year Ended December 31,
2019
(in thousands)
2018
66,988 $
18,283
11,222
6,771
3,096
2,671
—
10,268
119,299
5
(452 )
201
119,053
$
67,900 $
17,064
8,755
9,060
2,936
3,797
—
14,221
123,732
439
—
1,734
125,906 $
69,435
15,944
6,870
6,178
3,003
4,041
846
11,749
118,066
(493 )
—
—
117,573
(1)
Provision (income) expense for losses on off-balance sheet items is now included in credit loss expense; the provision for losses on off-balance sheet items was $730,000 for the twelve months
ended December 31, 2020. Provision (income) expense for losses on off-balance sheet items, recorded in other operating expense, was $1.0 million and $143,000 for 2019 and 2018, respectively.
33
2020 Compared to 2019
For the year ended December 31, 2020, noninterest expense was $119.1 million, a decrease of $6.9 million, or 5.4 percent, compared with $125.9 million in 2019. The
decrease was due primarily to the capitalization of $3.1 million in cost for PPP originations, a $1.6 million decrease in repossessed personal property expense and a $1.5 million
decrease in impairments on bank premises.
2019 Compared to 2018
For the year ended December 31, 2019, noninterest expense was $125.9 million, an increase of $8.3 million, or 7.1 percent, compared with $117.6 million in 2018. The
increase was due primarily to increases in occupancy and equipment, data processing, professional fees, other operating expenses and an impairment loss on bank premises,
offset by decreases in salaries and employee benefits and merger and integration costs.
Income Tax Expense
For the years ended December 31, 2020, 2019 and 2018, income tax expense was $17.3 million, $14.6 million and $26.1 million, respectively. The effective tax rate
for the years ended December 31, 2020, 2019 and 2018 was 29.1 percent, 30.8 percent and 31.1 percent, respectively. The lower effective tax rate in 2020 compared to 2019 and
2018 was due mainly to lower federal and low-income housing tax credits, as well as a reduction in the valuation allowance for net operating loss carryforwards.
Income taxes are discussed in more detail in “Notes to Consolidated Financial Statements, Note 1 — Summary of Significant Accounting Policies” and “Note 11 —
Income Taxes” presented elsewhere herein.
Financial Condition
Securities Portfolio
As of December 31, 2020, our securities portfolio was primarily composed of mortgage-backed securities, collateralized mortgage obligations and debt securities
issued by U.S. government agencies and sponsored agencies. Most of the securities carried fixed interest rates. Other than holdings of U.S. government and agency securities,
there were no securities of any one issuer exceeding 10 percent of stockholders’ equity as of December 31, 2020, 2019 or 2018.
As of December 31, 2020, securities available for sale increased $119.3 million, or 18.8 percent, to $753.8 million from $634.5 million as of December 31, 2019. The
increase was mainly due to purchases of mortgage-backed securities and U.S. Government Agency securities.
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 and tax-equivalent book yield, as of December 31, 2020:
Within One
Year
After One
Year But
Within Five
Years
Amount
Yield
Amount
Yield
After Five
Years But
Within Ten
Years
Amount
Yield
(dollars in thousands)
After Ten
Years
Total
Amount
Yield
Amount
Yield
$
9,997
2.67 % $
—
0.00 % $
—
0.00 % $
—
0.00 % $
9,997
2.67 %
1,691
—
—
1.04 %
0.00 %
0.00 %
3,176
956
80,660
1.38 %
1.47 %
0.53 %
—
1,285
10,000
0.00 %
1.12 %
0.85 %
510,302
131,391
—
1.13 %
0.61 %
—
515,169
133,632
90,660
1,691
11,688
$
1.04 %
2.44 % $
84,792
84,792
0.58 %
0.58 % $
11,285
11,285
0.88 %
641,693
0.88 % $ 641,693
1.02 %
739,461
1.02 % $ 749,458
1.13 %
0.62 %
0.57 %
0.97 %
0.99 %
Securities available for sale:
U.S. Treasury securities
U.S. government agency and sponsored
agency obligations:
Mortgage-backed securities
Collateralized mortgage obligations
Debt securities
Total U.S. government agency and
sponsored agency obligations
Total securities available for sale
34
Loan Portfolio
As of December 31, 2020, 2019 and 2018, loans receivable (excluding loans held for sale), net of deferred loan costs, discounts and allowance for credit losses, were
$4.79 billion, $4.55 billion and $4.57 billion, respectively, representing an increase of $241.0 million or 5.3 percent in 2020 and a decrease of $19.8 million, or 0.4 percent in
2019. The $241.0 million increase in loans in 2020 was attributable to higher new loan production (primarily PPP loans), partially offset by higher allowance for credit losses
from the impacts of CECL implementation and the COVID-19 pandemic.
During the year ended December 31, 2020, total loan disbursements consisted of $525.5 million in commercial real estate loans, $133.2 million in leases receivable,
$229.4 million in commercial and industrial loans, $410.5 million in SBA loans and $28.5 million in residential/consumer loans, offset by $1.05 billion in pay-offs and other net
reductions.
The table below shows the maturity distribution of outstanding loans as of December 31, 2020. 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.
Real estate loans:
Commercial property
Retail
Hospitality
Other
Total commercial property loans
Construction
Residential/consumer loans
Total real estate loans
Commercial and industrial loans
Leases receivable
Loans receivable
Loans with predetermined interest rates
Loans with variable interest rates
Within One
Year
After One
Year but
Within Five
Years
After Five
Years but
Within
Fifteen
Years
(in thousands)
After
Fifteen
Years
Total
$
$
$
164,032
223,879
255,730
643,641
58,138
3,810
705,589
168,654
18,038
892,281
508,478
383,803
$
$
$
560,174
596,259
923,697
2,080,130
744
1,539
2,082,413
510,260
381,189
2,973,862
1,885,195
1,088,667
$
$
$
100,400
39,815
312,434
452,649
—
6,447
459,096
78,341
24,037
561,474
137,276
424,198
$
$
$
—
—
118,516
118,516
—
334,035
452,551
—
—
452,551
43,664
408,887
$
$
$
824,606
859,953
1,610,377
3,294,936
58,882
345,831
3,699,649
757,255
423,264
4,880,168
2,574,613
2,305,555
As of December 31, 2020, the loan portfolio included the following concentrations of loans to one type of industry that were greater than 10 percent of loans
receivable:
Lessor of nonresidential buildings
Hospitality
Loan Quality Indicators
Balance as of
December 31, 2020
Percentage
of Loans
Receivable
Outstanding
(in thousands)
$
$
1,448,067
915,294
29.7 %
18.8 %
Delinquent loans (defined as 30 to 89 days past due and still accruing) were $9.5 million, $10.3 million and $10.7 million as of December 31, 2020, 2019 and 2018,
respectively, representing a decrease of $777,000 or 7.6 percent, in 2020 and a decrease of $427,000 or 4.0 percent, in 2019.
Special mention loans increased by $50.3 million, or 189.0 percent to $77.0 million at December 31, 2020 compared with $26.6 million as of December 31, 2019. Of
such loans outstanding as of December 31, 2020, $49.1 million consisted of loans adversely affected by the pandemic.
35
Classified loans increased by $46.1 million, or 49.1 percent, to $140.2 million at December 31, 2020, from $94.0 million at December 31, 2019. Of such loans
outstanding as of December 31, 2020, $54.0 million were adversely affected by the pandemic.
Nonperforming Assets
Nonperforming loans consist of loans on nonaccrual status and loans 90 days or more past due and still accruing interest. Nonperforming assets consist of
nonperforming loans and OREO. Loans are placed on nonaccrual status when, in the opinion of management, the full timely collection of principal or interest is in doubt.
Generally, the accrual of interest is discontinued when principal or interest payments become more than 90 days past due, unless management believes the loan or lease is
adequately collateralized and in the process of collection. However, in certain instances, we may place a particular loan or lease on nonaccrual status earlier, depending upon the
individual circumstances surrounding the delinquency of the loan or lease. When a loan or lease 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 impaired loans not meeting the
criteria for nonaccrual. OREO consists of properties acquired by foreclosure or similar means or are vacant bank properties for which their usage for operations has ceased and
management intends to offer for sale.
Except for nonperforming loans set forth below, management is not aware of any loans as of December 31, 2020 for which known credit problems of the borrower
would cause serious doubts as to the ability of such borrowers to comply with their present loan or lease repayment terms, or any known events that would result in the loan or
lease being designated as nonperforming at some future date. Management cannot, however, predict the extent to which a deterioration in general economic conditions, real
estate values, increases in general rates of interest, or changes in the financial condition or business of borrower may adversely affect a borrower’s ability to pay. As of
December 31, 2020, the Company had loans receivable modified under the CARES Act of $155.6 million. Approximately 13.6%, or $21.1 million, of modified loans and
leases were under deferred payment arrangements, with the remainder making payments that were less than the contractually required amount. Of the modified loans receivable
portfolio, 20.1% were special mention and 15.7% were classified. In addition, 4.6% were on nonaccrual status at December 31, 2020.
Nonaccrual loans were $83.0 million, $63.8 million and $15.5 million as of December 31, 2020, 2019 and 2018, respectively, representing an increase of $19.2
million, or 30.1 percent, in 2020 and an increase of $48.3 million, or 311.6 percent, in 2019. The increase in nonaccrual loans in 2020 was primarily due to the addition of $33.8
million for five hospitality loans and $12.4 million for two film tax credit loans, offset by a $25.3 million charge-off on a troubled relationship. At December 31, 2020, $33.0
million of nonaccrual loans and leases related to loans adversely affected by the COVID-19 pandemic. As of December 31, 2020 and 2019, all loans and leases 90 days or more
past due were classified as nonaccrual.
All of the $83.0 million nonperforming loans as of December 31, 2020 were considered nonperforming and resulted in aggregate individually evaluated allowances of
$14.0 million. The allowance for collateral-dependent loans is calculated as the difference between the outstanding loan balance and the value of the collateral as determined by
recent appraisals less estimated costs to sell. The allowance for collateral-dependent loans varies based on the collateral coverage of the loan at the time of designation as
nonperforming. We continue to monitor the collateral coverage, based on recent appraisals, on these loans on a quarterly basis and adjust the allowance accordingly.
As of December 31, 2020, OREO consisted of four properties with a combined carrying value of $2.4 million. As of December 31, 2019, there were two properties
with a combined carrying value of $63,000 in OREO.
Individually Evaluated Loans
Prior to the adoption of ASU 2016-13, individually evaluated loans were measured based on the present value of expected future cash flows discounted at the loan's
effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan was collateral dependent, less estimated costs
to sell. If the estimated value of the individually evaluated loan was less than the recorded investment in the loan, we charged-off the deficiency against the allowance for credit
losses or we established a specific allowance in the allowance for credit losses. Additionally, we excluded from the quarterly migration analysis individually evaluated loans
when determining the amount of the allowance for credit losses required for the period.
Individually evaluated loans were $91.0 million, $64.8 million and $25.1 million as of December 31, 2020, 2019 and 2018, respectively, representing an increase of
$26.2 million, or 40.4 percent, in 2020, and an increase of $39.6 million, or 157.8 percent, in 2019. Specific allowance allocations associated with individually evaluated loans
decreased $11.8 million to $14.0 million as of December 31, 2020, compared with $25.8 million as of December 31, 2019.
36
For the year ended December 31, 2020, we restructured monthly payments for five loans, with a net carrying value of $4.5 million at the time of modification, which
we subsequently classified as TDRs. For the year ended December 31, 2019, we restructured monthly payments for eight loans, with a net carrying value of $54.1 million at the
time of modification, which we subsequently classified as TDRs. Temporary payment structure modifications included, but were not limited to, extending the maturity date,
reducing the amount of principal and/or interest due monthly, and/or allowing for interest only monthly payments for six months or less.
As of December 31, 2020 and 2019, TDRs on accrual status were $7.9 million and $830,000, respectively, all of which were temporary interest rate and payment
reductions or extensions of maturity, and a $5,000 and $29,000 allowance relating to these loans, respectively, was included in the allowance for credit losses. As of December
31, 2020 and 2019, restructured loans on nonaccrual status were $17.1 million and $55.5 million, respectively, and a $12,000 and $22.7 million allowance relating to these
loans, respectively, was included in the allowance for credit losses.
As of December 31, 2018, TDRs on accrual status were $6.0 million, all of which were temporary interest rate and payment reductions or extensions of maturity, and a
$57,000 allowance relating to these loans was included in the allowance for credit losses. As of December 31, 2018, restructured loans on nonaccrual status were $4.3 million
and a $256,000 allowance relating to these loans, was included in the allowance for credit losses.
Allowance for credit losses, Allowance for credit losses related to off-balance sheet items, and Allowance for accrued interest receivable
The Company’s estimate of the allowance for credit losses at December 31, 2020 reflects losses expected over the remaining contractual life of the assets based on
historical, current, and forward-looking information. The contractual term does not consider extensions, renewals or modifications unless the Company has identified an
expected troubled debt restructuring.
Management selected three loss methodologies for the collective allowance estimation. At December 31, 2020, the Company used the discounted cash flow (“DCF”)
method to estimate allowances for credit losses for the commercial and industrial loan portfolio, the PD/LGD method for the commercial property, construction and residential
property portfolios, and the Weighted Average Remaining Maturity (“WARM”) method to estimate expected credit losses for equipment financing agreements or the equipment
lease receivables portfolio. Loans that do not share similar risk characteristics are individually evaluated for allowances.
For all loan pools 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 Probability of Default/Loss
Given Default (“PD/LGD”) using all available historical periods. Since reasonable and supportable forecasts of economic conditions are imbedded directly into the DCF model,
qualitative adjustments are reduced but considered.
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 no historical losses. In
addition, for those loans granted a loan modification due to COVID-19, the Company used the annualized PD/LGD as of March 31, 2020 to reflect the moratorium on TDRs
under Section 4013 of the CARES Act. The PD/LGD method incorporates a forecast into loss estimates using a qualitative adjustment.
The Company used the Weighted Average Remaining Maturity (“WARM”) method to estimate expected credit losses for equipment financing agreements or the
equipment lease receivables portfolio. The Company applied an expected loss ratio based on internal historical losses adjusted as appropriate for qualitative factors.
As of and for the quarter ended December 31, 2020, the Company relied on the economic projections from Moody’s Analytics Economic Scenarios and Forecasts to
inform its loss driver forecasts over the four-quarter forecast period whereas it had previously relied on Federal Reserve Economic Database economic data. For all loan pools,
the Company utilizes and forecasts the national unemployment rate as the primary loss driver.
37
To adjust the historical and forecast periods to current conditions, the Company applies various qualitative factors derived from market, industry or business specific
data, changes in the underlying portfolio composition, trends relating to credit quality, delinquency, nonperforming and adversely rated leases, and reasonable and supportable
forecasts of economic conditions.
The allowance for credit losses was $90.4 million at December 31, 2020 compared with $61.4 million at December 31, 2019. The allowance attributed to loans
individually evaluated was $14.0 million at December 31, 2020 compared with $25.8 million at December 31, 2019, the decline primarily reflecting the $25.2 million charge-
off of the previously identified troubled loan relationship during the first quarter of 2020. The allowance attributed to loans collectively evaluated was $76.4 million at
December 31, 2020 compared with $35.6 million at December 31, 2019. The increase principally reflects the adoption of ASU 2016-13 as well as the change from January 1,
2020 to December 31, 2020 in the macroeconomic assumptions including a higher portion of the allowance attributable to loans collectively evaluated for impairment and also
higher projected average unemployment rate for the subsequent four quarters. The Company recognizes the inherent uncertainties in the estimate of the allowance for credit
losses and the effect the COVID-19 pandemic may have on borrowers. The following table reflects our allocation of the allowance for credit losses by loan category as well as
the loans receivable for each loan category to total loans, including related percentages:
Real estate loans:
Commercial property
Retail
Hospitality
Other
Total commercial property loans
Construction
Residential/consumer loans
Total real estate loans
Commercial and industrial loans
Leases receivable
Unallocated
Total
As of December 31,
2020
Loans
2019
Loans
Allowance
Amount
Balance
Percent
Allowance
Amount
Balance
Percent
(dollars in thousands)
$
$
4,855
28,801
13,991
47,647
2,876
1,353
51,876
21,410
17,140
—
90,426
$
$
824,606
859,953
1,610,377
3,294,936
58,882
345,831
3,699,649
757,255
423,264
—
4,880,168
16.9 % $
17.6 %
33.0 %
67.5 %
1.2 %
7.1 %
75.8 %
15.5 %
8.7 %
—
100.0 % $
4,911
6,686
8,060
19,657
15,003
1,775
36,435
16,206
8,767
—
61,408
$
$
869,302
922,288
1,358,432
3,150,022
76,455
415,697
3,642,175
484,093
483,879
—
4,610,147
18.9 %
20.0 %
29.5 %
68.3 %
1.7 %
9.0 %
79.0 %
10.5 %
10.5 %
—
100.0 %
The following table sets forth certain information regarding certain ratios related to our allowance for credit losses and allowance for credit losses related to off-
balance sheet items for the periods presented. Allowance for credit losses related to off-balance sheet items is determined by applying loss factors according to loan pool and
grade as well as actual current commitment usage figures by loan type to existing contingent liabilities:
Ratios:
Allowance for credit losses to loans
Nonaccrual loans to loans
Allowance for credit losses to nonaccrual loans
Balance:
Nonaccrual loans at end of period
Nonperforming loans at end of period
2020
As of and for the Year Ended December 31,
2019
(dollars in thousands)
2018
1.85 %
1.70 %
108.91 %
83,032
83,032
$
$
1.33 %
1.38 %
96.31 %
63,761
63,761
$
$
0.70 %
0.34 %
205.95 %
15,525
15,529
$
$
The allowance for credit losses was $90.4 million, $61.4 million and $32.0 million, respectively, as of December 31, 2020, 2019 and 2018, representing an increase of
$29.0 million, or 47.3 percent, in 2020 and an increase of $29.4 million, or 92.1 percent, in 2019. The allowance for credit losses as a percentage of loans increased to 1.85
percent as of December 31, 2020 from 1.33 percent as of December 31, 2019. The increase in the allowance for credit losses was mainly due to specific allowances for
collectively evaluated loans resulting from the COVID-19 pandemic as of December 31, 2020.
38
The allowance for off-balance sheet exposure, primarily unfunded loan commitments, as of December 31, 2020, 2019 and 2018, was $2.8 million, $2.4 million and
$1.4 million, respectively, representing an increase of $395,000, or 16.5 percent, in 2020, and an increase of $958,000, or 66.6 percent, in 2019. 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 losses inherent in the loan portfolio and off-balance sheet exposure as of December
31, 2020.
During the fourth quarter of 2020, the Company established an allowance for uncollectible accrued interest receivable of $1.7 million related to $9.2 million of accrued
interest receivable for loans currently or previously modified under the CARES Act based on Management’s estimate of the portion of the balance that will not be collected.
The following table presents a summary of net charge-offs (recoveries) for the loan portfolio:
2020
For the year ended December 31,
2019
2018
Average Loans
Net Charge-offs
(Recoveries)
Net Charge-offs
(Recoveries) to
Average Loans
Average Loans
Net Charge-offs
(Recoveries) to
Average Loans
Average Loans
Net Charge-offs
(Recoveries)
Net Charge-offs
(Recoveries) to
Average Loans
Real estate loans
Commercial and industrial loans
Leases receivable
Total
$
$
$
3,606,585
615,423
462,504
4,684,512
$
13,443
12,976
4,470
30,889
0.37 % $
2.11 %
0.97 %
0.66 % $
3,523,823
537,211
446,941
4,507,975
$
736
0.02 % $
4,456,202
$
(0.06 )% $
0.01 %
0.61 %
$
3,572,690
538,308
345,204
1,384
(555 )
2,230
3,059
0.04 %
(0.10 )%
0.65 %
0.07 %
Net Charge-offs
(Recoveries)
$
(dollars in thousands)
(2,058 )
53
2,741
For the year ended December 31, 2020, charge-offs were $34.0 million, an increase of $29.4 million, or 640.0 percent, from $4.6 million for the same period in 2019,
and recoveries were $3.1 million, a decrease of $789,000, or 20.5 percent, from $3.9 million in 2019. Net loan charge-offs were $30.9 million, or 0.66 percent of average loans,
compared with $736,000, or 0.02 percent of average loans, respectively, for the year ended December 31, 2020 and 2019.
Classified loans increased by 49.1 percent, to $140.2 million for the year ended December 31, 2020 from $94.0 million for the year ended December 31, 2019. The
increase in classified loans was mainly attributable to various downgrades of $41.8 million for nine commercial real estate hotel loans and $12.4 million for two Puerto Rican
film credit loans.
Deposits
The following table shows the composition of deposits by type as of the dates indicated:
Demand – noninterest-bearing
Interest-bearing:
Demand
Money market and savings
Uninsured time deposits of more than $250,000:
Three months or less
Over three months through six months
Over six months through twelve months
Over twelve months
Other time deposits
Total deposits
2020
As of December 31,
2019
2018
Balance
Percent
Balance
Percent
Balance
Percent
$
1,898,766
36.0 % $
(dollars in thousands)
1,391,624
29.6 % $
1,284,530
100,617
1,991,926
134,543
70,011
52,401
8,633
1,018,111
5,275,008
$
1.9 %
37.7 %
2.6 %
1.3 %
1.0 %
0.2 %
19.3 %
100.0 % $
84,323
1,667,096
91,313
97,360
44,751
4,490
1,318,005
4,698,962
1.8 %
35.5 %
1.9 %
2.1 %
1.0 %
0.1 %
28.0 %
100.0 % $
87,582
1,573,622
88,927
130,925
—
5,064
1,576,585
4,747,235
27.1 %
1.8 %
33.1 %
1.9 %
2.8 %
0.0 %
0.1 %
33.2 %
100.0 %
Total deposits were $5.28 billion, $4.70 billion and $4.75 billion as of December 31, 2020, 2019 and 2018, respectively, representing an increase of $576.0 million, or
12.3 percent, in 2020, and a decrease of $48.3 million, or 1.0 percent, in 2019. The increase in total deposits for 2020 was mainly attributable to a $507.1 million increase in
noninterest bearing demand accounts and an increase of $324.8 million in money market and savings accounts, offset by a decrease of $299.9 million in time deposits $250,000
or less.
39
The average balance of deposits for the years ended December 31, 2020, 2019 and 2018 were $4.95 billion, $4.69 billion and $4.46 billion, respectively. The average
balance of deposits increased 5.4 percent in 2020 and 5.2 percent in 2019.
As of December 31, 2020, the aggregate amount of uninsured deposits (deposits in amounts greater than $250,000, which is the maximum amount for federal deposit
insurance) was $2.09 billion. Other uninsured deposits, such as demand deposits and money market and savings deposits was $1.82 billion. In addition, as of December 31,
2020, the aggregate amount of all our uninsured certificates of deposit was $265.6 million. The following table sets forth the maturity of these certificates of deposits as of
December 31, 2020.
Maturity Period:
Three months or less
Over three months through six months
Over six months through twelve months
Over twelve months
Total
Borrowings and Subordinated Debentures
(In thousands)
134,543
70,011
52,401
8,633
265,588
$
$
Borrowings mostly take the form of advances from the FHLB. At December 31, 2020, advances from the FHLB were $150.0 million, an increase of $60.0 million
from $90.0 million at December 31, 2019. At December 31, 2020, the Bank had $150.0 million in term advances and no overnight advances from the FHLB. Borrowings
increased primarily due to favorable borrowing rates, as the Federal Reserve lowered the federal funds rate by 150 basis points in 2020.
The following is a summary of contractual maturities greater than twelve months of FHLB advances:
FHLB of San Francisco
December 31, 2020
December 31, 2019
Outstanding
Balance
Weighted
Average
Rate
Outstanding
Balance
Weighted
Average
Rate
Advances due over 12 months through 24 months
Advances due over 24 months through 36 months
Outstanding advances over 12 months
$
$
50,000
50,000
100,000
(dollars in thousands)
1.62 %
0.97 %
1.30 % $
25,000
25,000
50,000
1.66 %
1.72 %
1.69 %
The following is financial data pertaining to FHLB advances:
Weighted-average interest rate at end of year
Weighted-average interest rate during the year
Average balance of FHLB advances
Maximum amount outstanding at any month-end
2020
As of December 31,
2019
(dollars in thousands)
2018
1.40 %
1.42 %
156,601
300,000
$
$
1.70 %
1.89 %
40,374
285,000
$
$
2.56 %
1.94 %
174,452
300,000
$
$
Subordinated debentures were $119.0 million as of December 31, 2020 and $118.4 million as of December 31, 2019. Subordinated debentures are comprised of fixed-
to-floating subordinated notes of $98.5 million and $98.3 million as of December 31, 2020 and 2019, respectively, and junior subordinated deferrable interest debentures of
$20.4 million and $20.0 million as of December 31, 2020 and 2019, respectively. See “Note 10 - Subordinated Debentures” to the consolidated financial statements for more
details.
40
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 rather than maximizing yield. 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 as of December 31, 2020, 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). This sensitivity analysis is compared 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.
Change in
Interest
Rate
300%
200%
100%
(100%)
Change in
Interest
Rate
300%
200%
100%
(100%)
Net Interest Income Simulation
1- to 12-Month Horizon
13- to 24-Month Horizon
Dollar
Change
Percentage
Change
Dollar
Change
Percentage
Change
(dollars in thousands)
$
$
$
$
26,941
18,801
10,800
(2,186 )
13.80%
9.63%
5.53%
(1.12%)
$
$
$
$
41,737
28,294
15,555
(3,606 )
21.18%
14.36%
7.89%
(1.83%)
Economic Value of Equity
(EVE)
Dollar
Change
Percentage
Change
(dollars in thousands)
163,533
129,800
84,818
(93,640 )
37.89%
30.08%
19.65%
(21.70%)
$
$
$
$
The estimated sensitivity does not necessarily represent our forecast, and the results may not be indicative of actual changes to our net interest income. These estimates
are based upon a number of assumptions including the nature and timing of interest rate levels including yield curve shape, prepayments on loans and securities, pricing
strategies on loans and deposits, and replacement of asset and liability cash flows. While the assumptions used are based on current economic and local market conditions, there
is no assurance as to the predictive nature of these conditions, including how customer preferences or competitor influences might change.
Capital Resources and Liquidity
Capital Resources
Historically, our primary source of capital has been the retention of operating earnings. In order to ensure adequate levels of capital, management periodically assesses
projected sources and uses of capital in conjunction with projected increases in assets and levels of risk. Management considers, among other things, earnings generated from
operations, and access to capital from financial markets through the issuance of additional securities, including common stock or notes, to meet our capital needs.
41
In response to the uncertainty surrounding the COVID-19 pandemic, the Board reduced the quarterly cash dividend paid on common stock for the third and fourth
quarter of 2020 to $0.08 per share, from $0.12 per share paid in the second quarter of 2020 and $0.24 per share paid in the first quarter of 2020. The Board believes these
actions were the most prudent course of action as it continues to monitor the results of operations and financial condition of the Company and expects to continue to re-evaluate
quarterly the level of any subsequent regular quarterly dividend. We cannot assure you that future dividends will not be reduced or eliminated based on such re-evaluation.
The Company’s ability to pay dividends to shareholders depends in part upon dividends it receives from the Bank. California law restricts the amount available for cash
dividends to the lesser of a bank’s retained earnings or net income for its last three fiscal years (less any distributions to shareholders made during such period). Where the above
test is not met, cash dividends may still be paid, with the prior approval of the Department of Financial Protection and Innovation (“DFPI”), in an amount not exceeding the
greatest of: (1) retained earnings of the bank; (2) net income of the bank for its last fiscal year; or (3) the net income of the bank for its current fiscal year. As of January 1, 2021,
after giving effect to the 2021 first quarter dividend declared by the Company, the Bank has the ability to pay $17.8 million of dividends without the prior approval of the
Commissioner of the DFPI.
At December 31, 2020, the Bank’s total risk-based capital ratio of 14.86 percent, Tier 1 risk-based capital ratio of 13.60 percent, common equity Tier 1 capital ratio of
13.60 percent, and Tier 1 leverage capital ratio of 10.83 percent, placed the Bank in the “well capitalized” category, which is defined as institutions with total risk-based capital
ratio equal to or greater than 10.0 percent, Tier 1 risk-based capital ratio equal to or greater than 8.0 percent, common equity Tier 1 capital ratio of 6.5 percent, and Tier 1
leverage capital ratio equal to or greater than 5.0 percent.
At December 31, 2020, the Company’s total risk-based capital ratio, Tier 1 risk-based capital ratio, common equity Tier 1 capital ratio and Tier 1 leverage capital ratio
were 15.21 percent, 11.93 percent, 11.52 percent, and 9.49 percent, respectively, all of which exceeded all of the Company’s regulatory capital ratio requirements.
For a discussion of recently implemented changes to the capital adequacy framework prompted by Basel III and the Dodd-Frank Act, see “Note 13 — Regulatory
Matters” of Notes to Consolidated Financial Statements in this Report.
Liquidity
The Bank has Contingency Funding Plans (“CFPs”) designed to ensure that liquidity sources are sufficient to meet its ongoing obligations and commitments,
particularly in the event of a liquidity contraction. The CFPs are designed to examine and quantify its liquidity under various “stress” scenarios. Furthermore, the CFPs provide a
framework for management and other critical personnel to follow in the event of a liquidity contraction or in anticipation of such an event. The CFPs address authority for
activation and decision making, liquidity options and the responsibilities of key departments in the event of a liquidity contraction.
For a discussion of our liquidity position, see “Note 22 - Liquidity” of Notes to Consolidated Financial Statements in this Report.
Off-Balance Sheet Arrangements
For a discussion of off-balance sheet arrangements, see “Note 19 — Off-Balance Sheet Commitments” of Notes to Consolidated Financial Statements and “Item 1.
Business — Off-Balance Sheet Commitments” in this Report.
42
Contractual Obligations
Our contractual obligations, excluding accrued interest payments, as of December 31, 2020 are as follows:
Time deposits
Federal Home Loan Bank advances
Commitments to extend credit
Standby letter of credit
Operating lease obligations
Total
One Year or Less
$
$
1,122,132 $
50,000
339,683
45,500
7,519
1,564,834 $
More Than One
Year and Three
Years or Less
More Than
Three Years
and Five Years or
Less
(in thousands)
More Than
Five Years
Total
153,833 $
100,000
74,890
1,669
14,305
344,697 $
7,734 $
—
17,014
—
12,586
37,334 $
— $
—
22,312
—
25,730
48,042 $
1,283,699
150,000
453,899
47,169
60,140
1,994,907
Operating lease obligations represent the total minimum lease payments under non-cancelable operating leases with remaining terms of up to fifteen years.
Recently Issued Accounting Standards Not Yet Effective
FASB ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, In December 2019, the FASB issued ASU 2019-12 as part of the
Simplification Initiative. The amendments in ASU 2019-12 affect entities within the scope of Topic 740, Income Taxes. The amendments in ASU 2019-12 simplify the
accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP
for other areas of Topic 740 by clarifying and amending existing guidance.
FASB ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, On March 12, 2020, the
FASB issued ASU 2020-04 to ease the potential burden in accounting for reference rate reform. The amendments in ASU 2020-04 are elective and apply to all entities that
have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform.
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
For quantitative and qualitative disclosures regarding market risks in the Bank’s portfolio, see “Item 7. Management’s Discussion and Analysis of Financial Condition
and Results of Operations — Interest Rate Risk Management” and “— Capital Resources and Liquidity.”
Item 8.
Financial Statements and Supplementary Data
The financial statements required to be filed as a part of this Report are set forth on pages 56 through 116.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Controls and Procedures
Disclosure Controls and Procedures
As of December 31, 2020, Hanmi Financial carried out an evaluation of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act, under the supervision and with the participation of our senior management, including our Chief Executive Officer (principal executive
officer) and our Chief Financial Officer (principal financial officer). The purpose of the disclosure controls and procedures is to ensure that information required to be disclosed
in the reports that are filed or submitted under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC rules and forms,
and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions
regarding required disclosure.
43
Based upon that evaluation, the Company’s principal executive officer and principal financial officer concluded that as of December 31, 2020, the Company’s
disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is (i)
accumulated and communicated to the Company’s management (including the Principal Executive Officer and Principal Financial Officer) to allow timely decisions regarding
required disclosure, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Management’s Annual Report on Internal Control Over Financial Reporting
The management of Hanmi Financial is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in
Exchange Act Rule 13a-15(f) and 15d-15(f) under the Exchange Act. Hanmi Financial’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with GAAP. Internal control over
financial reporting includes those policies and procedures that:
•
•
•
•
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP;
provide reasonable assurance that receipts and expenditures of the Company are being made only in accordance with authorizations of management and
directors of the Company; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies
or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020. Management based this assessment on
criteria for effective internal control over financial reporting described in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission (“COSO”). Management’s assessment included an evaluation of the design of Hanmi Financial’s internal control over financial reporting and
testing of the operational effectiveness of its internal control over financial reporting. Management reviewed the results of its assessment with the Audit Committee of our
Board of Directors. Based on this assessment, management concluded that Hanmi Financial maintained effective internal control over financial reporting as of December 31,
2020.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) that occurred during the
fourth quarter of fiscal 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Attestation Report of the Company’s Independent Registered Public Accounting Firm
Crowe LLP, the independent registered public accounting firm that audited and reported on the Consolidated Financial Statements of Hanmi Financial and its
subsidiaries, has issued an audit report on the effectiveness of Hanmi Financial’s internal control over financial reporting as of December 31, 2020 in accordance with the
standards of Public Company Accounting Oversight Board (United States).
Item 9B.
Other Information
None.
44
Item 10.
Directors, Executive Officers and Corporate Governance
Part III
The information required by this Item is incorporated herein by reference to the sections of Hanmi Financial Corporation’s Definitive Proxy Statement to be filed with
the SEC in connection with its 2021 Annual Meeting of Stockholders (the “2021 Proxy Statement”) entitled “Election of Directors,” “Corporate Governance Principles and
Board Matters,” “Executive Compensation — Officers” and “Beneficial Ownership of Principal Stockholders and Management — Delinquent Section 16(a) Reports.”
The Company maintains in effect a Code of Business Conduct and Ethics for all employees, executive officers and directors. The codes of conduct are available on the
Company’s website www.hanmi.com on the “Investors Relations” page and is also available to any person without charge by sending a request to the Corporate Secretary at
900 Wilshire Boulevard, Suite 1250, Los Angeles, California 90017.
Item 11.
Executive Compensation
The information required by this Item is incorporated herein by reference to the sections of the Proxy Statement entitled “Corporate Governance and Board Matters —
Director Compensation,” “— CHR Committee Interlocks and Insider Participation” and “Executive Compensation.”
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information concerning security ownership of certain beneficial owners and management not otherwise included herein is incorporated by reference to the 2021 Proxy
Statement under the heading “Beneficial Ownership of Principal Stockholders and Management.”
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth the total number of shares available for issuance under the Company’s equity compensation plans as of December 31, 2020:
Plan category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total equity compensation plans
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights (a)
Weighted-average
exercise price of
outstanding options,
warrants and rights
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in
column (a))
125,938
—
125,938
$
$
19.59
—
19.59
263,523
—
263,523
Item 13.
Certain Relationships and Related Transactions, and Director Independence
The information required by this Item is incorporated herein by reference to the sections of the Proxy Statement entitled “Corporate Governance and Board Matters —
Director Independence” and “Certain Relationships and Related Transactions.”
Item 14.
Principal Accounting Fees and Services
The information required by this Item is incorporated herein by reference to the section of the 2021 Proxy Statement entitled “Ratification of the Appointment of the
Independent Registered Public Accounting Firm” and “Audit and Non-Audit Fees.”
45
Item 15.
Exhibits and Financial Statement Schedules
(1)
The financial statements are listed in the Index to consolidated financial statements on page 47 of this Report.
Part IV
(2) All financial statement schedules have been omitted, as the required information is not applicable, not material or has been included in the notes to consolidated
financial statements.
(3)
The exhibits required to be filed with this Report are listed in the exhibit index included herein at pages 107-108.
Item 16.
Form 10-K Summary
None.
46
Hanmi Financial Corporation and Subsidiaries
Index to Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firms
Consolidated Balance Sheets as of December 31, 2020 and 2019
Consolidated Statements of Income for the Years Ended December 31, 2020, 2019 and 2018
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2020, 2019 and 2018
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2020, 2019 and 2018
Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2019 and 2018
Notes to Consolidated Financial Statements
47
Page
48
53
54
55
56
57
58
Report of Independent Registered Public Accounting Firm
Shareholders and the Board of Directors of Hanmi Financial Corporation and Subsidiaries
Los Angeles, California
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Hanmi Financial Corporation and Subsidiaries (the "Company") as of December 31, 2020 and 2019, the
related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2020,
and the related notes (collectively referred to as the "financial statements"). We also have audited the Company’s internal control over financial reporting as of December 31,
2020, based on criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and
the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2020 in conformity with accounting principles generally accepted
in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31,
2020, based on criteria established in Internal Control – Integrated Framework: (2013) issued by COSO.
Change in Accounting Principle
As discussed in Notes 1 and 3 to the financial statements, the Company changed its method for accounting for credit losses effective January 1, 2020, due to adoption of
Financial Accounting Standards Board (FASB) Accounting Standards Codification No. 326, Financial Instruments - Credit Losses (ASC 326). The Company adopted the new
credit loss standard using the modified retrospective method provided in Accounting Standards Update No. 2016-13 such that prior period amounts are not adjusted and
continue to be reported in accordance with previously applicable generally accepted accounting principles. The adoption of the new credit loss standard and its subsequent
application is also communicated as a critical audit matter below.
Basis for Opinions
The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company’s internal control over financial reporting based on our
audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained
in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of
the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included
performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally
48
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that,
in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures
may deteriorate.
Critical Audit Matter
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated to the audit committee and
that : (i) relate to accounts or disclosures that are material to the financial statements and (ii) involved especially challenging, subjective, or complex judgments. The
communication of the critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical
audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.
Allowance for Credit Losses on Loans – Implementation: Discounted Cash Flow Model (also see change in accounting principle explanatory paragraph above)
As described in Note 1 to the financial statements, effective January 1, 2020 the company adopted ASU 2016-13 “Financial Instruments – Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments.” The Company reported a gross loan portfolio of $4.61 billion and a related allowance for credit losses (ACL) on
loans of $78.8 million at January 1, 2020. The Company employed various methodologies to estimate expected credit losses for their loan segments, including a discounted
cash flow (“DCF”) method for the Real Estate, Commercial & Industrial and Consumer loan portfolios, a Probability of Default / Loss Given Default method (“PD/LGD”) for
the SBA loan portfolio, and a Weighted Average Remaining Maturity (“WARM”) method for the equipment lease portfolio. The discounted cash flow (DCF) model accounted
for the over 85% of the loan portfolio. The Company’s discounted cash flow methodology incorporates a probability of default (PD) and loss given default (LGD) model, as
well as expectations of future economic conditions using reasonable and supportable forecasts and current conditions or asset-specific adjustments, to generate estimates of cash
flows expected to be collected over the estimated life of a loan.
The PD and LGD assumptions for loans under the DCF model are largely based on internal default and loss history but may employ the use of third-party proxy loan
information when no such loss history exists internally. The use of proxy loan information requires significant judgment to assess expected performance of the credit portfolio.
The Company leverages economic projections published by established governmental authorities to inform their assessment over primary loss driver forecasts and their
determination of the length of the forecast and reversion period. The application of reasonable and supportable forecasts requires significant judgment, including selection of
loss drivers, determining the appropriate length of the forecast period, and reversion to long term averages.
Finally, the Company’s methodology employs certain current condition or asset-specific qualitative adjustments that are based on management’s assessment of company,
market, industry or business specific data, changes the in underlying loan composition of specific portfolios, trends relating to credit quality, delinquency, nonperforming and
adversely rated loans. The application of these qualitative adjustments requires significant judgment, including management’s analysis to determine the quantitative impact of
the qualitative factors on the reserve.
We consider the Company’s implementation of Current Expected Credit Losses (CECL) for the portion of the portfolio using the DCF model a critical audit matter, particularly
as it pertains to management judgments employed in development of the regression model and application of qualitative adjustments. Auditing management’s implementation
of the DCF model, along with accompanying qualitative adjustments, involved especially subjective auditor judgment in applying and evaluating audit procedures and required
significant effort, including the need to involve firm valuation specialists.
The primary procedures we performed to address this critical audit matter included:
49
•
•
Testing the design and operating effectiveness of controls over the development of the assumption models used to support the DCF model, as well as the
qualitative adjustments, including controls addressing:
o
o
o
o
o
The completeness and accuracy of internal data
Relevance and reliability of peer data used in the Frye-Jacobs estimation technique that impacts the regression model supporting the DCF forecast
Initial third-party model validation
Reasonableness of management’s judgments over significant assumptions
Approval of final model methodology and significant assumptions over reasonable and supportable forecasts, model inputs, and qualitative top-of-
model adjustments
Substantively testing management's process, including evaluating management’s judgments and assumptions, for developing the estimate of the allowance for
credit losses derived with the DCF model which included:
o
o
o
o
o
o
Testing management’s methodology and conceptual soundness of the DCF model, for which we used Crowe LLP valuation specialists to assist with
evaluating the third-party regression models used in forecasting and loss-driver analysis, and validation of inputs to the model;
Testing the accuracy and completeness of historical data used to derive various assumptions and conclusions within the model;
Evaluating the reasonableness of management’s judgments over the selection of proxy loan information when applicable, including evaluating
whether judgments were applied as described within the model;
Evaluating the reasonableness of management’s judgments over the application of reasonable and supportable forecasts, determination of the forecast
period and reversion periods, and evaluating the relevance and reliability of external data used to inform management’s judgments;
Evaluating the reasonableness of management’s judgments over selection of qualitative adjustments, including testing the completeness and accuracy
of internally derived data, and evaluating the relevance and reliability of external data used in developing judgments;
Evaluating the procedures and results of the Company’s third-party model validation, as well as management’s responses to results.
Allowance for Credit Losses on Loans – Methodology Change for Real Estate Portfolio
As described in Notes 1 and 3 to the financial statements, as of December 31, 2020 the Company reported a gross loan portfolio of $4.88 billion and a related allowance for
credit losses (“ACL”) on loans of $90.4 million. During the second quarter of 2020, the Company made changes to the methodologies and assumptions used to estimate
expected credit losses for certain loan segments.
Whereas at adoption the Company employed a discounted cash flow (“DCF”) method to estimate expected credit losses for the commercial property, construction, and
residential real estate portfolios (collectively the Real Estate loans portfolio), management transitioned the estimation methodology for these portfolios to the Probability of
Default / Loss Given Default method (“PD/LGD”). After the change in methodology, the PD/LGD model accounted for over 80% of the loan portfolio. The Company continues
to estimate expected credit losses for Commercial & Industrial and Consumer loan portfolios using a DCF method, for the SBA portfolios using a PD/LGD method, and for the
equipment lease portfolio using a Weighted Average Remaining Maturity (“WARM”) method.
The primary reason for the Company’s change in methodology relates to the impact of the COVID-19 pandemic on the Real Estate portfolios. As described in Note 1,
management determined that, due to model limitations, the regression model that supports the DCF calculation for the commercial property, construction, and residential real
estate portfolios did not take into account the high degree of uncertainty of the impact of the COVID-19 pandemic and related government assistance programs on these
portfolios. Management also changed their forecast data provider from the economic projections from the Federal Open Market Committee and the Federal Reserve Economic
Database (“FRED”) to the Moody’s unemployment forecast. Management’s reason for the change from the FRED economic data to Moody’s data was because Moody’s
updates the unemployment forecast on a more frequent and timely basis, thus providing a more timely basis for periodically re-estimating future cash flows.
The change in methodology for estimating the ACL on the Real Estate portfolios, as well as the impact of this change on significant assumptions, is a critical audit matter
because it involved significant management judgment that required especially subjective auditor judgment and significant audit effort in applying and evaluating audit
procedures.
The primary procedures we performed to address this critical audit matter included:
50
•
•
Testing the design and operating effectiveness of controls over the change in methodology for the Real Estate portfolios, as well as controls over significant
assumptions used to support the PD/LGD model, including controls addressing:
o
o
o
Management’s review and evaluation of the reasonableness and conceptual soundness of proposed changes to the methodology
Management’s review and evaluation of the significant assumptions in the PD/LGD model
Third-party model validation designed to evaluate the conceptual soundness of the PD/LGD model
Substantively testing management's process and evaluating management’s judgments and assumptions for the PD/LGD model on Real Estate portfolios including:
o
o
o
o
o
Evaluating the results of the Company’s third-party validation which addressed the PD/LGD model for the Real Estate portfolios
Evaluating the appropriateness of the change in methodology for estimating the ACL on the Real Estate portfolios by:
▪
▪
▪
Evaluating whether management had a reasonable basis for the change in methodology;
Evaluating whether the new methodology was appropriate for the nature of the loan segments and the environment;
Evaluating alternative methods, assumptions, and data considered by management;
Evaluating the reasonableness of management’s judgments over the application of reasonable and supportable forecasts, determination of the forecast
period and reversion periods, and evaluating the relevance and reliability of external data used to inform management’s judgments;
Evaluating the reasonableness of management’s judgments over selection of qualitative adjustments, including testing the completeness and accuracy
of internally derived data, and evaluating the relevance and reliability of external data used in developing judgments;
At the individual assumption level, evaluating management’s election of other significant assumptions outside of the qualitative adjustment
framework, and evaluating management’s assessment of sensitivity and impact on previously reported estimates
/s/ Crowe LLP
We have served as the Company's auditor since 2019.
Los Angeles, California
March 1, 2021
51
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Hanmi Financial Corporation:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows of Hanmi Financial
Corporation and subsidiaries (the Company) for the year ended December 31, 2018, and the related notes (collectively, the consolidated financial statements). In our opinion,
the consolidated financial statements present fairly, in all material respects, the results of its operations and its cash flows for the year ended December 31, 2018, in conformity
with U.S. generally accepted accounting principles.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial
statements based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with
the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of
material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a
reasonable basis for our opinion.
/s/ KPMG LLP
We served as the Company’s auditor from 2001 to 2019.
Los Angeles, California
March 1, 2019
52
Hanmi Financial Corporation and Subsidiaries
Consolidated Balance Sheets
(in thousands except share data)
December 31,
2020
December 31,
2019
$
391,849
$
Assets
Cash and due from banks
Securities available for sale, at fair value (amortized cost of $749,458 as of December 31, 2020 and $629,725 as of
December 31, 2019)
Loans held for sale, at the lower of cost or fair value
Loans receivable, net of allowance for credit losses of $90,426 as of December 31, 2020 and $61,408 as of December 31,
2019
Accrued interest receivable
Premises and equipment, net
Customers' liability on acceptances
Servicing assets
Goodwill and other intangible assets, net
Federal Home Loan Bank ("FHLB") stock, at cost
Income tax assets
Bank-owned life insurance
Prepaid expenses and other assets
Total assets
Liabilities and stockholders' equity
Liabilities:
Deposits:
Noninterest-bearing
Interest-bearing
Total deposits
$
$
Accrued interest payable
Bank's liability on acceptances
Borrowings
Subordinated debentures ($126,800 face amount less unamortized discount and debt issuance costs of $ 7,828) as of
December 31, 2020 and ($126,800 face amount less unamortized discount and debt issuance costs of $ 8,423) as of
December 31, 2019
Accrued expenses and other liabilities
Total liabilities
Stockholders' equity:
Preferred Stock, $0.001 par value; authorized 10,000,000 shares; no shares issued as of December 31, 2020 and
December 31, 2019
Common stock, $0.001 par value; authorized 62,500,000 shares; issued 33,560,801 shares (30,717,835 shares
outstanding) as of December 31, 2020 and 33,475,402 shares (30,799,624 shares outstanding) as of December 31, 2019
Additional paid-in capital
Accumulated other comprehensive income, net of tax expense of $ 1,247 as of December 31, 2020 and $1,370 as of
December 31, 2019
Retained earnings
Less: treasury stock; 2,842,966 shares as of December 31, 2020 and 2,675,778 shares as of December 31, 2019
Total stockholders' equity
Total liabilities and stockholders' equity
$
See Accompanying Notes to Consolidated Financial Statements.
53
$
$
753,781
8,568
4,789,742
16,363
26,431
1,319
6,212
11,612
16,385
42,704
53,894
83,028
6,201,888
1,898,766
3,376,242
5,275,008
4,564
1,319
150,000
118,972
74,981
5,624,844
—
33
578,360
3,076
114,621
(119,046 )
577,044
6,201,888
$
121,678
634,477
6,020
4,548,739
11,742
26,070
66
6,956
11,873
16,385
36,787
52,782
64,609
5,538,184
1,391,624
3,307,338
4,698,962
11,215
66
90,000
118,377
56,297
4,974,917
—
33
575,816
3,382
100,551
(116,515 )
563,267
5,538,184
Interest and dividend income:
Interest and fees on loans receivable
Interest on securities
Dividends on FHLB stock
Interest on deposits in other banks
Total interest and dividend income
Interest expense:
Interest on deposits
Interest on borrowings
Interest on subordinated debentures
Total interest expense
Net interest income before credit loss expense
Credit loss expense
Net interest income after credit loss expense
Noninterest income:
Service charges on deposit accounts
Trade finance and other service charges and fees
Gain on sale of Small Business Administration ("SBA") loans
Net gain (loss) on sales of securities
Other operating income
Total noninterest income
Noninterest expense:
Salaries and employee benefits
Occupancy and equipment
Data processing
Professional fees
Supplies and communications
Advertising and promotion
Merger and integration costs
Other operating expenses
Total noninterest expense
Income before tax
Income tax expense
Net income
Basic earnings per share
Diluted earnings per share
Weighted-average shares outstanding:
Basic
Diluted
Hanmi Financial Corporation and Subsidiaries
Consolidated Statements of Income
(in thousands, except share and per share data)
2020
Year Ended December 31,
2019
2018
$
$
$
$
211,836 $
10,536
902
592
223,866
33,994
2,367
6,607
42,968
180,898
45,454
135,444
8,485
4,033
5,247
15,712
9,627
43,104
66,988
18,283
11,222
6,771
3,096
2,671
—
10,022
119,053
59,495
17,299
42,196
$
1.38 $
1.38 $
229,402 $
14,661
1,147
1,562
246,772
63,105
763
7,032
70,900
175,872
30,170
145,702
9,951
4,786
5,251
1,295
6,269
27,552
67,900
17,064
8,755
9,060
2,936
3,797
—
16,394
125,906
47,348
14,560
32,788
$
1.06 $
1.06 $
219,590
12,817
1,413
577
234,397
43,080
3,379
6,925
53,384
181,013
3,990
177,023
10,000
4,616
4,954
(341 )
5,291
24,520
69,435
15,944
6,870
6,178
3,003
4,041
846
11,256
117,573
83,970
26,102
57,868
1.80
1.79
30,280,415
30,280,415
30,725,376
30,760,422
31,924,863
32,051,333
See Accompanying Notes to Consolidated Financial Statements.
54
Hanmi Financial Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
(in thousands)
Year Ended December 31,
2019
2020
2018
$
42,196 $
32,788 $
57,868
Net income
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on securities:
Unrealized holding gain (loss) arising during period
Less: reclassification adjustment for net gain included in net income
Income tax benefit (expense) related to items of other comprehensive income
Other comprehensive income (loss), net of tax
Comprehensive income
15,283
(15,712 )
123
(306 )
41,890 $
14,583
(1,295 )
(3,827 )
9,461
42,249 $
(5,790 )
(87 )
1,684
(4,193 )
53,675
$
See Accompanying Notes to Consolidated Financial Statements.
55
Hanmi Financial Corporation and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
(in thousands, except share data)
Balance at January 1, 2018
Adjustments related to adoption of new accounting standards:
ASU 2016-01 (See Notes 1 and 3)
ASU 2018-02 (See Notes 1 and 11)
Adjusted balance at January 1, 2018
Stock options exercised
Restricted stock awards, net of forfeitures
Share-based compensation expense
Restricted stock surrendered due to employee tax liability
Repurchase of common stock
Cash dividends declared (common stock, $0.96/share)
Net income
Change in unrealized gain (loss) on securities available for sale,
net of income taxes
Balance at December 31, 2018
Stock options exercised
Restricted stock awards, net of forfeitures
Share-based compensation expense
Restricted stock surrendered due to employee tax liability
Repurchase of common stock
Cash dividends declared (common stock, $0.96/share)
Net income
Change in unrealized gain (loss) on securities available for sale,
net of income taxes
Balance at December 31, 2019
Adjustment related to adopting of new accounting standards
ASU 2016-13 (See Notes 1 and 3)
Adjusted balance at January 1, 2020
Restricted stock awards, net of forfeitures
Share-based compensation expense
Restricted stock surrendered due to employee tax liability
Repurchase of common stock
Cash dividends declared (common stock, $0.52/share)
Net income
Change in unrealized gain (loss) on securities available for sale,
net of income taxes
Balance at December 31, 2020
Common Stock - Number of Shares
Stockholders' Equity
Shares
Issued
33,083,133
Treasury
Shares
(651,506 )
Shares
Outstanding
32,431,627
Common
Stock
Additional
Paid-in
Capital
$
33
$
565,627
Accumulated
Other
Comprehensive
Income (Loss)
(1,869 )
$
Retained
Earnings
Treasury
Stock,
at Cost
Total
Stockholders'
Equity
$
70,575
$
(71,889 )
$
562,477
—
—
33,083,133
25,750
93,486
—
—
—
—
—
—
—
(651,506 )
—
—
—
(22,426 )
(1,600,000 )
—
—
$
—
—
32,431,627
25,750
93,486
—
(22,426 )
(1,600,000 )
—
—
—
33,202,369
—
(2,273,932 )
—
30,928,437
$
181,900
91,133
—
—
—
—
—
—
—
—
(26,846 )
(375,000 )
—
—
181,900
91,133
—
(26,846 )
(375,000 )
—
—
—
33,475,402
—
(2,675,778 )
—
30,799,624
$
—
33,475,402
85,399
—
—
—
—
—
—
(2,675,778 )
—
—
(31,788 )
(135,400 )
—
—
—
30,799,624
85,399
—
(31,788 )
(135,400 )
—
—
—
33,560,801
—
(2,842,966 )
—
30,717,835
$
—
—
33
—
—
—
—
—
—
—
—
33
—
—
—
—
—
—
—
—
33
—
33
—
—
—
—
—
—
—
33
$
$
—
—
565,627
570
—
3,515
—
—
—
—
$
382
(399 )
(1,886 )
—
—
—
—
—
—
—
—
569,712
$
$
(4,193 )
(6,079 )
$
2,979
—
3,125
—
—
—
—
—
—
—
—
—
—
—
(382 )
399
70,592
—
—
—
—
—
(30,921 )
57,868
—
97,539
—
—
—
—
—
(29,776 )
32,788
$
$
—
—
(71,889 )
—
—
—
(680 )
(36,068 )
—
—
—
(108,637 )
$
$
—
—
—
(517 )
(7,362 )
—
—
—
562,477
570
—
3,515
(680 )
(36,068 )
(30,921 )
57,868
(4,193 )
552,568
2,979
—
3,125
(517 )
(7,362 )
(29,776 )
32,788
—
575,816
$
$
9,461
3,382
$
—
100,551
$
—
(116,515 )
$
9,461
563,267
—
575,816
—
2,544
—
—
—
—
—
3,382
—
—
—
—
—
—
(12,167 )
88,384
—
—
—
—
(15,960 )
42,196
—
(116,515 )
—
—
(335 )
(2,196 )
—
—
—
578,360
$
$
(306 )
3,076
$
—
114,621
$
—
(119,046 )
(12,167 )
551,100
—
2,544
(335 )
(2,196 )
(15,960 )
42,196
(306 )
$
577,044
See Accompanying Notes to Consolidated Financial Statements
56
Hanmi Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
2020
Year Ended December 31,
2019
2018
$
42,196
$
32,788
$
57,868
Depreciation and amortization
Share-based compensation expense
Credit loss expense
(Gain) loss on sales of securities
Gain on sales of SBA loans
Origination of SBA loans held for sale
Proceeds from sales of SBA loans
Change in bank-owned life insurance
Change in prepaid expenses and other assets
Change in income tax assets
Change in accrued expenses and other liabilities
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Purchases of securities available for sale
Proceeds from matured, called and repayment of securities
Proceeds from sales of securities available for sale
Purchases of loans receivable
Purchases of premises and equipment
Proceeds from disposition of premises and equipment
Proceeds from sales of other real estate owned ("OREO")
Change in loans receivable, excluding purchases
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Change in deposits
Change in overnight borrowings
Proceeds from borrowings
Proceeds from exercise of stock options
Cash paid for surrender of vested shares due to employee tax liability
Repurchase of common stock
Cash dividends paid
Net cash (used in) provided by financing activities
Net increase (decrease) in cash and due from banks
Cash and due from banks at beginning of year
Cash and due from banks at end of period
Supplemental disclosures of cash flow information:
Interest expense paid
Income taxes paid
Non-cash activities:
Transfer of loans receivable to other real estate owned
Income tax (expense) benefit related to items of other comprehensive income
Change in right-of-use asset obtained in exchange for lease liability
10,952
2,544
45,454
(15,712 )
(5,247 )
(71,692 )
63,805
(1,112 )
(29,986 )
(2,004 )
21,006
60,203
(837,264 )
233,572
495,566
(10,400 )
(4,392 )
842
159
(285,670 )
(407,587 )
576,046
(15,000 )
75,000
—
(335 )
(2,196 )
(15,960 )
617,555
270,171
121,678
391,849
49,619
18,020
2,652
123
23,207
$
$
$
$
$
$
9,532
3,125
30,170
(1,295 )
(5,251 )
(76,765 )
74,866
(1,121 )
(5,770 )
(4,859 )
3,376
58,796
(320,815 )
159,942
113,306
—
(1,579 )
5,655
716
(1,770 )
(44,545 )
(48,273 )
(75,000 )
110,000
2,979
(517 )
(7,362 )
(29,776 )
(47,949 )
(33,698 )
155,376
121,678
71,064
15,570
248
(3,827 )
43,085
$
$
$
$
$
$
11,111
3,515
3,990
341
(4,954 )
(79,146 )
82,133
(1,107 )
404
4,208
(1,728 )
76,635
(141,351 )
99,253
34,751
(66,966 )
(3,696 )
—
2,173
(235,731 )
(311,567 )
398,581
(95,000 )
—
570
(680 )
(36,068 )
(30,921 )
236,482
1,550
153,826
155,376
47,314
20,792
938
1,684
—
$
$
$
$
$
$
See Accompanying Notes to Consolidated Financial Statements
57
Note 1 — Summary of Significant Accounting Policies
Summary of Operations
Hanmi Financial Corporation (“Hanmi Financial,” the “Company,” “we,” “us” or “our”) is the holding company of Hanmi Bank (the “Bank”).
The Bank is a California state-chartered financial institution insured by the Federal Deposit Insurance Corporation (the “FDIC”). The Bank is a state nonmember bank
and the FDIC is its primary federal bank regulator. The California Department of Financial Protection and Innovation is the Bank's primary state bank regulator.
The Bank’s primary operations are related to traditional banking activities, including the acceptance of deposits and originating loans and investing in securities. The
Bank is a community bank conducting general business banking, with its primary market encompassing the Korean-American and other ethnic communities. The Bank’s full-
service offices are located in markets where many of the businesses are run by immigrants and other minority groups. The Bank’s client base reflects the multi-ethnic
composition of these communities. As of December 31, 2020, the Bank maintained a network of 35 full-service branch offices and 9 loan production offices in California,
Texas, Illinois, Virginia, New Jersey, New York, Colorado, Georgia and Washington State.
Basis of Presentation
The accounting and reporting policies of Hanmi Financial and subsidiaries conform, in all material respects, to U.S. generally accepted accounting principles
(“GAAP”) and general practices within the banking industry. The information set forth in the following notes is presented on a continuing operations basis. The following is a
summary of the significant accounting policies consistently applied in the preparation of the accompanying Consolidated Financial Statements.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of Hanmi Financial and its wholly-owned subsidiary, the Bank and Hanmi Financial Corporation
Statutory Trust I. All intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and 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. Actual results could differ from those estimates.
The outbreak of COVID-19 has resulted in restrictions on travel and gatherings and restricted business activities. As a result, the operations and business results of the
Company could be materially adversely affected. The extent to which the COVID-19 crisis may impact business activity or investment results will depend on future
developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus and the actions
required to contain the coronavirus or treat its impact, among others. This uncertainty may impact the accuracy of our significant estimates, which includes the allowance for
credit losses, the allowance for credit losses related to off-balance sheet items, and the valuation of intangible assets including deferred tax assets, goodwill, and servicing
assets.
Reclassifications
Certain amounts in the prior years' financial statements and related disclosures were reclassified to conform to the current year presentation with no effect on previously
reported net income, stockholders’ equity or cash flows.
Segment Reporting
Through our branch network and lending units, we provide a broad range of financial services to individuals and companies. These services include demand, time and
savings deposits; and commercial and industrial, real estate and consumer lending. While our chief decision makers monitor the revenue streams of our various products and
services, operations are managed and financial performance is evaluated on a company-wide basis. Accordingly, we consider all of our operations to be aggregated in one
reportable operating segment.
58
Cash and Due from Banks
Cash and due from banks include cash, deposits with other financial institutions, and federal funds sold. Net cash flows are reported for customer loan and deposit
transactions, interest bearing deposits in other financial institutions, and federal funds purchased and repurchase agreements.
Securities
Securities are classified into three categories and accounted for as follows:
(i)
(ii)
Securities that we have the positive intent and ability to hold to maturity are classified as “held to maturity” and reported at amortized cost;
Securities that are bought and held principally for the purpose of selling them in the near future are classified as “trading securities” and reported at fair value.
Unrealized gains and losses are recognized in earnings;
(iii) Securities not classified as held to maturity or trading securities are classified as “available for sale” and reported at fair value. Unrealized gains and losses are
reported either in earnings or as a separate component of stockholders’ equity as accumulated other comprehensive income, net of income taxes.
Substantially all of the securities held by the Company are available for sale debt securities. For available-for-sale debt securities in an unrealized loss position, the
Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of
the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For available-for-sale debt securities
that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment,
management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically
related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are
compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss is recorded and
an allowance for credit losses is established, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through
an allowance for credit losses is recognized in other comprehensive income.
Changes in the allowance for credit losses are recorded as a provision for (or reversal of) credit loss expense. Losses are charged against the allowance when
management believes the uncollectability of an available-for-sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met.
Accrued interest receivable on available-for-sale debt securities totaled $1.2 million at December 31, 2020 and is excluded from the estimate of credit losses.
Loans receivable
Originated loans: Loans are primarily originated by the Company with the intent to hold them for investment and are stated at the principal amount outstanding, net of
deferred fees and costs. Net deferred fees and costs include nonrefundable loan fees, direct loan origination costs and initial direct costs. Net deferred fees or costs are
recognized as an adjustment to interest income over the contractual life of the loans using the effective interest method or taken into income when the related loans are paid off
or sold. The amortization of loan fees or costs is discontinued when a loan is placed on nonaccrual status. Interest income is recorded on an accrual basis in accordance with the
terms of the respective loan and includes prepayment penalties. Equipment leases are similar to commercial business loans in that the leases are typically made on the basis of
the borrower’s ability to make repayment from the cash flows of the borrower’s business.
Nonaccrual loans and nonperforming assets: 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 management believes the
loan is adequately collateralized and is 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 status. When an asset is placed on nonaccrual, 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 assets 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 impaired loans not meeting the criteria for nonaccrual.
59
Nonperforming assets consist of loans on nonaccrual status, loans 90 days or more past due and still accruing interest, loans restructured with troubled borrowers where
the terms of repayment have been renegotiated resulting in a reduction or deferral of interest or principal, other real estate owned (“OREO”), and other repossessed personal
property.
Loans held for sale
Loans originated, or transferred from loans receivable, and intended for sale in the secondary market are carried at the lower of aggregate cost or fair market value. Fair
market value, if lower than cost, is determined based on valuations obtained from market participants or the value of underlying collateral, calculated individually. A valuation
allowance is established if the market value of such loans is lower than their cost and net unrealized losses, if any, are recognized through a valuation allowance by charges to
income. Origination fees on loans held for sale, net of certain costs of processing and closing the loans, are deferred until the time of sale and are included in the computation of
the gain or loss from the sale of the related loans.
Allowance for credit losses
Prior to January 1, 2020, the Company followed an “incurred loss” approach in determining the allowance for credit losses. On January 1, 2020, the Company adopted
ASU 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaced the incurred loss methodology with
an expected loss methodology that is referred to as the current expected credit loss (“CECL”) approach. See “Accounting Standards Adopted in 2020” for discussion of the
Company’s 2020 policy for determining the allowance for credit losses under CECL.
Under the incurred loss methodology, the allowance for loan losses represented management’s estimate of probable incurred losses inherent in the loan portfolio.
Management’s estimates were based on: previous loss experience; growth, size and composition of the loan portfolio; the value of collateral; and current economic conditions.
These estimates are inherently uncertain and depend on the outcome of future events. The allowance was determined through an analysis involving quantitative calculations
based on historic loss rates and qualitative adjustments to account for risk and uncertainties, as well as general allowances and individual impairment calculations for certain
individual loans.
For 2019, the Company utilized a 35-quarter look-back period, anchored to the first quarter of 2012, with equal weighting to all quarters. Management determined it
was appropriate to anchor the look-back period, in consideration for a prolonged period of low losses and the procyclical nature of provisioning. The anchoring allowed the
Bank to better capture the economic cycle while improving the ability to measure losses. For 2018, the Bank utilized a 31-quarter look-back period. The estimated loss
emergence period utilized in the Company’s loss migration analysis was 2.5 years. Moreover, the Company reevaluated the qualitative adjustments, adjusting to then-current
condition in light of the lengthening of the business cycle and the continued improvement in credit metrics.
To determine general allowance requirements, existing loans were divided into eleven general pools of risk-rated loans as well as three homogeneous loan pools. For
risk-rated loans, a migration analysis allocated historical losses by loan pool and risk grade to determine risk factors for potential losses inherent in the loan portfolio. Since the
homogeneous loans were bulk graded, the risk grade was not factored into the historical loss analysis. In addition, specific allowances were allocated for loans deemed
“nonperforming.”
When determining the appropriate level for allowance for credit losses, management considered qualitative adjustments for any factors that were likely to cause
estimated losses associated with the Company’s portfolio to differ from historical loss experience, including, but not limited to, national and local economic and business
conditions, volume and geographic concentrations, and problem loan trends.
To systematically quantify the credit risk impact of trends and changes within the loan portfolio, a credit risk matrix was utilized. The qualitative factors were
considered on a loan pool by loan pool basis subsequent to, and in conjunction with, a loss migration analysis. The credit risk matrix provided various scenarios with positive or
negative impact on the portfolio along with corresponding basis points for qualitative adjustments.
Loans were measured for impairment when it was probable that not all amounts, including principal and interest, were to be collected in accordance with the original
contractual terms of the loan agreement. The amount of impairment and any subsequent changes were recorded through the provision for loan losses as an adjustment to the
allowance for credit losses. Recoveries were applied to the allowance for credit losses when realized. The Company charged or credited the income statement for changes to the
estimated allowance at least quarterly based upon the allowance need.
60
In general, the Company recognized a charge off when management determined a loan was uncollectable. To determine if a loan should be charged off, possible
sources of repayment were analyzed, including the potential for future cash flows from income or liquidation of other assets, the value of any collateral, and the strength of co-
makers or guarantors. When these sources did not provide a reasonable probability that principal could be collected in full, the Company fully or partially charged off the loan.
For real estate loans, including commercial term loans secured by collateral, a loan was considered nonperforming if the loan was 90 or more days past due. In a case
where the fair value of collateral was less than the loan balance and the borrower had no other assets or income to support repayment, the amount of the deficiency was
considered a loss and charged off.
For commercial and industrial loans other than those secured by real estate, if the borrower was in the process of a bankruptcy filing in which the Company was an
unsecured creditor or deemed virtually unsecured by lack of collateral equity or lien position and the borrower had no realizable equity in assets and prospects for recovery are
negligible, the loan was considered a loss and charged off. Additionally, commercial and industrial unsecured loans that are more than 120 days past due were considered a loss
and charged off.
For unsecured consumer loans where the borrower files for bankruptcy, the loan was considered a loss within 60 days of receipt of notification of filing from the
bankruptcy court. Other unsecured consumer loans are considered a loss if they were more than 90 days past due. Other events, such as fraud or death result in charge offs being
recorded in an earlier period.
Credit Losses on Off-Balance Sheet Credit Exposures
The Company has credit loss exposure for off-balance sheet lending commitments and letters of credit. The Company estimates expected credit losses for off-balance
sheet exposures over the contractual period in which it is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable
by the Company. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded
over its estimated life. Adjustments to the allowance for credit losses on off-balance sheet credit exposures is recognized as a provision for credit loss expense.
Individually Evaluated Loans
Prior to the adoption of ASU 2016-13, impaired loans were measured based on the present value of expected future cash flows discounted at the loan's effective interest
rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan was collateral dependent, less estimated costs to sell. If the
estimated value of the impaired loan was less than the recorded investment in the loan, the Company charged-off the deficiency against the allowance for loan losses or we
established a specific allowance in the allowance for loan losses. Additionally, we excluded from the quarterly migration analysis impaired loans when determining the amount
of the allowance for loan losses required for the period.
Under ASU 2016-13, the Company reviews all loans on an individual basis when they do not share similar risk characteristics with loan pools.
Troubled Debt Restructuring
A loan is identified as a TDR when a borrower is experiencing financial difficulties and, for economic or legal reasons related to these difficulties, the Company grants
a concession to the borrower in the restructuring that it would not otherwise consider. In order to determine whether a borrower is experiencing financial difficulty, an
evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is
performed under the Company’s internal underwriting policy. The Company has granted a concession when, as a result of the restructuring, it does not expect to collect all
amounts due, including principal and/or interest accrued at the original terms of the loan. The concessions may be granted in various forms, including a below-market change in
the stated interest rate, a reduction in the loan balance or accrued interest, an extension of the maturity date, or a note split with principal forgiveness. TDRs are reviewed for
potential impairment. Generally, a nonaccrual loan that is restructured remains on nonaccrual status for a period of six months to demonstrate that the borrower can perform
under the restructured terms. If the borrower’s performance under the new terms is not reasonably assured, the loan remains classified as a nonaccrual loan. Loans classified as
TDRs are reported as impaired loans.
61
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are computed on the straight-line method
over the estimated useful lives of the various classes of assets. The ranges of useful lives for the principal classes of assets are as follows:
Buildings and improvements
Furniture and equipment
Leasehold improvements
Software
10 to 30 years
3 to 10 years
Term of lease or useful life, whichever is shorter
3 years
Impairment of Long-Lived Assets
We review long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net undiscounted cash flows
expected to be generated by the asset. If such assets are considered to be nonperforming, the individual amount to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
Other Real Estate Owned and Repossessed Personal Property
Other real estate owned includes real estate acquired through foreclosure and other real estate holdings that are not used in the operation of the Company’s
business. Other repossessed personal property primarily consists of repossessed leasing equipment. Other real estate owned and repossessed personal property are recorded at
the lower of cost or fair value less estimated costs to sell. Subsequent declines in fair value are recorded through expense.
Servicing Assets and Servicing liabilities
Servicing assets and servicing liabilities are initially recorded at fair value. The fair values of servicing assets and servicing liabilities represent either the price paid if
purchased, or the allocated carrying amounts based on relative values when retained in a sale. Servicing assets and servicing liabilities are amortized in proportion to, and over
the period of, estimated net servicing income.
The servicing assets and servicing liabilities are recorded based on the present value of the contractually specified servicing fee, net of adequate compensation cost, for
the estimated life of the loan, using a discount rate and a constant prepayment rate. Management periodically evaluates the servicing assets and servicing liabilities for
impairment. Impairment, if it occurs, is recognized in a valuation allowance in the period of impairment.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets consist of acquired intangible assets arising from acquisitions, including core deposit and third-party originator intangibles. The
acquired intangible assets are initially measured at fair value and then are amortized on the straight-line method over their estimated useful lives while goodwill is not
amortized.
Goodwill and other intangible assets are assessed for impairment annually or whenever events or changes in circumstances indicate the carrying amount may not be
recoverable. The Company performed its annual impairment test and determined no impairment existed as of December 31, 2020.
Federal Home Loan Bank Stock
The Bank is a member of the FHLB of San Francisco and is required to own common stock in the FHLB based upon the Bank’s balance of outstanding FHLB
advances. FHLB stock is carried at cost and may be sold back to the FHLB at its carrying value. FHLB stock is periodically evaluated for impairment based on ultimate
recovery of par value. Both cash and stock dividends received are reported as dividend income.
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Bank-Owned Life Insurance
We have purchased single premium life insurance policies (“bank-owned life insurance”) on certain officers. The Bank and named beneficiaries of various current
covered officers are the beneficiaries under each policy. In the event of the death of a covered officer, the Bank and named beneficiaries of the covered officer will receive the
specified insurance benefit from the insurance carrier. Bank-owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet
date, which is the cash surrender value adjusted for other charges or other amounts due, if any, that are probable at settlement. Under the Split Dollar Death Benefit Agreement,
upon death of an active employee, the designated beneficiary(ies) are eligible to receive benefits, which in the aggregate, total $3.4 million.
Income Tax
We provide for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment
date. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized.
The Company has invested in limited partnerships formed to develop and operate affordable housing units for lower income tenants throughout California. The
partnership interests are accounted for utilizing the proportional amortization method with amortization expense and tax benefits recognized through the income tax provision.
Share-Based Compensation
The Company may provide awards of options, stock appreciation rights, restricted stock awards, restricted stock unit awards, shares granted as a bonus or in lieu of
another award, dividend equivalent, other stock-based award or performance award, together with any other right or interest to a participant. Plan participants include executives
and other employees, officers, directors, consultants and other persons who provide services to the Company or its related entities. All stock options granted under its stock-
based benefit plans have an exercise price equal to the fair market value of the underlying common stock on the date of grant. Stock options granted generally vest based on
three to five years of continuous service and expire 10 years from the date of grant. Restricted stock awards under the Plans become fully vested after a certain number of years
or after certain performance criteria are met. Performance stock units vest upon achievement of certain market condition criteria and may have dividend equivalent rights
associated with them. Hanmi Financial becomes entitled to an income tax deduction in an amount equal to the taxable income reported by the holders of the restricted shares
when the restrictions are released and the shares are issued. Restricted shares are forfeited if officers and employees terminate prior to the lapsing of restrictions or if certain
market condition criteria are not met. Forfeitures of restricted stock are treated as canceled shares.
Excess tax benefits from exercise or vesting of share-based awards are included as a reduction in provision for income tax expense in the period in which the exercise or
vesting occurs.
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. For diluted EPS,
weighted-average number of common shares included the impact of unvested restricted stock under the treasury method.
Unvested restricted stock containing rights to non-forfeitable dividends are considered participating securities prior to vesting and have been included in the earnings
allocation in computing basic and diluted EPS under the two-class method.
63
Treasury Stock
In January 2019, the Company's Board of Directors adopted a stock repurchase program. Under this repurchase program, the Company may repurchase up to 5.0
percent of its outstanding shares or approximately 1.5 million shares of its common stock. The program permits shares to be repurchased in open market or private transactions,
through block trades, and pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities and Exchange Commission. The repurchase
program may be suspended, terminated or modified at any time for any reason, including market conditions, the cost of repurchasing shares, the availability of alternative
investment opportunities, liquidity, and other factors deemed appropriate. These factors may also affect the timing and amount of share repurchases. The repurchase program
does not obligate the Company to purchase any particular number of shares. During the year ended December 31, 2020, the Company repurchased 135,400 shares of common
stock at a cost of $2.2 million under this program.
We use the cost method of accounting for treasury stock. The cost method requires us to record the reacquisition cost of treasury stock as a deduction from
stockholders’ equity on the Consolidated Balance Sheets.
Fair Value of Financial Instruments
Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value
estimates involve uncertainties and matters of significant judgement regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad
markets for particular items. Changes in assumptions or in market conditions could significantly affect these estimates.
Reclassifications
Certain amounts in the prior years' financial statements and related disclosures were reclassified to conform to the current year presentation with no effect on previously
reported net income, stockholders’ equity or cash flows.
Accounting Standards Adopted in 2020
FASB ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, On January 1, 2020, the
Company adopted ASU 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaced the incurred loss
methodology with an expected loss methodology that is referred to as the current expected credit loss methodology. The measurement of expected credit losses under the CECL
methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet
credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases
recognized by a lessor in accordance with Topic 842 on leases. In addition, ASU 2016-13 made changes to the accounting for available-for sale debt securities.
The Company adopted ASU 2016-13 using the prospective transition approach for debt securities for which the Company would have recognized other-than-temporary
impairment prior to January 1, 2020. However, the Company had no such securities and as a result, there was no effect on the balance sheet related to securities from the
adoption of ASU 2016-13. As a result, the amortized cost basis remained the same before and after the effective date of ASU 2016-13.
The Company adopted ASU 2016-13 using the modified retrospective approach for loans carried at amortized cost. This approach resulted in a $17.4 million increase
to the beginning balance of the allowance for credit losses, a $335,000 decrease to the beginning balance of the allowance for off-balance sheet items, and an after-tax charge of
$12.2 million to the beginning balance of retained earnings.
According to ASU 2016-13, the Company was required to measure its expected credit losses of financial assets on a collective (pool) basis when similar risk
characteristic(s) exist. The Company segmented the loans primarily by loan types, including the collateral type, loan purpose, contract term, amortization and payment
structure, considering that the same type of loans share considerable similar risk characteristics. Depending on the nature of the pool of financial assets with similar risk
characteristics, the Company used a DCF method, a PD/LGD method, or a WARM method to estimate expected credit losses.
The Company’s methodologies for estimating the allowance for credit losses considered available relevant information about the collectability of cash flows, including
information about past events, current conditions, and reasonable and supportable forecasts. The methodologies applied historical loss information, adjusted for asset-specific
characteristics, economic conditions at the measurement date, and forecasts about future economic conditions expected to exist through the contractual lives of the financial
assets that were reasonable and supportable, to the identified pools of financial assets with
64
similar risk characteristics. The Company’s methodologies revert to historical loss rates on a straight-line basis over twelve quarters when reasonable supportable long-term (1
year or more) forecasts cannot be developed.
The Company has disaggregated the portfolios of financial assets into the following material segments of loans or leases with similar risk characteristics using the
following methodologies:
At January 1, 2020, the Company used the DCF method to estimate allowances for credit losses for the commercial property, construction, and residential real estate
loan portfolios and the commercial and industrial loan portfolio. During the quarter ended June 30, 2020, management determined that, due to model limitations, the regression
model that supports the DCF calculation for the commercial property, construction, and residential real estate portfolios did not take into account the high degree of uncertainty
of the impact of the COVID-19 pandemic and related government assistance programs on these portfolios. As a result, subsequent to March 31, 2020, the Company determined
that the Probability of PD/LGD method was more appropriate for these portfolios. This change did not result in a material impact on the Company’s financial statements. For all
loan pools utilizing the DCF method, the Company utilized and forecasted the national unemployment rate as the primary loss driver. The Company also utilized and forecasted
either the annualized average return rate from the National Council of Real Estate Investment Fiduciaries Property Index for commercial real estate loans or the one-year
percentage change in the S&P/Case-Shiller U.S National Home Price Index for residential real estate loans as a second loss driver depending on the nature of the underlying
loan pool and how well that loss driver correlated to expected future losses.
For all DCF models at January 1, 2020, 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. The Company leveraged quarterly economic projections from the Federal Open Market Committee and the
Federal Reserve Economic Database (“FRED”) to inform its loss driver forecasts over the four-quarter forecast period. During the quarter ended June 30, 2020, the Company
changed from using the FRED unemployment forecast to the Moody’s unemployment forecast, as Moody’s updates the unemployment forecast on a more frequent and timely
basis, and thus provided a more appropriate basis for periodically re-estimating future cash flows. For each of these loan segments, the Company applied an expected loss ratio
based on the discounted cash flows adjusted as appropriate for qualitative factors. Qualitative loss factors are based on the Company's judgment of company, market, industry or
business specific data, changes in the underlying loan composition of specific portfolios, trends relating to credit quality, delinquency, nonperforming and adversely rated loans,
and reasonable and supportable forecasts of economic conditions.
The Company used the PD/LGD method for the Small Business Administration (“SBA”) portfolio to accommodate the unique nature of these loans. Although the
PD/LGD methodology is an element of the DCF model, the stand-alone PD/LGD methodology minimizes complications related to the characteristics of SBA loans. A
uniqueness of the SBA portfolio is that the U.S. Small Business Administration policy requires servicers to undertake all reasonable collection efforts before charging-off the
loan. As a result, the recovery rate for SBA loans tend to be more volatile and not intuitively correlated to economic factors.
The Company used the WARM method to estimate expected credit losses for equipment financing agreements or the equipment lease receivables portfolio. The
Company applied an expected loss ratio based on internal historical losses adjusted as appropriate for qualitative factors. The Company's evaluation of market, industry or
business specific data, changes in the underlying portfolio composition, trends relating to credit quality, delinquency, nonperforming and adversely rated leases, and reasonable
and supportable forecasts of economic conditions informed the estimate of qualitative factors.
As permitted by ASU 2016-13, the Company elected to maintain pools of loans accounted for under ASC 310-30. In accordance with the standard, management did not
reassess whether modifications to individual acquired financial assets accounted for in pools were troubled debt restructurings as of the date of adoption.
The Company estimated the allowance for credit losses on loans based on the underlying assets’ amortized cost basis.
In the event that collection of principal becomes uncertain, the Company has policies in place to reverse accrued interest in a timely manner. Therefore, the Company
has a policy election to exclude accrued interest from the measurement of allowance for credit losses.
Expected credit losses are reflected in the allowance for credit losses through a charge to credit loss expense. When the Company deems all or a portion of a financial
asset to be uncollectible, the appropriate amount is written off and the allowance for credit losses is reduced by the same amount. Subsequent recoveries, if any, are credited to
the allowance for credit losses when received.
65
The following table illustrates the allowance for credit losses and the related impact under ASU 2016-13 to the Company as of January 1, 2020.
As Reported
Under ASU
2016-13
Pre-ASU
2016-13
Adoption
Impact of
ASU 2016-13
Adoption
Real estate loans:
Commercial property
Retail
Hospitality
Other
Total commercial property loans
Construction loans
Residential/consumer loans
Total real estate loans
Commercial and industrial loans:
Commercial term loans
Commercial lines of credit
International loans
Total commercial loans
$
6,785 $
12,387
13,415
32,587
15,590
2,286
50,463
12,175
1,358
176
13,709
14,669
78,841 $
4,911 $
6,686
8,060
19,657
15,003
1,775
36,435
14,077
1,887
242
16,206
8,767
61,408 $
1,873
5,702
5,355
12,930
587
510
14,027
(1,903 )
(529 )
(65 )
(2,497 )
5,902
17,432
2,062 $
2,398 $
(335 )
Leases receivable
Allowance for credit losses on loans receivable
Allowance for credit losses on off-balance sheet items
$
$
Section 4013 of the CARES Act, “Temporary Relief From Troubled Debt Restructurings,” The Coronavirus Aid, Relief, and Economic Security Act (the “CARES
Act”) was signed into law on March 27, 2020. Section 4013 of the CARES Act permits the temporary suspension under U.S GAAP related to TDRs. To qualify, borrowers are
required to have been current at December 31, 2019, and the modification is required to have been completed between March 1, 2020 and the earlier of the 60th day after the
COVID-19 national emergency and December 31, 2020. On December 27, 2020, the provisions of the CARES Act pertaining to the suspension of TDRs were extended through
January 1, 2022. Substantially all of the modifications completed by the Company during year ended December 31, 2020 were modified under the CARES Act and have not
been accounted for as TDRs. See Note 3 for further discussion.
FASB ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, Effective January 1, 2020, the Company adopted
this standard, which simplifies the subsequent measurement of goodwill impairment by eliminating the requirement to calculate the implied fair value of goodwill (i.e., the
current Step 2 of the goodwill impairment test) to measure a goodwill impairment charge. Under this ASU, the impairment test is simply the comparison of the fair value of a
reporting unit with its carrying amount (the current Step 1), with the impairment charge being the deficit in fair value but not exceeding the total amount of goodwill allocated to
that reporting unit. The simplified one-step impairment test applies to all reporting units (including those with zero or negative carrying amounts). An entity was to apply the
amendments in this ASU on a prospective basis and was required to disclose the nature of and reason for the change in accounting principle upon transition. The Company’s
goodwill arose from the purchase of an equipment leasing portfolio in 2016. The equipment leasing portfolio has grown since acquisition, and the Company has concluded no
impairment has occurred.
Recently Issued Accounting Standards Not Yet Effective
ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, On March 12, 2020, the FASB
issued ASU 2020-04 to ease the potential burden in accounting for reference rate reform. The amendments in ASU 2020-04 are elective and apply to all entities that have
contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform.
The new guidance provided several optional expedients that reduce costs and complexity of accounting for reference rate reform, including measures to simplify or
modify accounting issues resulting from reference rate reform for contract modifications, hedges, and debt securities.
66
The amendments are effective for all entities from the beginning of an interim period that includes the issuance date of ASU 2020-04. An entity may elect to apply the
amendments prospectively through December 31, 2022.
The adoption of this standard is not expected to have 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 December 31, 2020 and 2019:
December 31, 2020
U.S. Treasury securities
U.S. government agency and sponsored agency obligations:
Mortgage-backed securities
Collateralized mortgage obligations
Debt securities
Total U.S. government agency and sponsored agency obligations
Total securities available for sale
$
Amortized
Cost
Gross
Unrealized
Gain
Gross
Unrealized
Loss
Estimated
Fair
Value
(in thousands)
$
9,997 $
135 $
— $
10,132
515,169
133,632
90,660
739,461
749,458 $
4,260
186
148
4,594
4,729 $
(188 )
(217 )
(1 )
(406 )
(406 ) $
519,241
133,601
90,807
743,649
753,781
December 31, 2019
U.S. Treasury securities
U.S. government agency and sponsored agency obligations:
Mortgage-backed securities
Collateralized mortgage obligations
Debt securities
Total U.S. government agency and sponsored agency obligations
Total securities available for sale
$
$
34,946 $
259 $
— $
35,206
406,813
164,232
23,733
594,778
629,725 $
4,334
792
168
5,294
5,553 $
(347 )
(432 )
(22 )
(801 )
(801 ) $
410,801
164,592
23,878
599,271
634,477
The amortized cost and estimated fair value of securities as of December 31, 2020, 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.
Within one year
Over one year through five years
Over five years through ten years
Over ten years
Total
67
Available for Sale
Amortized
Cost
Estimated
Fair Value
$
$
(in thousands)
13,305 $
139,876
25,764
570,513
749,458 $
13,435
140,100
25,768
574,478
753,781
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
December 31, 2020, aggregated by major security type and length of time in a continuous unrealized loss position:
Gross
Unrealized
Loss
Less than 12 Months
Estimated
Fair
Value
Number
of
Securities
Gross
Unrealized
Loss
Holding Period
12 Months or More
Estimated
Fair
Value
Number
of
Securities
Gross
Unrealized
Loss
Total
Estimated
Fair
Value
Number
of
Securities
(in thousands, except number of securities)
December 31, 2020
U.S. government agency and sponsored agency obligations:
Mortgage-backed securities
Collateralized mortgage obligations
Debt securities
Total U.S. government agency and sponsored agency obligations
Total
December 31, 2019
U.S. government agency and sponsored agency obligations:
Mortgage-backed securities
Collateralized mortgage obligations
Debt securities
Total U.S. government agency and sponsored agency obligations
Total
$
$
$
$
(188 ) $
(217 )
(1 )
(406 )
(406 ) $
76,023
97,659
4,999
178,681
178,681
(186 ) $
(112 )
(20 )
(318 )
(318 ) $
51,261
41,419
8,236
100,916
100,916
10
21
1
32
32
17
14
2
33
33
$
$
$
$
—
—
—
—
—
$
$
—
—
—
—
—
(160 ) $
(320 )
(3 )
(483 )
(483 ) $
18,757
39,936
2,997
61,690
61,690
—
—
—
—
—
14
36
1
51
51
$
$
$
(188 ) $
(217 )
(1 )
(406 )
(406 ) $
76,023
97,659
4,999
178,681
178,681
(346 )
(432 )
(23 )
(801 )
(801 ) $
70,018
81,355
11,233
162,606
162,606
10
21
1
32
32
31
50
3
84
84
The Company evaluates its available-for-sale securities portfolio for impairment on an at least quarterly basis. This assessment took into account the credit quality of
these debt securities and determined that since all were 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, no credit impairment had occurred.
Realized gains and losses on sales of securities and proceeds from sales of securities were as follows for the periods indicated:
Gross realized gains on sales of securities
Gross realized losses on sales of securities
Net realized gains (losses) on sales of securities
Proceeds from sales of securities
2020
Year Ended December 31,
2019
(in thousands)
2018
$
$
$
15,712 $
—
15,712 $
1,359 $
(64 )
1,295 $
495,566
113,306
87
(957 )
(870 )
34,751
In January 2016, FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (Topic 825). This new guidance, among
other provisions, amends accounting related to the classification and measurement of investments in equity securities. We adopted this guidance, as required, in the first quarter
of 2018. ASU 2016-01 requires the amounts reported in accumulated other comprehensive income for equity securities that exist as of the date of adoption previously classified
as available-for-sale be reclassified to retained earnings. The Company reduced the balance of securities by $529,000 as of January 1, 2018, representing the loss related to all of
our mutual fund equity securities, which resulted in a net reduction of retained earnings of $382,000 and an increase of $147,000 in net deferred tax assets based on the
transition requirements of this standard.
For the year ended December 31, 2020, the Company recorded $15.7 million in net realized gains from sale of securities that had previously been recognized as net
unrealized gains of $15.3 million in comprehensive income.
For the year ended December 31, 2019, the Company recorded $1.3 million in net realized gains from sale of securities that had previously been recognized as net
unrealized gains of $586,000 in comprehensive income. For the year ended December 31, 2018, the Company recorded $870,000 in net realized losses from the sale of
securities that had previously been recognized as net unrealized losses of $413,000 in comprehensive income. This included sale of all of the Company's mutual fund equity
securities with gross realized losses of $957,000. The Company recorded a $428,000 net loss in earnings resulting from the sale of these securities. The remaining loss of
$529,000 related to these sold securities was recorded as a transition adjustment upon adoption of ASU 2016-01 as of the beginning of the period as described in the previous
paragraph.
68
Securities available for sale with market values of $27.3 million and $30.2 million as of December 31, 2020 and 2019, respectively, were pledged to secure advances
from the Federal Reserve Bank, Discount Window facility, and for other purposes as required or permitted by law.
At year-end 2020, there were no holdings of securities of any one issuer, other than the U.S. government and its agencies in an amount greater than 10 percent of
shareholders’ equity.
Note 3 — Loans Receivable
The Board of Directors and management review and approve the Bank’s loan policy and procedures on a regular basis to reflect matters such as regulatory and
organizational structure changes, strategic planning revisions, concentrations of credit, loan delinquencies and nonperforming loans, and problem loans.
Real estate loans are loans secured by liens or interest in real estate, to provide purchase, construction, and refinance on real estate properties. Commercial and
industrial loans consist of commercial term loans, commercial lines of credit, SBA and international loans. Leases receivable include equipment finance agreements, which are
typically secured by the business assets being financed. We maintain management loan review and monitoring departments that review and monitor pass graded loans as well
as problem loans to prevent further deterioration.
Concentrations of Credit: The majority of the Bank’s loan portfolio consists of commercial real estate loans.
Loans receivable, net
Loans receivable consisted of the following as of the dates indicated:
Real estate loans:
Commercial property
Retail
Hospitality
Other (1)
Total commercial property loans
Construction
Residential/consumer loans
Total real estate loans
Commercial and industrial loans
Leases receivable
Loans receivable
Allowance for credit losses
Loans receivable, net
2020
December 31,
(in thousands)
2019
$
$
824,606 $
859,953
1,610,377
3,294,936
58,882
345,831
3,699,649
757,255
423,264
4,880,168
(90,426 )
4,789,742 $
869,302
922,288
1,358,432
3,150,022
76,455
415,698
3,642,175
484,093
483,879
4,610,147
(61,408 )
4,548,739
(1)
Includes, among other property types, mixed-use, gas station, apartment, office, industrial, faith-based facilities and warehouse; the remaining real estate categories represent less than one
percent of the Bank's total loans receivable.
The CARES Act allows financial institutions to assist customers in dealing with financial hardship by (a) providing federal funding so that financial institutions can
originate SBA loans to borrowers at a low interest rate under the Paycheck Protection Program (“PPP”) loans with eventual debt forgiveness should the borrower continue to
meet certain criteria; and (b) allowing financial institutions to temporarily modify loan terms by deferring loan payments, loan fees, etc. without considering them Troubled
Debt Restructures.
At December 31, 2020, there were $295.7 million of PPP loans included in commercial and industrial loans in the table above. In addition, during 2020, a total of
$1.41 billion of loans entered into payment deferrals under Section 4013 of the CARES Act.
69
Accrued interest on loans was $15.2 million and $10.0 million at December 31, 2020 and 2019, respectively. Accrued interest at December 31, 2020 included unpaid
deferred interest receivable related to loans modified under the CARES Act of $7.5 million, net of a $1.7 million valuation allowance.
At December 31, 2020 and 2019, loans of $2.17 billion and $1.35 billion, respectively, were pledged to secure advances from the FHLB.
Loans Held for Sale
The following table details the information on SBA loans held for sale by portfolio segment for the years ended December 31, 2020 and 2019:
December 31, 2020
Balance at beginning of period
Originations and transfers
Sales
Principal paydowns and amortization
Balance at end of period
December 31, 2019
Balance at beginning of period
Originations and transfers
Sales
Principal paydowns and amortization
Balance at end of period
Allowance for credit losses
Real Estate
Commercial
and Industrial
(in thousands)
Total
$
$
$
$
2,943
44,770
(39,666 )
(5 )
8,042
5,194
43,001
(45,251 )
(1 )
2,943
$
$
$
$
3,077
26,922
(29,386 )
(87 )
526
4,196
33,764
(34,865 )
(18 )
3,077
$
$
$
$
Activity in the allowance for credit losses was as follows for the periods indicated:
Allowance for credit losses:
Balance at beginning of period
Adjustment related to adoption of ASU 2016-13
Adjusted balance
Less loans receivable charged off
Recoveries on loans receivable previously charged off
Provision for credit losses
Balance at end of period
2020
As of and for the Year Ended December 31,
2019
(in thousands)
2018
61,408 $
17,433
78,841
33,952
(3,063 )
42,474
90,426 $
31,974 $
—
31,974
4,588
(3,852 )
30,170
61,408 $
$
$
70
6,020
71,692
(69,052 )
(92 )
8,568
9,390
76,765
(80,116 )
(19 )
6,020
31,043
—
31,043
7,310
(4,251 )
3,990
31,974
The following table details the information on the allowance for credit losses by portfolio segment for the years ended December 31, 2020 and 2019:
Real
Estate
Commercial
and
Industrial
Leases
Receivable
(in thousands)
Unallocated
Total
December 31, 2020
Allowance for credit losses:
Beginning balance
Adjustment related to adoption of ASU 2016-13
Adjusted balance
Less loans charged off
Recoveries on loans receivable previously charged off
Provision for credit losses
Ending balance
Individually evaluated
Collectively evaluated
Loans receivable
Individually evaluated
Collectively evaluated
December 31, 2019
Allowance for credit losses:
Beginning balance
Less loans charged off
Recoveries on loans receivable previously charged off
Provision for credit losses
Ending balance
Individually evaluated for impairment
Collectively evaluated for impairment
Loans receivable
Individually evaluated for impairment
Collectively evaluated for impairment
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
36,435
14,028
50,463
15,567
(2,124 )
14,856
51,876
$
20
51,855
$
$
3,699,649
$
65,160
3,634,489
$
$
18,482
132
(2,190 )
15,896
36,435
$
$
$
16,206
(2,497 )
13,709
13,312
(336 )
20,677
21,410
7,976
13,434
$
$
$
757,255
$
14,568
742,687
$
$
7,162
1,293
(1,241 )
9,097
16,206
$
$
$
8,767
5,902
14,669
5,073
(603 )
6,941
17,140
$
6,056
11,085
$
$
423,264
$
11,234
412,030
$
$
6,303
3,162
(422 )
5,205
8,767
$
$
14,029
22,406
$
$
3,642,175
$
45,163
3,597,012
$
$
8,885
7,321
$
$
484,093
$
13,700
470,393
$
$
2,863
5,904
$
$
483,879
$
5,902
477,977
$
$
—
—
$
$
—
$
—
—
$
$
—
—
—
—
—
—
—
—
—
$
$
$
61,408
17,433
78,841
33,952
(3,063 )
42,474
90,426
14,052
76,374
—
$
—
—
$
$
4,880,168
90,961
4,789,207
27
—
—
(27 )
—
$
$
31,974
4,588
(3,852 )
30,170
61,408
25,777
35,631
4,610,147
64,765
4,545,382
The table below illustrates the allowance for credit losses by portfolio segment as a percentage of the recorded total allowance for credit losses and as a percentage of
the aggregate recorded investment of loans receivable for the years ended December 31, 2020 and 2019:
December 31, 2020
December 31, 2019
Allowance
Amount
Total
Loans
Percentage
of Total
Loans
Allowance
Amount
Total
Loans
Percentage
of Total
Loans
Real estate loans:
Commercial property
Retail
Hospitality
Other
Total commercial property loans
Construction
Residential/consumer loans
Total real estate loans
Commercial and industrial loans
Leases receivable
Total
(in thousands)
16.9 % $
17.6 %
33.0 %
67.5 %
1.2 %
7.1 %
75.8 %
15.5 %
8.7 %
100.0 % $
4,911
6,686
8,060
19,657
15,003
1,775
36,435
16,206
8,767
61,408
$
$
869,302
922,288
1,358,432
3,150,022
76,455
415,698
3,642,175
484,093
483,879
4,610,147
18.9 %
20.0 %
29.4 %
68.3 %
1.7 %
9.0 %
79.0 %
10.5 %
10.5 %
100.0 %
$
$
4,855
28,801
13,991
47,647
2,876
1,353
51,876
21,410
17,140
90,426
$
$
824,606
859,953
1,610,377
3,294,936
58,882
345,831
3,699,649
757,255
423,264
4,880,168
71
The following table represents the amortized cost basis of collateral-dependent loans by class of loans as of December 31, 2020, for which repayment is expected to be
obtained through the sale of the underlying collateral and any collateral dependent loans that are still accruing but are considered nonperforming.
December 31, 2020
Real estate loans:
Commercial property
Retail
Hospitality
Other
Commercial property
Construction
Residential/consumer loans
Total real estate loans
Commercial and industrial loans
Total (1)
Amortized
Cost
(in thousands)
$
$
6,330
20,612
8,410
35,352
24,854
2,867
63,073
41
63,114
(1)
Includes, among other property types, hospitality, retail and other, mixed-use, gas station, apartment, office, industrial, faith-based facilities and warehouse; the remaining real estate categories
represent less than one percent of the Bank's total loans receivable.
Loan Quality Indicators
As part of the on-going monitoring of the quality of our loan portfolio, we utilize an internal loan grading system to identify credit risk and assign an appropriate grade
(from 0 to 8) for each loan in our portfolio. A third-party loan review is required on an annual basis. Additional adjustments are made when determined to be necessary. The
loan grade definitions are as follows:
Pass and Pass-Watch: Pass and Pass-Watch loans, grades (0-4), are in compliance with the Bank’s credit policy and regulatory requirements, and do not exhibit any
potential or defined weaknesses as defined under “Special Mention,” “Substandard” or “Doubtful.” This category is the strongest level of the Bank’s loan grading system. It
consists of all performing loans with no identified credit weaknesses. It includes cash and stock/security secured loans or other investment grade loans.
Special Mention: A Special Mention loan, grade (5), has potential weaknesses that deserve management’s close attention. If not corrected, these potential weaknesses
may result in deterioration of the repayment of the debt and result in a Substandard classification. Loans that have significant actual, not potential, weaknesses are considered
more severely classified.
Substandard: A Substandard loan, grade (6), has a well-defined weakness that jeopardizes the liquidation of the debt. A loan graded Substandard is not protected by
the sound worth and paying capacity of the borrower, or of the value and type of collateral pledged. With a Substandard loan, there is a distinct possibility that the Bank will
sustain some loss if the weaknesses or deficiencies are not corrected.
Doubtful: A Doubtful loan, grade (7), is one that has critical weaknesses that would make the collection or liquidation of the full amount due improbable. However,
there may be pending events which may work to strengthen the loan, and therefore the amount or timing of a possible loss cannot be determined at the current time.
Loss: A loan classified as Loss, grade (8), is considered uncollectible and of such little value that their continuance as active bank assets is not warranted. This
classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this asset even though partial
recovery may be possible in the future. Loans classified as Loss will be charged off in a timely manner.
Under regulatory guidance, loans graded special mention or worse are considered criticized loans, and loans graded substandard or worse are considered classified
loans.
72
As of December 31, 2020 and 2019, the recorded investment in pass/pass-watch, special mention and classified (substandard, doubtful and loss) loans, disaggregated by
loan class, were as follows:
December 31, 2020
Real estate loans:
Commercial property
Retail
Hospitality
Other
Total commercial property loans
Construction
Residential/consumer loans
Total real estate loans
Commercial and industrial loans
Leases receivable
Total loans receivable
December 31, 2019
Real estate loans:
Commercial property
Retail
Hospitality
Other
Total commercial property loans
Construction
Residential/consumer loans
Total real estate loans
Commercial and industrial loans
Leases receivable
Total loans receivable
Pass/Pass-
Watch
Special
Mention
Classified
Total
(in thousands)
$
$
$
$
807,348 $
788,369
1,571,012
3,166,729
34,028
337,549
3,538,306
712,685
412,030
4,663,021 $
859,739 $
915,834
1,329,817
3,105,390
36,956
410,984
3,553,329
458,184
477,977
4,489,491 $
3,382 $
26,086
23,876
53,344
—
5,078
58,422
18,556
—
76,978 $
2,835 $
939
7,807
11,580
1,613
3,217
16,410
10,222
—
26,632 $
13,876 $
45,498
15,489
74,863
24,854
3,204
102,921
26,014
11,234
140,169 $
6,728 $
5,515
20,809
33,052
37,886
1,497
72,436
15,687
5,902
94,025 $
824,606
859,953
1,610,377
3,294,936
58,882
345,831
3,699,649
757,255
423,264
4,880,168
869,302
922,288
1,358,432
3,150,022
76,455
415,698
3,642,175
484,093
483,879
4,610,147
At December 31, 2020, of the $155.6 million of loans modified in accordance with the provision of the CARES Act, $99.9 million were in pass/watch, $31.3 million
were special mention, and $24.4 million were classified.
73
Loans by Vintage Year and Risk Rating
December 31, 2020
Real estate loans:
Commercial property
Risk Rating
Pass / Pass Watch
Special Mention
Classified
Total commercial property
Construction
Risk Rating
Pass / Pass Watch
Special Mention
Classified
Total construction
Residential/consumer loans
Risk Rating
Pass / Pass Watch
Special Mention
Classified
Total residential property
Total real estate loans
Risk Rating
Pass / Pass Watch
Special Mention
Classified
Total real estate loans
Commercial and industrial loans:
Risk Rating
Pass / Pass Watch
Special Mention
Classified
Total commercial and industrial loans
Leases receivable:
Risk Rating
Pass / Pass Watch
Special Mention
Classified
Total leases receivable
Total loans receivable:
Risk Rating
Pass / Pass Watch
Special Mention
Classified
Total loans receivable
$
$
$
$
$
$
$
Term Loans
Amortized Cost Basis by Origination Year (1)
2020
2019
2018
2017
2016
Prior
Revolving
Loans
Amortized
Cost Basis
Total
$
920,876
23,429
20,307
964,612
$
513,962
2,484
4,276
520,722
$
479,221
8,630
9,239
497,090
$
343,659
1,672
3,084
348,415
$
418,362
14,971
18,712
452,045
$
459,366
2,158
19,115
480,639
$
31,283
—
130
31,413
3,166,729
53,344
74,863
3,294,936
$
33,415
—
12,808
46,223
$
27,997
—
—
27,997
$
$
613
—
—
613
962
—
—
962
$
—
—
12,046
12,046
$
—
—
—
—
$
—
—
—
—
$
—
—
—
—
$
—
—
—
—
34,028
—
24,854
58,882
$
$
37,122
930
620
38,672
$
127,987
828
2,283
131,098
$
82,124
1,863
301
84,288
$
54,004
1,457
—
55,461
$
7,353
—
—
7,353
337,549
5,078
3,204
345,831
$
982,288
23,429
33,115
1,038,832
$
515,537
2,484
4,276
522,297
$
516,343
9,560
21,905
547,808
$
471,646
2,500
5,367
479,513
$
500,486
16,834
19,013
536,333
$
513,370
3,615
19,115
536,100
$
38,636
—
130
38,766
3,538,306
58,422
102,921
3,699,649
$
406,486
7,239
8,552
422,277
$
73,160
4,509
4,784
82,453
$
54,110
4,146
1,364
59,620
$
17,834
1,110
930
19,874
$
4,464
31
4,380
8,875
$
9,910
1,074
1,359
12,343
$
146,721
447
4,645
151,813
712,685
18,556
26,014
757,255
$
113,712
—
452
114,164
$
165,242
—
5,728
170,970
$
91,408
—
3,137
94,545
$
30,405
—
876
31,281
$
10,096
—
804
10,900
$
1,167
—
237
1,404
$
—
—
—
—
412,030
—
11,234
423,264
$
1,502,486
30,668
42,119
1,575,273
$
753,939
6,993
14,788
775,720
$
661,861
13,706
26,406
701,973
$
519,885
3,610
7,173
530,668
$
515,046
16,865
24,197
556,108
$
524,447
4,689
20,711
549,847
$
185,357
447
4,775
190,579
4,663,021
76,978
140,169
4,880,168
(1)
Includes extensions, renewals, or modifications of credit contracts, which consist of a new credit decision.
74
Loans by Vintage Year and Payment Performance
Term Loans
Amortized Cost Basis by Origination Year (1)
2020
2019
2018
2017
2016
Prior
Revolving
Loans
Amortized
Cost Basis
Total
December 31, 2020
Real estate loans:
Commercial property
Payment performance
Performing
Nonperforming
Total commercial property
Construction
Payment performance
Performing
Nonperforming
Total construction
Residential/consumer loans
Payment performance
Performing
Nonperforming
Total residential property
Total real estate loans
Payment performance
Performing
Nonperforming
Total real estate loans
Commercial and industrial loans:
Payment performance
Performing
Nonperforming
Total commercial and industrial loans
Leases receivable:
Payment performance
Performing
Nonperforming
Total leases receivable
Total loans receivable:
Payment performance
Performing
Nonperforming
Total loans receivable
$
$
$
$
$
$
961,973
2,639
964,612
$
520,330
392
520,722
$
496,936
154
497,090
$
346,029
2,386
348,415
$
437,231
14,814
452,045
$
471,067
9,572
480,639
$
31,283
130
31,413
3,264,849
30,087
3,294,936
$
33,415
12,808
46,223
$
613
—
613
$
—
12,046
12,046
$
—
—
—
$
—
—
—
$
—
—
—
$
—
—
—
34,028
24,854
58,882
$
27,997
—
27,997
$
962
—
962
$
38,052
620
38,672
$
129,669
1,429
131,098
$
83,987
301
84,288
$
55,461
—
55,461
7,353
—
7,353
343,481
2,350
345,831
$
1,023,385
15,447
1,038,832
$
521,905
392
522,297
$
534,988
12,820
547,808
$
475,698
3,815
479,513
$
521,218
15,115
536,333
$
526,528
9,572
536,100
38,636
130
38,766
3,642,358
57,291
3,699,649
$
413,725
8,552
422,277
$
77,672
4,781
82,453
$
59,436
184
59,620
$
19,002
872
19,874
$
8,875
—
8,875
$
12,228
115
12,343
151,813
—
151,813
113,712
452
114,164
165,242
5,728
170,970
91,408
3,137
94,545
30,405
876
31,281
10,096
804
10,900
1,167
237
1,404
—
—
—
742,751
14,504
757,255
412,030
11,234
423,264
$
$
1,550,822
24,451
$
1,575,273
$
764,819
10,901
$
775,720
$
685,832
16,141
$
701,973
$
525,105
5,563
$
530,668
$
540,189
15,919
$
556,108
$
539,923
9,924
$
549,847
$
190,449
130
4,797,139
83,029
190,579
$
4,880,168
(1)
Includes extensions, renewals, or modifications of credit contracts, which consist of a new credit decision
75
Individually Evaluated Loans
Prior to the adoption of ASU 2016-13, loans were individually evaluated based on the present value of expected future cash flows discounted at the loan's effective
interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan was collateral dependent, less estimated costs to sell. If
the estimated value of the individually evaluated loan was less than the recorded investment in the loan, the Company charged-off the deficiency against the allowance for loan
losses or we established a specific allowance in the allowance for loan losses. Additionally, we excluded from the quarterly migration analysis individually evaluated loans
when determining the amount of the allowance for loan losses required for the period.
Under ASU 2016-13, the Company reviews all loans on an individual basis when they do not share similar risk characteristics with loan pools.
The following tables provide information on individually evaluated loans receivable as of December 31, 2020 and December 31, 2019, disaggregated by loan class, as
of the dates indicated:
Recorded
Investment
Unpaid
Principal
Balance
With No
Related
Allowance
Recorded
With an
Allowance
Recorded
(in thousands)
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
December 31, 2020
Real estate loans:
Commercial property
Retail
Hospitality
Other
Total commercial property loans
Construction
Residential/consumer loans
Total real estate loans
Commercial and industrial loans
Leases receivable
Total
December 31, 2019
Real estate loans:
Commercial property
Retail
Hospitality
Other
Total commercial property loans
Construction
Residential/consumer loans
Total real estate loans
Commercial and industrial loans
Leases receivable
Total
December 31, 2018
Real estate loans:
Commercial property
Retail
Hospitality
Other
Total commercial property loans
Construction
Residential/consumer loans
Total real estate loans
Commercial and industrial loans
Leases receivable
Total
$
$
$
$
$
$
6,331
20,612
10,430
37,373
24,854
2,933
65,160
14,568
11,233
90,961
434
244
14,864
15,542
27,201
2,421
45,164
13,700
5,902
64,766
2,166
4,282
7,525
13,973
—
1,627
15,600
4,396
5,129
25,125
$
$
$
$
$
$
6,423
20,627
11,736
38,786
26,494
3,253
68,533
14,688
11,237
94,458
459
400
15,151
16,010
28,000
2,751
46,761
14,090
5,909
66,760
2,207
5,773
8,016
15,996
—
2,002
17,998
4,601
5,162
27,761
$
$
$
$
$
$
76
6,330
20,612
9,522
36,464
24,854
2,867
64,185
58
2,318
66,561
111
22
14,696
14,829
—
2,309
17,138
143
1,112
18,393
1,894
4,032
6,253
12,179
—
1,534
13,713
1,644
1,256
16,613
$
$
$
$
$
$
1
—
908
909
—
66
975
14,510
8,915
24,400
323
223
167
713
27,201
112
28,026
13,557
4,790
46,373
272
250
1,272
1,794
—
93
1,887
2,752
3,873
8,512
$
$
$
$
$
$
—
—
20
20
—
1
21
7,976
6,056
14,053
19
24
12
55
13,973
1
14,029
8,885
2,863
25,778
—
—
1
1
—
—
1
428
1,383
1,812
$
$
$
$
$
$
6,728
21,120
11,202
39,050
27,803
2,997
69,850
14,751
13,147
97,748
894
1,683
10,619
13,196
18,421
2,845
34,462
19,361
4,854
58,677
2,001
7,285
7,978
17,264
—
2,952
20,216
3,568
5,229
29,013
$
$
$
$
$
$
—
—
—
—
—
—
—
—
758
758
13
—
168
181
249
66
495
512
44
1,052
183
482
601
1,266
—
151
1,417
211
46
1,674
The following is a summary of interest foregone on individually evaluated loans for the periods indicated:
2020
Year Ended December 31,
2019
(in thousands)
2018
Interest income that would have been recognized had individually evaluated loans
performed in accordance with their original terms
Less: Interest income recognized on individually evaluated loans
Interest foregone on individually evaluated loans
$
$
5,438 $
(758 )
4,680 $
3,439 $
(1,279 )
2,160 $
2,808
(1,674 )
1,134
There were no commitments to lend additional funds to borrowers whose loans or leases are included above.
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 December 31, 2020 and 2019.
December 31, 2020
Nonaccrual Loans
With
No Allowance for
Credit Losses
Nonaccrual Loans
With
Allowance for
Credit Losses
Loans
Past Due
90 Days Still
Accruing
Total
Nonperforming
Loans
Real estate loans:
Retail
Hospitality
Other
Commercial property loans
Construction loans
Residential/consumer loans
Total real estate loans
Commercial and industrial loans
Leases receivable
Total
Real estate loans:
Retail
Hospitality
Other
Commercial property loans
Construction loans
Residential/consumer loans
Total real estate loans
Commercial and industrial loans
Leases receivable
Total
$
6,331 $
20,612
2,236
29,179
24,854
2,350
56,383
58
2,318
58,759 $
(in thousands)
— $
—
909
909
—
—
909
14,449
8,915
24,273 $
— $
—
—
—
—
—
—
—
—
— $
6,331
20,612
3,145
30,088
24,854
2,350
57,292
14,507
11,233
83,032
December 31, 2019
Nonaccrual Loans
With
No Allowance for
Credit Losses
Nonaccrual Loans
With
Allowance for
Credit Losses
Loans
Past Due
90 Days Still
Accruing
Total
Nonperforming
Loans
(in thousands)
166 $
222
167
555
27,201
35
27,791
13,336
4,790
45,917 $
— $
—
—
—
—
—
—
—
—
— $
277
225
14,864
15,366
27,201
1,813
44,380
13,479
5,902
63,761
111 $
3
14,697
14,811
—
1,778
16,589
143
1,112
17,844 $
77
$
$
$
The following is an aging analysis of loans, disaggregated by loan class, as of the dates indicated:
December 31, 2020
Real estate loans:
Commercial property
Retail
Hospitality
Other
Total commercial property loans
Construction
Residential/consumer loans
Total real estate loans
Commercial and industrial loans
Leases receivable
Total loans receivable
December 31, 2019
Real estate loans:
Commercial property
Retail
Hospitality
Other
Total commercial property loans
Construction
Residential/consumer loans
Total real estate loans
Commercial and industrial loans
Leases receivable
Total loans receivable
30-59
Days
Past
Due
60-89
Days
Past
Due
90 Days
or More
Past Due
Total
Past
Due
(in thousands)
Current
Total
$
$
$
$
— $
—
—
—
—
4,693
4,693
282
4,051
9,026 $
6 $
907
51
964
—
540
1,504
635
5,358
7,497 $
— $
—
—
—
12,807
461
13,268
27
1,786
15,081 $
132 $
—
—
132
—
1,657
1,789
133
2,138
4,060 $
— $
11,076
731
11,807
—
564
12,371
12,487
4,675
29,533 $
111 $
—
38
149
—
309
458
143
3,493
4,094 $
— $
11,076
731
11,807
12,807
5,718
30,332
12,796
10,512
53,640 $
824,606 $
848,877
1,609,646
3,283,129
46,075
340,113
3,669,317
744,459
412,752
4,826,528 $
824,606
859,953
1,610,377
3,294,936
58,882
345,831
3,699,649
757,255
423,264
4,880,168
249 $
907
89
1,245
—
2,507
3,752
911
10,990
15,652 $
869,053 $
921,381
1,358,344
3,148,778
76,455
413,191
3,638,424
483,183
472,889
4,594,496 $
869,302
922,288
1,358,432
3,150,022
76,455
415,697
3,642,175
484,093
483,879
4,610,147
There were no loans that were 90 days or more past due and accruing interest as of December 31, 2020 and 2019. In addition, $53.4 million and $60.9 million of loans
past due less than 90 days were classified as nonaccrual at December 31, 2020 and 2019, respectively.
At December 31, 2020, all $155.6 million of currently modified loans under the CARES Act were classified as current. For loans previously modified under the
CARES Act, $4.9 million were 30-59 days past due, $1.7 million were 60-89 days past due, and $13.9 million were 90 days or more past due.
78
The following table details nonaccrual loans, disaggregated by loan class, as of the dates indicated:
Real estate loans:
Commercial property
Retail
Hospitality
Other
Total commercial property loans
Construction
Residential/consumer loans
Total real estate loans
Commercial and industrial loans
Leases receivable
Total nonaccrual loans
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")
Total nonperforming assets
As of December 31,
2020
2019
(in thousands)
6,330
20,612
3,145
30,087
24,854
2,350
57,291
14,507
11,234
83,032
$
$
As of December 31,
2020
2019
(in thousands)
83,032
—
83,032
2,360
85,392
$
$
277
225
14,864
15,366
27,201
1,813
44,380
13,479
5,902
63,761
63,761
—
63,761
63
63,824
$
$
$
$
OREO consisted of four properties with a combined carrying value of $2.4 million as of December 31, 2020, and two properties with a combined carrying value of
$63,000 as of December 31, 2019. OREO is included in prepaid expenses and other assets in the accompanying Consolidated Balance Sheets as of December 31, 2020 and
2019.
Troubled Debt Restructuring
The following table details the recorded investment in TDRs, disaggregated by concession type and by loan type, as of December 31, 2020 and 2019:
December 31, 2020
Real estate loans
Commercial and industrial loans
Total
December 31, 2019
Real estate loans
Commercial and industrial loans
Total
Deferral of
Principal
$
$
$
$
1,095
—
1,095
689
—
689
$
$
$
$
Nonaccrual TDRs
Reduction
of
Principal
and
Interest
Deferral of
Principal
and
Interest
Extension
of
Maturity
Deferral
of
Principal
Total
(in thousands)
Deferral
of
Principal
and
Interest
Accrual TDRs
Reduction
of
Principal
and
Interest
Extension
of
Maturity
Total
3,334
144
3,478
$
$
12,492
—
12,492
$
$
—
—
—
$
$
16,921
144
17,065
$
$
132
153
285
$
$
27,740
12,527
40,266
$
$
13,926
312
14,238
$
$
42,487
12,991
55,478
$
$
513
—
513
$
$
531
—
531
$
$
—
—
—
$
$
—
36
36
$
$
67
4
71
$
$
7,290
56
7,346
$
$
77
71
148
$
$
—
114
114
$
$
7,870
60
7,930
608
222
830
All TDRs are individually evaluated for specific impairment using one of these three criteria: (1) the present value of expected future cash flows discounted at the
loan’s effective interest rate; (2) the loan’s observable market price; or (3) the fair value of the collateral if the loan is collateral dependent. At December 31, 2020 and 2019,
TDRs were subjected to specific impairment analysis. We determined an impairment allowance of $16,000 and $22.7 million as of December 31, 2020 and 2019, respectively,
related to these loans and such allowances were included in the allowance for credit losses.
79
The following table presents the number of loans by class modified as troubled debt restructurings that occurred during the years ending December 31, 2020, 2019 and
2018 with their pre- and post-modification recorded amounts.
December 31, 2020
Pre-
Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
December 31, 2019
Pre-
Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
Number
of Loans
December 31, 2018
Pre-
Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
Number
of Loans
Number
of Loans
Real estate loans
Commercial and industrial loans
Total
5
—
5
$
$
4,479
—
4,479
$
$
3,676
—
3,676
(in thousands except for number of loans)
6
2
8
$
$
41,292
12,779
54,071
$
$
42,329
12,562
54,892
—
2
2
$
$
—
684
684
$
$
—
664
664
A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms. One loan for $398,000 defaulted during the twelve
months ended December 31, 2020 following modification. During the year ended December 31, 2019, one loan for $132,000 defaulted within the twelve-month period
following modification. The allowance for credit losses resulting from these defaulted loans were $3,000 and $0 as of December 31, 2020 and 2019.
Note 4 — Servicing Assets
The changes in servicing assets for the years ended December 31, 2020 and 2019 were as follows:
Balance at beginning of period
Addition related to sale of SBA loans
Amortization
Balance at end of period
As of December 31,
2020
2019
(in thousands)
6,956 $
1,517
(2,261 )
6,212 $
8,520
1,699
(3,263 )
6,956
$
$
At December 31, 2020 and 2019, we serviced the loans sold to unaffiliated parties in the amount of $429.4 million and $422.3 million, respectively. These represent
loans that have been sold for which the Bank continues to provide servicing. These loans are maintained off balance sheet and are not included in the loans receivable balance.
All of the loans being serviced were SBA loans.
The Company recorded servicing fee income of $4.2 million, $4.4 million and $4.7 million for the years ended December 31, 2020, 2019 and 2018, respectively. Net
amortization expense was $2.0 million, $2.8 million and $2.6 million for the years ended December 31, 2020, 2019 and 2018, respectively. Servicing fee income, net of
amortization of servicing assets and liabilities, is included in other operating income in the consolidated statements of income.
80
The fair value of servicing rights was $6.9 million at year-end 2020. Fair value at year-end 2020 was determined using discount rates ranging from 9.3 percent to 12.2
percent and prepayment speeds ranging from 11.8 percent to 19.1 percent, depending on the stratification of the specific right.
Note 5 — Premises and Equipment
The following is a summary of the major components of premises and equipment:
As of December 31,
2020
2019
Land
Building and improvements
Furniture and equipment
Leasehold improvements
Leased equipment
Accumulated depreciation and amortization
Total premises and equipment, net
$
$
$
(in thousands)
6,850
12,423
31,973
14,813
880
66,939
(40,508 )
26,431
$
7,980
14,120
27,358
12,715
879
63,052
(36,982 )
26,070
Depreciation and amortization expense related to premises and equipment was $4.0 million, $3.3 million and $2.6 million for the years ended December 31, 2020, 2019
and 2018, respectively.
Note 6 — Leases
The Company enters into leases in the normal course of business primarily for financial centers, back-office operations locations, business development offices,
information technology data centers and information technology equipment. The Company’s leases have remaining terms ranging from one to thirteen years, some of which
include renewal or termination options to extend the lease for up to five years.
The Company includes lease extension and termination options in the lease term if, after considering relevant economic factors, it is reasonably certain the Company
will exercise the option. In addition, the Company has elected to account for any non-lease components in its real estate leases as part of the associated lease component. The
Company has also elected not to recognize leases with original lease terms of 12 months or less (short-term leases) on the Company’s balance sheet.
Leases are classified as operating or finance leases at the lease commencement date. Lease expense for operating leases and short-term leases is recognized on a
straight-line basis over the term of the lease. Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to
make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of the
lease payments over the lease term.
The Company adopted ASU 2016-02, Leases (Topic 842), effective January 1, 2019. In determining whether a contract contained a lease, we determined whether an
arrangement was or included a lease at contract inception. Operating lease right-of-use asset and liability were recognized at commencement date and initially measured based
on the present value of lease payments over the defined lease term. The opening balance for both our right-of-use asset and lease liability were $40.9 million as of the adoption
date of January 1, 2019 and outstanding balances were $52.2 million and $54.0 million, respectively, as of December 31, 2020. The outstanding balances of the right-of-use
asset and lease liability were $36.5 million and $37.2 million, respectively, as of December 31, 2019.
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 commencement date to calculate the present value of lease payments.
The Company's right-of-use asset is included in prepaid expenses and other assets and our lease liability is included in accrued expenses and other liabilities in the
accompanying consolidated balance sheet.
81
We lease our premises under non-cancelable operating leases. At December 31, 2020, future minimum annual rental commitments under these non-cancelable
operating leases, with initial or remaining terms of one year or more, were as follows:
2021
2022
2023
2024
2025
Thereafter
Remaining lease commitments
Interest
Present value of lease liability
Amount
(in thousands)
7,519
7,261
7,044
6,526
6,060
25,730
60,140
(6,177 )
53,963
$
For the years ended December 31, 2020, 2019 and 2018, net rental expenses recorded under such leases amounted to $8.5 million, $7.9 million, and $7.4 million,
respectively.
Weighted average remaining lease terms for the Company’s operating leases were 8.75 years and 8.57 years, respectively, as of December 31, 2020 and 2019.
Weighted average discount rates used for the Company’s operating leases were 2.43 percent and 3.24 percent, respectively, as of December 31, 2020 and 2019. Net lease
expense recognized for the twelve months ended December 31, 2020 and 2019 was $8.5 million and $7.9 million, respectively. This included operating lease costs of $8.5
million and $8.0 million and sublease income of $132,000 and $132,000, respectively, for the twelve months ended December 31, 2020 and 2019. The Company chose the
practical expedients and reviewed the lease and non-lease components for any impairment or otherwise, subsequently determining that no cumulative-effect adjustment to
equity was necessary as part of implementing the modified retrospective approach for its adoption of ASC 842.
Cash paid, and included in cash flows from operating activities, for amounts included in the measurement of the lease liability for the Company's operating leases for
the twelve months ended December 31, 2020 and 2019 was $7.6 million and $7.2 million, respectively.
Note 7 — Goodwill and other intangibles
The third-party originators intangible of $483,000 and goodwill of $11.0 million were recorded as a result of the acquisition of a leasing portfolio in 2016. The core
deposit intangible of $2.2 million was recognized for the core deposits acquired in a 2014 acquisition. The Company's intangible assets were as follows for the periods indicated:
Amortization
Period
Gross
Carrying
Amount
December 31, 2020
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Amount
December 31, 2019
Accumulated
Amortization
Net
Carrying
Amount
Core deposit intangible
Third-party originators intangible
Goodwill
Total intangible assets
10 years
7 years
N/A
$
$
2,213
483
11,031
13,727
$
$
(1,746 ) $
(369 )
—
(2,115 ) $
(in thousands)
467
114
11,031
11,612
$
$
2,213
483
11,031
13,727
$
$
(1,567 ) $
(287 )
—
(1,854 ) $
646
196
11,031
11,873
82
Intangible assets amortization expense for the years ended December 31, 2020, 2019 and 2018 was $261,000, $309,000 and $362,000, respectively, and estimated
future amortization expense related to the Core Deposit Intangible and the third-party originators intangible for each of the next five years is as follows:
2021
2022
2023
2024
2025
Thereafter
Amount
(in thousands)
216
171
126
68
—
—
581
$
$
The Company performed its annual goodwill impairment analysis in the fourth quarter of 2020 and determined no impairment existed as of December 31, 2020. As of
December 31, 2020, management was not aware of any circumstances that would indicate impairment of goodwill or other intangible assets. There were no impairment charges
related to intangible assets recorded in earnings in the three years ended December 31, 2020.
Note 8 — Deposits
Time deposits at or exceeding the FDIC insurance limit of $250,000 at year-end 2020 and 2019 were $311.8 million and $299.9 million, respectively.
At December 31, 2020, the scheduled maturities of time deposits are as follows:
Year Ending December 31,
2021
2022
2023
2024
2025 & thereafter
Total
Time
Deposits of
$250,000
or More
Other Time
Deposits
(in thousands)
$
$
296,455
14,315
804
—
264
311,838
$
$
825,677
115,832
22,881
5,382
2,089
971,861
A summary of interest expense on deposits was as follows for the periods indicated:
Demand: interest-bearing
Money market and savings
Time deposits of $250,000 or more
Other time deposits
Total interest expense on deposits
2020
Year Ended December 31,
2019
(in thousands)
$
$
70
11,016
3,521
19,387
33,994
$
$
116
23,556
6,338
33,095
63,105
Total
2018
1,122,132
130,148
23,685
5,382
2,352
1,283,699
106
16,182
9,598
17,194
43,080
$
$
$
$
Accrued interest payable on deposits was $4.6 million and $11.2 million at December 31, 2020 and 2019, respectively. Total deposits reclassified to loans due to
overdrafts at December 31, 2020 and 2019 were $241,000 and $1.5 million, respectively.
83
Note 9 — Borrowings
Borrowings consisted of FHLB advances, which represent collateralized obligations with the FHLB. The following is a summary of contractual maturities of FHLB
advances:
As of December 31,
2020
2019
Outstanding
Balance
Weighted
Average
Rate
Outstanding
Balance
Weighted
Average
Rate
Overnight advances
Advances due within 12 months
Advances due over 12 months through 24 months
Advances due over 24 months through 36 months
Outstanding advances
$
$
—
50,000
50,000
50,000
150,000
The following is financial data pertaining to FHLB advances:
(dollars in thousands)
0.00 % $
1.61 %
1.62 %
0.97 %
1.40 % $
15,000
25,000
25,000
25,000
90,000
1.66 %
1.75 %
1.66 %
1.72 %
1.70 %
Weighted-average interest rate at end of year
Weighted-average interest rate during the year
Average balance of FHLB advances
Maximum amount outstanding at any month-end
2020
As of December 31,
2019
(dollars in thousands)
2018
1.40 %
1.42 %
156,601
300,000
$
$
1.70 %
1.89 %
40,374
285,000
$
$
2.56 %
1.94 %
174,452
300,000
$
$
We have pledged loans receivable with market values of $2.17 billion as collateral with the FHLB for this borrowing facility. The total borrowing capacity available
from the collateral that has been pledged is $1.73 billion, of which $1.44 billion remained available as of December 31, 2020. At December 31, 2020, we had $26.3 million
available for use through the Federal Reserve Bank of San Francisco Discount Window, as we pledged securities with carrying values of $27.3 million, and there were no
borrowings.
At December 31, 2020, advances from the FHLB were $150.0 million, an increase of $60.0 million from $90.0 million at December 31, 2019, and all of the FHLB
advances were term borrowings at December 31, 2020. For the years ended December 31, 2020, 2019 and 2018, interest expense on FHLB advances were $2.2 million,
$763,000 and $3.4 million, respectively, and the weighted-average interest rates were 1.42 percent, 1.89 percent and 1.94 percent, respectively. There were no outstanding
borrowings on the FRB PPP Lending Facility as of December 31, 2020 and available borrowing capacity was $300.4 million, which was extended through March 31, 2021.
Note 10 — Subordinated Debentures
The Company issued Fixed-to-Floating Subordinated Notes (“Notes”) of $100.0 million on March 21, 2017, with a final maturity on March 30, 2027. The Notes have
an initial fixed interest rate of 5.45 percent per annum, payable semi-annually on March 30 and September 30 of each year. From and including March 30, 2022 and thereafter,
the Notes bear interest at a floating rate equal to the then current three-month LIBOR, as calculated on each applicable date of determination, plus 3.315 percent payable
quarterly. If the then current three-month LIBOR is less than zero, three-month LIBOR will be deemed to be zero. Debt issuance cost was $2.3 million, which is being
amortized through the Note’s maturity date. At December 31, 2020 and 2019, the balance of Notes included in the Company’s Consolidated Balance Sheet, net of debt issuance
cost, was $98.5 million and $98.3 million. The amortization of debt issuance cost was $205,000, $193,000 and $182,000 for the years ended December 31, 2020, 2019 and
2018, respectively.
84
The Company assumed Junior Subordinated Deferrable Interest Debentures (“Subordinated Debentures”) as a result of an acquisition in 2014 with an unpaid principal
balance of $26.8 million and an estimated fair value of $18.5 million. The $8.3 million discount is being amortized to interest expense through the debentures’ maturity date of
March 15, 2036. A trust was formed in 2005 which issued $26.0 million of Trust Preferred Securities (“TPS”) at a 6.26 percent fixed rate for the first five years and a variable
rate at the three-month LIBOR plus 140 basis points thereafter and invested the proceeds in the Subordinated Debentures. The Company may redeem the Subordinated
Debentures at an earlier date if certain conditions are met. 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 December 31, 2020 and 2019, the balance of Subordinated Debentures included in the Company’s Consolidated Balance Sheets, net of discount of $6.4 million and
$6.8 million, was $20.4 million and $20.0 million. The amortization of discount was $390,000, $376,000 and $356,000 for the years ended December 31, 2020, 2019 and 2018,
respectively.
Note 11 — Income Taxes
In accordance with the provisions of ASC 740, the Company periodically reviews its income tax positions based on tax laws and regulations and financial reporting
considerations, and records adjustments as appropriate. This review takes into consideration the status of current taxing authorities’ examinations of the Company’s tax returns,
recent positions taken by the taxing authorities on similar transactions, if any, and the overall tax environment.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
Unrecognized tax benefits at beginning of year
Gross decreases for tax positions of prior years
Lapse of statute of limitations
Gross increase for new tax positions
Unrecognized tax benefits (expense) at end of year
2020
Year Ended December 31,
2019
(in thousands)
2018
$
$
73 $
(73 )
—
—
— $
202 $
(202 )
—
73
73 $
1,039
—
(837 )
—
202
The total amount of unrecognized tax benefits that would affect our effective tax rate if recognized was $0, $73,000 and $202,000 as of December 31, 2020, 2019 and
2018, respectively.
For the year ended December 31, 2020, unrecognized tax benefits decreased by $73,000 related to the filing of state income tax returns for open tax years in
jurisdictions in which the Company had nexus. For the year ended December 31, 2019, unrecognized tax benefits decreased by $129,000 related to state taxes, primarily in
connection with the settlement of the California Franchise Tax Board 2008 and 2009 examinations. For the year ended December 31, 2018, unrecognized tax benefits decreased
by $837,000 in connection with California Enterprise Zone interest deductions as result of the lapse of the statute of limitations.
The Company does not have any open uncertain tax positions as of December 31, 2020. We account for potential interest and penalties related to uncertain tax
positions as part of our provision for federal and state income taxes. Accrued interest and penalties are included within accrued expenses and other liabilities on the Consolidated
Balance Sheets.
As of December 31, 2020, the Company is subject to examination by various taxing authorities for its federal tax returns for the for the years ending December 31,
2017 through 2019 and state tax returns for the years ending December 31, 2016 through 2019.
85
A summary of the provision for income taxes was as follows:
Current expense:
Federal
State
Total current expense
Deferred expense (benefit):
Federal
State
Total deferred expense
Income tax expense
Deferred tax assets and liabilities were as follows:
Deferred tax assets:
Provision for loan losses
Purchase accounting
Net operating loss carryforward
Unrealized loss on securities available for sale
Mark to market
Lease liability
Tax credits
State taxes
Other
Total deferred tax assets
Deferred tax liabilities:
Mark to market
Depreciation
Unrealized gain loss on securities available for sale
Leases - right of use assets
Other
Total deferred tax liabilities
Valuation allowance
Net deferred tax assets
2020
Year Ended December 31,
2019
(in thousands)
2018
10,565 $
6,310
16,875
663
(239 )
424
17,299 $
18,737 $
9,377
28,114
(10,515 )
(3,039 )
(13,554 )
14,560 $
2020
Year Ended December 31,
2019
(in thousands)
2018
26,883 $
3,902
15,342
—
—
15,562
—
1,223
3,669
66,581
(1,660 )
(631 )
(1,247 )
(15,044 )
(2,228 )
(20,810 )
(4,352 )
41,418 $
18,401 $
3,912
15,453
—
261
10,716
198
1,739
3,766
54,446
—
(388 )
(1,370 )
(10,517 )
(532 )
(12,807 )
(4,852 )
36,787 $
13,415
5,293
18,708
3,428
3,966
7,394
26,102
10,035
2,724
17,609
2,457
—
—
561
1,138
2,955
37,479
(4,719 )
(467 )
—
—
—
(5,186 )
(4,852 )
27,441
$
$
$
$
$
As of each reporting date, management considers the realizability of deferred tax assets based on management’s judgment of various future events and uncertainties,
including the timing and amount of future income, as well as the implementation of various tax planning strategies to maximize realization of deferred tax assets. A valuation
allowance is provided when it is more likely than not that some portion of deferred tax assets will not be realized. As of December 31, 2020, management determined that a
valuation allowance of $4.4 million was appropriate against certain state net operating losses and certain state tax credits. For all other deferred tax assets, management believes
it was more likely than not that these deferred tax assets will be realized principally through future taxable income and reversal of existing taxable temporary differences. As of
December 31, 2019, management determined a valuation allowance of $4.9 million was appropriate against certain state net operating losses and certain state tax credits.
As of December 31, 2020, the Company had net operating loss carryforwards of $14.8 million and $214.8 million for federal and state income tax purposes,
respectively. The federal net operating loss carryforwards of $14.8 million expire at various dates from 2034 to 2035. The state net operating loss carryforwards include
California of $152.3 million which expire at various dates from 2031 through 2035, and Illinois of $62.5 million which expire at various dates from 2024 to 2025. As of
December 31, 2020, the Company had zero state low income housing tax credit carryforwards.
86
Reconciliation between the federal statutory income tax rate and the effective tax rates is shown in the following table:
Federal statutory income tax rate
State taxes, net of federal tax benefits
Tax credit - federal
Federal rate adjustment, net of federal benefits of state
Low-income housing amortization
Other
Effective tax rate
2020
Year Ended December 31,
2019
2018
21.00 %
7.86 %
(2.68 )%
0.00 %
3.02 %
(0.12 )%
29.08 %
21.00 %
9.39 %
(3.49 )%
0.00 %
4.17 %
(0.32 )%
30.75 %
21.00 %
9.50 %
(2.37 )%
1.32 %
2.40 %
(0.76 )%
31.09 %
The CARES Act includes provisions for tax payment relief, significant business incentives, and certain corrections to the 2017 Tax Cuts and Jobs Act. The tax relief
measures for entities includes a five-year net operating loss carry back, increases in interest expense deduction limits, accelerates alternative minimum tax credit refunds,
provides payroll tax relief, and provides a technical correct to allow accelerated deductions for qualified improvement property. ASC Topic 740, Income Taxes, requires the
effect of changes in tax law be recognized in the period in which new legislation is enacted. The enactment of the CARES Act was not material to the Company’s income taxes
for the year ended December 31, 2020.
Note 12 — Accumulated Other Comprehensive Income (Loss)
Activity in accumulated other comprehensive income for the year ended December 31, 2020, 2019 and 2018 was as follows:
Unrealized
Gains and
Losses on
Available-for-
Sale Securities
Tax Benefit
(Expense)
(in thousands)
Total
For the year ended December 31, 2020
Balance at beginning of period
Other comprehensive income (loss) before reclassification
Reclassification from accumulated other comprehensive income
Net current period other comprehensive income
Balance at end of period
For the year ended December 31, 2019
Balance at beginning of period
Other comprehensive income (loss) before reclassification
Reclassification from accumulated other comprehensive income
Net current period other comprehensive income
Balance at end of period
For the year ended December 31, 2018
Balance at beginning of period
Other comprehensive income (loss) before reclassification
Reclassification from accumulated other comprehensive income
Adjustments to accumulated other comprehensive income
Net current period other comprehensive income
Balance at end of period
$
$
$
$
$
$
4,752
15,283
(15,712 )
(429 )
4,323
$
$
(8,536 ) $
14,583
(1,295 )
13,288
4,752
$
(3,188 ) $
(5,790 )
(87 )
529
(5,348 )
(8,536 ) $
(1,370 ) $
123
—
123
(1,247 ) $
$
2,457
(3,827 )
—
(3,827 )
(1,370 ) $
$
1,319
1,684
—
(546 )
1,138
2,457
$
3,382
15,406
(15,712 )
(306 )
3,076
(6,079 )
10,756
(1,295 )
9,461
3,382
(1,869 )
(4,106 )
(87 )
(17 )
(4,210 )
(6,079 )
The Company recorded a net $17,000 adjustment related to adoption of two new accounting standards (ASU 2016-01 and ASU 2018-02) effective January 1, 2018.
The $17,000 adjustment includes a $529,000 reduction of unrealized losses related to the Company’s mutual funds equity securities upon adoption of ASU 2016-01 and
a $546,000 reduction in tax benefits upon adoption of ASU 2016-01 and ASU 2018-02. All mutual fund equity securities were sold during the three months ended March 31,
2018. See Notes 3 and 11 to the Consolidated Financial Statements for additional information on adoption of ASU 2016-01 and ASU 2018-02, respectively.
87
For the year ended December 31, 2020, there was a reclassification from accumulated other comprehensive income to net gain on sales of securities in noninterest
income. Net unrealized gain of $15.3 million related to these sold securities had previously been recorded in accumulated other comprehensive income or loss.
For the year ended December 31, 2019, there was a $1.3 million reclassification from accumulated other comprehensive income to net gain on sales of securities in
noninterest income. Net unrealized gains of $586,000 related to these sold securities had previously been recorded in accumulated other comprehensive income or loss. For the
year ended December 31, 2018, there was a $87,000 reclassification from accumulated other comprehensive income to net gain on sales of securities in noninterest income. Net
unrealized losses of $413,000 related to these sold securities had previously been recorded in accumulated other comprehensive income or loss.
Note 13 — Regulatory Matters
Risk-Based Capital
Federal bank regulatory agencies require bank holding companies and banks to maintain a minimum ratio of qualifying total capital to risk-weighted assets of 8.0
percent and a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0 percent. In addition to the risk-based guidelines, federal bank regulatory agencies require bank
holding companies and banks to maintain a minimum ratio of Tier 1 capital to average assets, referred to as the leverage ratio, of 4.0 percent.
In order for banks to be considered “well capitalized,” federal bank regulatory agencies require them to maintain a minimum ratio of qualifying total capital to risk-
weighted assets of 10.0 percent and a minimum ratio of Tier 1 capital to risk-weighted assets of 8.0 percent. In addition to the risk-based guidelines, federal bank regulatory
agencies require depository institutions to maintain a minimum ratio of Tier 1 capital to average assets, referred to as the leverage ratio, of 5.0 percent.
At December 31, 2020, the Bank’s capital ratios exceeded the minimum requirements to place the Bank in the “well capitalized” category and the Company exceeded
all of its applicable minimum regulatory capital ratio requirements.
A capital conservation buffer of 2.5 percent became effective on January 1, 2019, and must be met to avoid limitations on the ability of the Bank to pay dividends,
repurchase shares or pay discretionary bonuses. The Bank’s capital conservation buffer was 6.86 percent and 6.64 percent and the Company's capital conservation buffer was
5.93 percent and 5.78 percent as of December 31, 2020 and 2019, respectively.
In 2019, the federal banking agencies jointly issued a final rule that provides for an optional, simplified measure of capital adequacy, the community bank leverage
ratio framework (“CBLR”), for qualifying community banking organizations, consistent with Section 201 of the Economic Growth, Regulatory Relief, and Consumer Act. The
final rule became effective January 1, 2020, however the Company opted out of the CBLR as of December 31, 2020.
In March 2020, the OCC, the Board of Governors of the Federal Reserve System, and the FDIC 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.
88
The capital ratios of Hanmi Financial and the Bank as of December 31, 2020 and 2019 were as follows:
Actual
Minimum Regulatory
Requirement
Minimum to be
Categorized as
“Well Capitalized”
Amount
Ratio
Amount
Ratio
Amount
Ratio
(in thousands)
December 31, 2020
Total capital (to risk-weighted assets):
Hanmi Financial
Hanmi Bank
Tier 1 capital (to risk-weighted assets):
Hanmi Financial
Hanmi Bank
Common equity Tier 1 capital (to risk-weighted assets)
Hanmi Financial
Hanmi Bank
Tier 1 capital (to average assets):
Hanmi Financial
Hanmi Bank
December 31, 2019
Total capital (to risk-weighted assets):
Hanmi Financial
Hanmi Bank
Tier 1 capital (to risk-weighted assets):
Hanmi Financial
Hanmi Bank
Common equity Tier 1 capital (to risk-weighted assets)
Hanmi Financial
Hanmi Bank
Tier 1 capital (to average assets):
Hanmi Financial
Hanmi Bank
Note 14 — Fair Value Measurements
Fair Value Measurements
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
743,091
726,532
583,076
665,058
562,647
665,058
583,076
665,059
714,288
691,024
556,820
631,978
536,781
631,978
556,820
631,978
15.21 % $
14.86 % $
11.93 % $
13.60 % $
11.52 % $
13.60 % $
9.49 % $
10.83 % $
15.11 % $
14.64 % $
11.78 % $
13.39 % $
11.36 % $
13.39 % $
10.15 % $
11.56 % $
390,884
391,114
293,163
293,336
219,872
220,002
245,882
245,736
378,059
377,516
283,544
283,137
212,658
212,353
219,367
218,748
8.00 %
8.00 % $
6.00 %
6.00 % $
4.50 %
4.50 % $
4.00 %
4.00 % $
8.00 %
8.00 % $
6.00 %
6.00 % $
4.50 %
4.50 % $
4.00 %
4.00 % $
N/A
488,893
N/A
391,114
N/A
317,780
N/A
307,170
N/A
471,895
N/A
377,516
N/A
306,732
N/A
273,435
N/A
10.00 %
N/A
8.00 %
N/A
6.50 %
N/A
5.00 %
N/A
10.00 %
N/A
8.00 %
N/A
6.50 %
N/A
5.00 %
ASC 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value including a three-level valuation hierarchy,
and expands disclosures about fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit
price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The three-level fair
value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs
that may be used to measure fair value are defined as follows:
•
•
•
Level 1 - Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2 - Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are
not active, and other inputs that are observable or can be corroborated by observable market data.
Level 3 - Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an
asset or liability.
Fair value is used on a recurring basis for certain assets and liabilities in which fair value is the primary basis of accounting. Additionally, fair value is used on a non-
recurring basis to evaluate assets or liabilities for impairment or for disclosure purposes.
89
We record securities available for sale at fair value on a recurring basis. Certain other assets, such as loans held for sale, nonperforming loans, OREO, bank-owned
premises, 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 and mutual funds 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 mortgage-backed securities, collateralized mortgage obligations, U.S.
government agency securities and municipal bonds in markets that are active. In determining the fair value of the securities categorized as Level 2, we obtain reports from
investment accounting service provider detailing the fair value of each investment security held as of each reporting date. The broker-dealers use prices obtained from an
investment accounting service provider 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 – All loans held for sale are SBA loans carried at the lower of cost or fair value. Management obtains quotes, bids or pricing indication sheets on all
or part of these 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 December 31, 2020 and 2019, the entire balance of SBA loans held for sale was recorded at its cost. We record SBA loans held for sale
on a nonrecurring basis with Level 2 inputs.
Nonperforming loans – Nonaccrual loans receivable and performing restructured loans receivable are considered nonperforming for reporting purposes and are
measured and recorded at fair value on a non-recurring basis. All nonperforming loans with a carrying balance over $250,000 are individually evaluated for the amount of
impairment, if any. Nonperforming loans with a carrying balance of $250,000 or less are evaluated collectively. However, from time to time, nonrecurring fair value
adjustments to collateral dependent nonperforming loans are recorded based on either the current appraised value of the collateral, a Level 2 measurement, or management’s
judgment and estimation of value reported on older appraisals that are then adjusted based on recent market trends, a Level 3 measurement.
OREO – Fair value of OREO is based primarily on third party appraisals, less costs to sell and result in a Level 3 classification of the inputs for determining fair value.
Appraisals are required annually and may be updated more frequently as circumstances require and the fair value adjustments are made to OREO based on the updated
appraised value of the property.
Other repossessed assets – Fair value of equipment from leasing contracts is based primarily on a third party valuation service, less costs to sell and result in a Level 3
classification of the inputs for determining fair value. Valuations are required at the time the asset is repossessed and may be subsequently updated periodically due to the
Company’s short-term possession of the asset prior it is sale or as circumstances require and the fair value adjustments are made to the asset based on its value prior to sale.
90
Assets and Liabilities Measured at Fair Value on a Recurring Basis
As of December 31, 2020 and 2019, assets and liabilities measured at fair value on a recurring basis are as follows:
December 31, 2020
Assets:
Securities available for sale:
U.S. Treasury securities
U.S. government agency and sponsored agency
obligations:
Mortgage-backed securities
Collateralized mortgage obligations
Debt securities
Total U.S. government agency and sponsored
agency obligations
Total securities available for sale
Derivative financial instruments
Liabilities:
Derivative financial instruments
$
$
$
December 31, 2019
Assets:
Securities available for sale:
U.S. Treasury securities
U.S. government agency and sponsored agency
obligations:
Mortgage-backed securities
Collateralized mortgage obligations
Debt securities
Total U.S. government agency and sponsored
agency obligations
Total securities available for sale
$
Level 1
Quoted
Prices in
Active
Markets for
Identical
Assets
Level 2
Significant
Observable
Inputs with No
Active Market
with Identical
Characteristics
Level 3
Significant
Unobservable
Inputs
(in thousands)
Total Fair Value
$
10,132 $
— $
— $
10,132
—
—
—
—
10,132 $
— $
519,241
133,601
90,807
743,649
743,649 $
1,088 $
—
—
—
—
— $
— $
519,241
133,601
90,807
743,649
753,781
1,088
— $
1,149 $
— $
1,149
$
35,205 $
— $
— $
35,205
410,800
164,592
23,879
599,272
599,272 $
—
—
—
—
— $
410,800
164,592
23,879
599,272
634,477
—
—
—
—
35,205 $
91
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
As of December 31, 2020 and 2019, assets and liabilities measured at fair value on a non-recurring basis are as follows:
December 31, 2020
Assets:
Collateral dependent loans (1)
Other real estate owned
Repossessed personal property
December 31, 2019
Assets:
Collateral dependent loans (2)
Other real estate owned
Bank-owned premises
Total
$
$
63,114 $
2,360
857
31,049 $
63
1,900
Level 1
Prices in Active
Markets for
Identical Assets
Level 2
Observable
Inputs with No
Active Market
with Identical
Characteristics
(in thousands)
Level 3
Significant
Unobservable
Inputs
— $
—
—
— $
—
—
— $
—
—
— $
—
—
63,114
2,360
857
31,049
63
1,900
(1)
(2)
Consisted of real estate loans of $ 63.1 million, commercial and industrial loans of $ 41,000.
Consisted of real estate loans of $ 27.2 million and commercial and industrial loans of $ 3.9 million. $ 27.2 million was secured by real estate and $ 3.9 million was secured by personal property.
92
The following table represents quantitative information about Level 3 fair value comments for assets measured at fair value on a non-recurring basis at December 31,
2020 and 2019:
December 31, 2020
Collateral dependent loans:
Real estate loans:
Commercial property
Retail
Hospitality
Other
Construction
Residential/consumer loans
Total real estate loans
Commercial and industrial loans:
Commercial term
Total
Other real estate owned
Repossessed personal property
December 31, 2019
Collateral dependent loans:
Real estate loans:
Commercial property
Other
Construction
Total real estate loans
Commercial and industrial loans:
Commercial lines of credit
Total
Other real estate owned
Bank-owned premises
Fair Value
Valuation
Techniques
Unobservable
Input(s)
Range (Weighted
Average)
(in thousands)
6,330
20,612
8,410
24,854
2,867
63,073
41
63,114
Market approach
Market approach
Market approach
Market approach
Market approach
Market data comparison
Market data comparison
Market data comparison
Market data comparison
Market data comparison
(45)% to 35% / 14%
(3)
(55)% to 34% / 15% (2)
(20)% to 12% / (8)%
(13)% to 15% / 6% (2)
Market approach
Market data comparison
(9)% to 15% / 6% (2)
2,360
Market approach
Market data comparison
(35)% to 15% / (14)%
857
Market approach
Market data comparison
(4)
13,926
13,228
27,154
3,895
31,049
Market approach
Market approach
Market data comparison
Market data comparison
(1)
(3)% to 43% /21% (2)
Market approach
Market data comparison
(8)% to 42% /18% (2)
63
Market approach
Market data comparison
(3)
1,900
Market approach
Market data comparison
(30)% to 55% /(2)% (2)
$
$
$
$
$
$
(1)
(2)
The values were estimated by current market data comparison, supplemented by cost information. The properties compared when possible, with others for sale and that have sold in the general
time period. Adjustments are made for differences in equipment, size, cosmetics, conversions, originality, condition as well as sale terms and current economic conditions at time of sale.
Appraisal reports utilize a combination of valuation techniques including a market approach, where prices and other relevant information generated by market transactions involving similar or
comparable properties are used to determine the appraised value. Appraisals may include an ‘as is’ and ‘upon completion’ valuation scenarios. Adjustments are routinely made in the appraisal
process by third-party appraisers to adjust for differences between the comparable sales and income data. Adjustments also result from the consideration of relevant economic and demographic
factors with the potential to affect property values. Also, prospective values are based on the market conditions which exist at the date of inspection combined with informed forecasts based on
current trends in supply and demand for the property types under appraisal. Positive adjustments disclosed in this table represent increases to the sales comparison and negative adjustment
represent decreases.
93
(3)
(4)
No discount weighted average range available given primary valuation methodology is via discounted cash flow analysis (DCF) for going concern properties.
The equipment is usually too low in value to use a professional appraisal service. The values are determined internally using a combination of auction values, vendor recommendations and sales
comparisons depending on the equipment type. Some highly commoditized equipment, such as commercial trucks have services that provide industry values.
ASC 825, Financial Instruments, requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities
that are not measured and reported at fair value on a recurring basis or non-recurring basis. The methodologies for estimating the fair value of financial assets and financial
liabilities that are measured on a recurring basis or non-recurring basis are discussed above.
The estimated fair value of financial instruments has been determined by using available market information and appropriate valuation methodologies. However,
considerable judgment is required to interpret market data in order to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative
of the amounts that we could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
Effective January 1, 2018, the Company adopted ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (Topic 825). This
standard, among other provisions, requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes.
Other than certain financial instruments for which we have concluded that the carrying amounts approximate fair value, the fair value estimates shown below are based on an
exit price notion as of December 31, 2020 and 2019, as required by ASU 2016-01. The financial instruments for which we have concluded that the carrying amounts
approximate fair value include: cash and due from banks, accrued interest receivable and payable, and noninterest-bearing deposits.
The estimated fair values of financial instruments were as follows:
Financial assets:
Cash and due from banks
Securities available for sale
Loans held for sale
Loans receivable, net of allowance for credit
losses
Accrued interest receivable
Financial liabilities:
Noninterest-bearing deposits
Interest-bearing deposits
Borrowings and subordinated debentures
Accrued interest payable
Carrying
Amount
Level 1
Fair Value
Level 2
Level 3
December 31, 2020
(in thousands)
$
391,849 $
753,781
8,568
391,849 $
10,132
—
— $
743,649
9,270
4,789,742
16,363
1,898,766
3,376,242
268,972
4,564
94
—
16,363
—
—
—
4,564
—
—
1,898,766
—
151,714
—
—
—
—
4,755,302
—
—
3,380,179
118,809
—
Carrying
Amount
Level 1
Fair Value
Level 2
Level 3
December 31, 2019
(in thousands)
Financial assets:
Cash and due from banks
Securities available for sale
Loans held for sale
Loans receivable, net of allowance for credit
losses
Accrued interest receivable
Financial liabilities:
Noninterest-bearing deposits
Interest-bearing deposits
Borrowings and subordinated debentures
Accrued interest payable
$
121,678 $
634,477
6,020
121,678 $
35,205
—
— $
599,272
6,382
4,548,739
11,742
1,391,624
3,307,338
208,377
11,215
—
11,742
—
—
—
11,215
—
—
1,391,624
—
89,831
—
—
—
—
4,520,322
—
—
3,317,867
118,807
—
The methods and assumptions used to estimate the fair value of each class of financial instruments for which it was practicable to estimate that value are explained
below:
Cash and due from banks – The carrying amounts of cash and due from banks approximate fair value due to the short-term nature of these instruments (Level 1).
Securities – The fair value of securities, consisting of securities available for sale, is generally obtained from market bids for similar or identical securities, from
independent securities brokers or dealers, or from other model-based valuation techniques described above (Level 1 and 2).
Loans held for sale – Loans held for sale, representing the guaranteed portion of SBA loans, are carried at the lower of aggregate cost or fair market value, as
determined based upon quotes, bids or sales contract prices (Level 2).
Loans receivable, net of allowance for credit losses – The fair value of loans receivable is estimated based on the discounted cash flow approach. To estimate the fair
value of the loans, certain loan characteristics such as account types, remaining terms, annual interest rates or coupons, interest types, past delinquencies, timing of principal and
interest payments, current market rates, loan-to-value ratios, loss exposures, and remaining balances are considered. Additionally, the Company’s prior charge-off rates and loss
ratios as well as various other assumptions relating to credit, interest, and prepayment risks are used as part of valuing the loan portfolio. Subsequently, the loans were
individually evaluated by sorting and pooling them based on loan types, credit risk grades, and payment types. Consistent with the requirements of ASU 2016-01 which was
adopted by the Company on January 1, 2018, the fair value of the Company's loans receivable is considered to be an exit price notion as of December 31, 2020 (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).
95
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 15 — Share-based Compensation
At December 31, 2020, we had two incentive plans; the 2007 Equity Compensation Plan (the “2007 Plan”) and the 2013 Equity Compensation Plan (the “2013 Plan”
and with 2007 Plan, the “Plans”).
The Company may provide awards of options, stock appreciation rights, restricted stock awards, restricted stock unit awards, shares granted as a bonus or in lieu of
another award, dividend equivalent, other stock-based award or performance award, together with any other right or interest to a participant. Plan participants include executives
and other employees, officers, directors, consultants and other persons who provide services to the Company or its related entities. Although no future stock options may be
granted, certain employees, directors and officers of Hanmi Financial and its subsidiaries still hold options to purchase Hanmi Financial common stock under the 2007 Plan.
Under the 2013 Plan, we may grant equity incentive awards for up to 1,500,000 shares of common stock. As of December 31, 2020, 263,523 shares were still available for
issuance under the 2013 Plan.
The table below provides the share-based compensation expense and related tax benefits for the periods indicated:
Share-based compensation expense
Related tax benefits
2020
Year Ended December 31,
2019
$
$
2,544
734
$
$
3,125
941
$
$
2018
3,515
984
As of December 31, 2020, unrecognized share-based compensation expense was $2.5 million with an average expected recognition period of 1.5 years.
2013 and 2007 Equity Compensation Plans
Stock Options
All stock options granted under the Plans have an exercise price equal to the fair market value of the underlying common stock on the date of grant. Stock options
granted generally vest based on three to five years of continuous service and expire ten years from the date of grant. New shares of common stock are issued or treasury shares
are utilized upon the exercise of stock options. There were no options granted during the three years ended December 31, 2020.
The following information under the Plans is presented for the periods indicated:
Fair value of options vested
Total intrinsic value of options exercised (1)
Cash received from options exercised
$
$
$
— $
— $
— $
— $
842 $
2,979 $
184
—
—
(1)
Intrinsic value represents the difference between the closing stock price on the exercise date and the exercise price, multiplied by the number of options.
2020
2019
2018
Year Ended December 31,
96
The following is a summary of stock option transactions under the Plans for the periods indicated:
Options outstanding at beginning of period
Options exercised
Options forfeited
Options expired
Options outstanding at end of period
Options exercisable at end of period
2020
Weighted-
Average
Exercise
Price Per
Share
Number of
Shares
156,438 $
— $
(30,500 ) $
— $
125,938 $
125,938 $
18.84
—
15.73
—
19.59
19.59
Year Ended December 31,
2019
Weighted-
Average
Exercise
Price Per
Share
2018
Weighted-
Average
Exercise
Price Per
Share
Number of
Shares
17.52
16.38
—
—
18.84
18.84
364,088 $
(25,750 ) $
— $
— $
338,338 $
$
338,338
17.86
22.06
—
—
17.52
17.52
Number of
Shares
$
338,338
$
(181,900 )
$
—
$
—
156,438
$
156,438 $
As of December 31, 2020, there was no unrecognized compensation cost related to nonvested stock options granted under the plan, and all stock options issued under
the plan had vested.
As of December 31, 2020, stock options outstanding under the Plans were as follows:
Options Outstanding
Options Exercisable
Intrinsic
Value
(1)
Number of
Shares
4,938
50,000
71,000
125,938
$
$
Weighted-
Average
Average
Exercise
Price Per
Share
—
—
—
—
$
$
12.54
16.43
22.31
19.59
Weighted-
Average
Remaining
Contractual
Life
1.95 years
2.66 years
3.84 years
Intrinsic
Value
(1)
Weighted-
Average
Exercise
Price Per
Share
Weighted-
Average
Remaining
Contractual
Life
—
—
—
$
$
1.95 years
2.66 years
3.84 years
12.54
16.43
22.31
19.59
Number of
Shares
$
4,938
50,000
71,000
125,938
$10.80 to $14.99
$15.00 to $19.99
$20.00 to $24.83
(1)
Intrinsic value represents the difference between the closing stock price on the last trading day of the period, which was $ 11.34 as of December 31, 2020, and the exercise price, multiplied by the
number of options. This value is presented in thousands.
Restricted Stock Awards
Restricted stock awards under the Plans become fully vested after a certain number of years or after certain performance criteria are met. Hanmi Financial becomes
entitled to an income tax deduction in an amount equal to the taxable income reported by the holders of the restricted shares when the restrictions are released and the shares are
issued. Restricted shares are forfeited if officers and employees terminate prior to the lapsing of restrictions. Forfeitures of restricted stock are treated as canceled shares.
97
The table below provides information for restricted stock awards under the 2013 Plan for the periods indicated:
2020
2019
2018
Weighted-
Average
Grant Date
Fair Value
Per Share
Number of
Shares
Number of
Shares
Weighted-
Average
Grant Date
Per Share
Number of
Shares
Restricted stock at beginning of period
Restricted stock granted
Restricted stock vested
Restricted stock forfeited
Restricted stock at end of period
296,201 $
125,896 $
(137,892 ) $
(40,497 ) $
243,708 $
22.91
8.51
24.68
16.55
15.60
304,595 $
181,204 $
(99,527 ) $
(90,071 ) $
296,201 $
21.98
22.05
27.56
13.78
22.91
317,783 $
156,771 $
(106,674 ) $
(63,285 ) $
304,595 $
Weighted-
Average
Grant Date
Fair Value
Per Share
21.09
25.02
27.11
15.38
21.98
As of December 31, 2020, there was $2.5 million of total unrecognized compensation cost related to nonvested shares granted under the Plan. The cost is expected to be
recognized over a weighted-average period of 1.5 years. The total fair value of shares vested during the years ended December 31, 2020, 2019 and 2018 was $1.4 million, $2.1
million, and $3.0 million, respectively.
During the twelve months ended December 31, 2020, the Company granted to members of executive management 23,937 performance stock units (PSUs) with a grant
date fair value of $231,000 from the 2013 Equity Compensation Plan. PSUs are similar to restricted stock awards, except the recipient does not receive the stock immediately,
but instead receives it in accordance to a vesting plan and distribution schedule after achieving required performance milestones and upon remaining with the Company for a
particular length of time. Each PSU that vests entitles the recipient to receive one share of the Company’s common stock on a specified issuance date.
Under the provisions of the plan, the PSUs vest into shares based on a three-year cliff vesting subject to achievement of a total shareholder return (TSR) performance
metric resulting in a grant date fair value of $9.65 per share. The fair value of the performance PSUs at the grant date was determined using a Monte Carlo simulation method.
The number of PSUs subject to the TSR that ultimately vest at the end of the three-year vesting performance period, if any, will be based on the relative rank of the Company’s
TSR among the TSRs of a peer group of 51 regional banks. Although the recipient does receive dividend equivalent rights for any dividends paid during the performance
period based on the target shares granted, no stockholder rights, including voting, or liquidation rights will be conferred upon the recipient until becoming the record holder of
those shares.
Compensation expense for these units is based on the fair value of the grants at the grant date and is straight-lined over the vesting period. As of the twelve months
ended December 31, 2020 total compensation expense for the PSUs was $32,000. The total fair value of the PSUs at December 31, 2020 was $271,000.
98
Note 16 — Earnings per Share
The following table is a reconciliation of the components used to derive basic and diluted EPS for the periods indicated:
Year Ended December 31, 2020
Basic EPS
Net income
Less: income allocated to unvested restricted stock
Basic EPS
Effect of dilutive securities - options and unvested restricted stock
Diluted EPS
Net income
Less: income allocated to unvested restricted stock
Diluted EPS
Year Ended December 31, 2019
Basic EPS
Net income
Less: income allocated to unvested restricted stock
Basic EPS
Effect of dilutive securities - options and unvested restricted stock
Diluted EPS
Net income
Less: income allocated to unvested restricted stock
Diluted EPS
Year Ended December 31, 2018
Basic EPS
Net income
Less: income allocated to unvested restricted stock
Basic EPS
Effect of dilutive securities - options and unvested restricted stock
Diluted EPS
Net income
Less: income allocated to unvested restricted stock
Diluted EPS
Net
Income
(Numerator)
Weighted-
Average
Shares
(Denominator)
Per
Share
Amount (1)
$
$
$
$
$
$
$
$
$
$
$
$
42,196
532
41,664
—
42,196
532
41,664
32,788
230
32,558
—
32,788
230
32,558
57,868
359
57,509
—
57,868
359
57,509
30,280,415 $
30,280,415
30,280,415 $
—
30,280,415 $
30,280,415
30,280,415 $
30,725,376 $
30,725,376
30,725,376 $
35,046
30,760,422 $
30,760,422
30,760,422 $
31,924,863 $
31,924,863
31,924,863 $
126,470
32,051,333 $
32,051,333
32,051,333 $
1.39
0.02
1.38
—
1.39
0.02
1.38
1.07
0.01
1.06
—
1.07
0.01
1.06
1.81
0.01
1.80
—
1.80
0.01
1.79
(1)
Per share amounts may not be able to be recalculated using net income and weighted-average shares presented above due to rounding.
There were no anti-dilutive options outstanding for the years ended December 31, 2020, 2019 and 2018.
99
Note 17 — Employee Benefits
401(k) Plan
We have a 401(k) plan for the benefit of substantially all of our employees. We match 75 percent of participant contributions to the 401(k) plan up to 8 percent of each
401(k) plan participant’s annual compensation. Contributions to the 401(k) plan were $2.4 million for all years ended December 31, 2020, 2019 and 2018, respectively.
Personal Paid Time Off
Full time employees of the Bank are provided a benefit for personal paid time off for vacation and sick time based on their length of employment. As of December 31,
2020 and 2019, the accrued expense liability for personal paid time off was $3.1 million and $2.5 million, respectively.
Bank-Owned Life Insurance
As of December 31, 2020 and 2019, the cash surrender value of bank-owned life insurance was $53.9 million and $52.8 million, respectively. The Bank is the main
beneficiary under the policy, although certain employees named on the policy are eligible for their heirs to be paid upon their death. In the event of the death of a covered
officer, we will receive the specified insurance benefit from the insurance carrier.
Note 18 — Commitments and Contingencies
In the normal course of business, we are involved in various legal claims. Management has reviewed all legal claims against us with in-house or outside legal counsel
and has taken into consideration the views of such counsel as to the outcome of the claims. In management’s opinion, the final disposition of all such claims will not have a
material adverse effect on our financial position or results of operations.
Note 19 — Off-Balance Sheet Commitments
The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial
instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk similar to
the risk involved with on-balance sheet items recognized in the Consolidated Balance Sheets and may expire without ever being utilized.
The Bank’s exposure to loan losses in the event of non-performance by the other party to commitments to extend credit and standby letters of credit is represented by
the contractual notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for extending loan
facilities to customers. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon
extension of credit, was based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, premises and
equipment, and income-producing or borrower-occupied properties.
The following table shows the distribution of undisbursed loan commitments as of the dates indicated:
Commitments to extend credit
Standby letters of credit
Commercial letters of credit
Total undisbursed loan commitments
December 31,
2020
2019
(in thousands)
453,900
47,169
54,547
555,616
$
$
371,287
31,372
11,133
413,792
$
$
100
The allowance for credit losses related to off-balance sheet items is maintained at a level believed to be sufficient to absorb probable losses related to these unfunded
credit facilities. The determination of the allowance adequacy is based on periodic evaluations of the unfunded credit facilities including an assessment of the probability of
commitment usage, credit risk factors for loans outstanding to these same customers, and the terms and expiration dates of the unfunded credit facilities. Net adjustments to the
allowance for credit losses related to off-balance sheet items are included in other operating expenses.
Activity in the allowance for credit losses related to off-balance sheet items was as follows for the periods indicated:
Balance at beginning of period
Adjustment related to adoption of ASU 2016-13
Adjusted balance
Provision expense for credit losses
Balance at end of period
Note 20 — Derivative Financial Instruments
2020
As of and for the Year Ended December 31,
2019
(in thousands)
2018
$
$
$
2,397
(335 )
2,062
730
2,792
$
$
1,439
—
1,439
958
2,397
$
$
1,296
—
1,296
143
1,439
The Company’s derivative financial instruments consist entirely of interest rate swap agreements between the Company and its customers and other third party
counterparties. The Company enters into “back to back swap” arrangements whereby the Company executes interest rate swap agreements with its customers and acquires an
offsetting swap position from a third party counterparty. These derivative financial statements are accounted for at fair value, with changes in fair value recognized in the
Company’s Consolidated Statements of Income.
The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Balance Sheet as of December 31, 2020.
No such instruments were outstanding as of December 31, 2019.
Notional
Amount
Derivative Assets
As of December 31, 2020
Balance Sheet
Location
Fair
Value
As of December 31, 2019
Fair
Value
Balance Sheet
Location
Notional
Amount
As of December 31, 2020
Fair
Value
Balance Sheet
Location
As of December 31, 2019
Fair
Value
Balance Sheet
Location
Derivative Liabilities
(in thousands)
Derivatives not designated as hedging
instruments
Interest rate products
Total derivatives not designated as
hedging instruments
$
66,904
Other Assets
$
1,088
Other Assets
N/A $
66,904
Other Liabilities
$
1,149
Other Liabilities
$
1,088
N/A
$
1,149
N/A
N/A
The table below presents the effect of the Company’s derivative financial instruments that are not designated as hedging instruments on the Income Statement as of
December 31, 2020. No such instruments were outstanding as of December 31, 2019.
Derivatives Not Designated as Hedging Instruments under Subtopic 815-20
Location of Gain or (Loss)
Recognized in Income on
Derivative
Amount of Gain or (Loss)
Recognized in Income on
Derivative
Year Ended December 31, 2020
(in thousands)
Interest rate products
Total
Other income
$
$
(61 )
(61 )
Fee income recognized from the Company's derivative financial instruments for the twelve months ended December 31, 2020 was $1.1 million.
101
The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives as of December 31, 2020. The net amounts
of derivative assets or liabilities can be reconciled to the tabular disclosure of fair value. The tabular disclosure of fair value provides the location that derivative assets and
liabilities are presented on the Balance Sheet.
Offsetting of Derivative Assets
As of December 31, 2020
Gross Amounts of
Recognized Assets
Gross Amounts Offset
in the Statement of
Financial Position
Net Amounts of
Assets presented
in the Statement
of Financial
Position
Financial Instruments
Cash
Collateral
Received
Net Amount
Gross Amounts Not Offset in the Statement of Financial Position
Derivatives
$
1,088 $
— $
(in thousands)
1,088 $
1,088 $
— $
1,088
Offsetting of Derivative Liabilities
As of December 31, 2020
Gross Amounts of
Recognized Liabilities
Gross Amounts Offset
in the Statement of
Financial Position
Gross Amounts Not Offset in the Statement of Financial Position
Net Amounts of
Liabilities
presented in the
Statement of
Financial Position Financial Instruments
Cash
Collateral
Provided
Net Amount
Derivatives
$
1,149 $
— $
(in thousands)
1,149 $
— $
1,150 $
(1 )
The Company has agreements with each of its derivative counterparties that contain a provision where 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 December 31, 2020, 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 $1.1 million. As of December 31, 2020, the Company had posted $1.2 million of collateral related to these agreements and is essentially over-
collateralized since its net liability position is $61,000 ($1.1 million fair value of assets less $1.1 million fair value of liabilities) as of the end of the period. If the Company had
breached any of the provisions described above at December 31, 2020, it could have been required to settle its obligations under the agreements at their termination value of
$1.1 million.
Note 21 — Qualified Affordable Housing Project Investments
The Company invests in qualified affordable housing projects. At December 31, 2020 and 2019, the balance of the investment for qualified affordable housing projects
was $7.8 million and $9.6 million, respectively. This balance is reflected in prepaid expenses and other assets on the consolidated balance sheets. Total unfunded commitments
related to the investments in qualified affordable housing projects aggregated $84,000 and $112,000 at December 31, 2020 and 2019, respectively. The Company expects to
fulfill these commitments during the year ending 2023.
During the years ended December 31, 2020 and 2019, the Company recognized amortization expense of $1.8 million and $2.0 million, respectively, which was
included within income tax expense on the consolidated statements of income.
102
Note 22 — Liquidity
Hanmi Financial
At December 31, 2020 and 2019, Hanmi Financial had $17.3 million and $17.1 million, respectively, in cash on deposit with its bank subsidiary. Management believes
that Hanmi Financial, on a stand-alone basis, had adequate liquid assets to meet its current debt obligations.
Hanmi Bank
The principal objective of our liquidity management program is to maintain the Bank’s ability to meet the day-to-day cash flow requirements of our customers who
either wish to withdraw funds or to draw upon credit facilities to meet their cash needs. Management believes that the Bank, on a stand-alone basis, has adequate liquid assets to
meet its current obligations. The Bank’s primary funding source will continue to be deposits originating from its branch platform. The Bank’s wholesale funds historically
consisted of FHLB advances and brokered deposits. As of December 31, 2020 and 2019, the Bank had $150.0 million and $90.0 million of FHLB advances and $193.7 million
and $264.2 million of brokered deposits, respectively.
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 percent of its assets. As of December 31, 2020, the total borrowing capacity available based on pledged collateral and the
remaining available borrowing capacity were $1.73 billion and $1.44 billion, respectively, compared to $1.11 billion and $878.4 million, respectively, as of December 31, 2019.
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 advance rates for
qualifying collateral may be adjusted upwards or downwards by the FHLB from time to time. To the extent deposit renewals and deposit growth are not sufficient to fund
maturing and withdrawable deposits, repay maturing borrowings, fund existing and future loans, leases and securities, and otherwise fund working capital needs and capital
expenditures, the Bank may utilize the remaining borrowing capacity from its FHLB borrowing arrangement.
As a means of augmenting its liquidity, the Bank had an available borrowing source of $26.3 million from the Federal Reserve Discount Window, to which the Bank
pledged securities with a carrying value of $27.3 million, and had no borrowings as of December 31, 2020. 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 December 31, 2020.
Note 23 — Condensed Financial Information of Parent Company
Balance Sheets
Assets
Liabilities and stockholders' equity
Cash
Investments in consolidated subsidiaries
Other assets
Total assets
Liabilities
Subordinated debentures
Other liabilities
Total liabilities
Stockholders' equity
Total liabilities and stockholders' equity
103
Year Ended December 31,
2019
2020
(in thousands)
$
$
$
$
17,266
679,455
995
697,716
118,972
1,701
120,673
577,043
697,716
$
$
$
$
17,105
658,464
7,511
683,080
118,377
1,436
119,813
563,267
683,080
Statements of Income
Dividends from bank subsidiaries
Interest expense
Other expense
Income before taxes and undistributed income of subsidiary
Income tax benefit
Income before undistributed income of subsidiary
Equity in undistributed income of subsidiary
Net income
Statements of Cash Flows
Cash Flows from Operating Activities:
Net income
Adjustments to reconcile net income to net cash used in operating activities
Undistributed income of subsidiary
Amortization of subordinated debentures
Share-based compensation expense
Change in other assets and liabilities
Net cash provided by (used in) operating activities
Cash Flows from Financing Activities:
Proceeds from exercise of stock options
Cash paid for repurchase of vested shares due to employee tax liability
Repurchase of common stock
Cash dividends paid
Net cash provided by (used in) financing activities
Net increase (decrease) in cash
Cash at beginning of year
Cash at end of year
2020
Year Ended December 31,
2019
(in thousands)
2018
$
$
16,986
(6,607 )
(4,892 )
5,487
3,247
8,734
33,463
42,197
$
$
44,500
(7,032 )
(5,333 )
32,135
3,823
35,958
(3,170 )
32,788
$
$
76,669
(6,925 )
(5,988 )
63,756
4,116
67,872
(10,004 )
57,868
2020
Year Ended December 31,
2019
(in thousands)
2018
$
42,197
$
32,788
$
57,868
(33,463 )
595
2,544
6,779
18,651
—
(335 )
(2,196 )
(15,959 )
(18,489 )
162
17,105
17,266
$
3,170
569
3,125
4,679
44,331
2,979
(517 )
(7,362 )
(29,776 )
(34,676 )
9,655
7,450
17,105
$
10,004
538
3,515
(10,463 )
61,462
570
(680 )
(36,068 )
(30,921 )
(67,099 )
(5,637 )
13,087
7,450
$
104
Note 24 — Quarterly Financial Data (Unaudited)
Summarized quarterly financial data is shown in the following tables:
2020:
Interest and dividend income
Interest expense
Net interest income before credit loss expense
Credit loss expense
Noninterest income
Noninterest expense
Income before tax
Income tax expense
Net income
Basic earnings per share
Diluted earnings per share
2019:
Interest and dividend income
Interest expense
Net interest income before credit loss expense
Credit loss expense
Noninterest income
Noninterest expense
Income before tax
Income tax expense
Net income
Basic earnings per share
Diluted earnings per share
Note 25 — Revenue Recognition
March 31
June 30
September 30
December 31
Quarter Ended
$
$
$
$
58,925
14,950
43,975
15,739
6,223
31,068
3,391
1,041
2,350
0.08
0.08
$
$
$
$
55,736
11,294
44,442
24,594
20,931
27,138
13,641
4,466
9,175
0.30
0.30
$
$
$
$
54,846
9,241
45,605
38
7,140
29,924
22,783
6,439
16,344
0.53
0.53
$
$
$
$
54,359
7,482
46,877
5,083
8,809
30,923
19,680
5,354
14,326
0.47
0.47
March 31
June 30
September 30 December 31
Quarter Ended
$
$
$
$
62,414
17,526
44,888
1,117
6,254
29,065
20,960
6,288
14,672
0.48
0.48
$
$
$
$
61,482
18,492
42,990
16,699
7,729
30,144
3,876
1,220
2,656
0.09
0.09
$
$
$
$
62,177
18,119
44,058
1,602
6,860
32,607
16,709
4,333
12,377
0.40
0.40
$
$
$
$
60,699
16,763
43,936
10,752
6,709
34,089
5,804
2,720
3,084
0.10
0.10
The Company adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606), as of January 1, 2018. ASU 2014-09 established a principles-based
approach to recognizing revenue that applies to all contracts other than those covered by other authoritative U.S. GAAP guidance. Quantitative and qualitative disclosures
regarding the nature, amount, timing and uncertainty of revenue and cash flows are also required. The standard’s core principle is that a company shall recognize revenue when
it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or
services. In doing so, companies generally are required to use more judgment and make more estimates than under prior guidance. These may include identifying performance
obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance
obligation.
Since the guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under GAAP, the new
guidance did not have an impact on revenue most closely associated with our financial instruments, including interest income and expense. The Company completed its overall
assessment of revenue streams and review of related contracts potentially affected by the ASU, including revenue streams associated with our noninterest income. Based on this
assessment, the Company concluded that ASU 2014-09 did not change the method in which the Company currently recognizes revenue for these revenue streams.
105
The Company's noninterest income primarily includes service charges on deposit accounts, trade finance and other service charges and fees, servicing income, bank-
owned life insurance income and gains or losses on sale of SBA loans and securities. Based on our assessment of revenue streams related to the Company's noninterest income,
we concluded that the Company's performance obligations for such revenue streams are typically satisfied as services are rendered. If applicable, the Company records contract
liabilities, or deferred revenue, when payments from customers are received or due in advance of providing services to customers and records contract assets when services are
provided to customers before payment is received or before payment is due. The Company’s noninterest revenue streams are largely based on transactional activities and since
the Company generally receives payments for its services during the period or at the time services are provided, there are no contract asset or receivable balances as of
December 31, 2020 and 2019. Consideration is often received immediately or shortly after the Company satisfies its performance obligations and revenue is recognized.
The Company also completed its evaluation of certain costs related to these revenue streams to determine whether such costs should be presented as expenses or contra-
revenue (i.e., gross versus net) and concluded that our Consolidated Statements of Income do not include any revenue streams that are impacted by such gross versus net
provisions of the new standard. The Company adopted ASU 2014-09 and its related amendments on its required effective date of January 1, 2018 utilizing the modified
retrospective approach. Since there was no impact upon adoption of this new standard, a cumulative effect adjustment to opening retained earnings was not necessary.
Note 26 — Subsequent Events
Management has evaluated subsequent events through the date of issuance of the financial data included herein. There have been no subsequent events that occurred
during such period that would require disclosure in this Annual Report on Form 10-K or would be required to be recognized in the Consolidated Financial Statements as of
December 31, 2020.
106
Exhibit
Number
3.1
3.2
3.3
3.4
4.1
4.2
4.3
4.4
4.5
4.6
4.7
10.1
10.2
10.3
Hanmi Financial Corporation and Subsidiary
Exhibit Index
Document
Amended and Restated Certificate of Incorporation of Hanmi Financial Corporation, dated April 19, 2000 (incorporated by reference herein from Exhibit
3.1 to Hanmi Financial’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2010, filed with the SEC on November 9, 2010).
Certificate of Amendment of Amended and Restated Certificate of Incorporation of Hanmi Financial Corporation, dated December 16, 2011 (incorporated
by reference herein from Exhibit 3.1 to Hanmi Financial’s Current Report on Form 8-K, filed with the SEC on December 19, 2011).
Second Amended and Restated Bylaws of Hanmi Financial Corporation, dated as of March 23, 2016 (incorporated by reference herein from Exhibit 3.1 to
Hanmi Financial’s Current Report on Form 8-K, filed with the SEC on March 29, 2016).
First Amendment to the Second Amended and Restated Bylaws of Hanmi Financial Corporation (incorporated by reference herein from Exhibit 3.1 to
Hanmi Financial’s Current Report on Form 8-K, filed with the SEC on October 2, 2017).
Specimen Stock Certificate representing Hanmi Financial Corporation Common Stock (incorporated by reference herein from Exhibit 4 to Hanmi
Financial’s Annual Report on Form 10-K for the year ended December 31, 2010, filed with the SEC on March 16, 2011).
Central Bancorp Statutory Trust I Junior Subordinated Indenture, dated as of December 27, 2005, entered into between Central Bancorp, Inc. and JPMorgan
Chase Bank, National Association as Trustee (incorporated by reference herein from Exhibit 10.1 to Hanmi Financial’s Annual Report on Form 10-K for
the year ended December 31, 2015, filed with the SEC on February 29, 2016).
Amended and Restated Declaration of Trust of Central Bancorp Statutory Trust I, dated as of December 27, 2005, among Central Bancorp, Inc., JPMorgan
Chase Bank, National Association, and the Administrative Trustees Named Therein (incorporated by reference herein from Exhibit 10.2 to Hanmi
Financial’s Annual Report on Form 10-K for the year ended December 31, 2015, filed with the SEC on February 29, 2016).
Central Bancorp Statutory Trust I Trust Preferred Securities Guarantee Agreement, dated as of December 27, 2005, entered into between Central Bancorp,
Inc., as Guarantor, and JPMorgan Chase Bank, National Association, as Guarantee Trustee (incorporated by reference herein from Exhibit 10.3 to Hanmi
Financial’s Annual Report on Form 10-K for the year ended December 31, 2015, filed with the SEC on February 29, 2016).
Subordinated Indenture, dated as of March 21, 2017, by and between Hanmi Financial Corporation and Wilmington Trust, National Association, as Trustee
(incorporated by reference herein from Exhibit 4.1 to Hanmi Financial Corporation’s Current Report on Form 8-K, filed with the SEC on March 21, 2017).
First Supplemental Indenture, dated as of March 21, 2017, by and between Hanmi Financial Corporation and Wilmington Trust, National Association, as
Trustee (incorporated by reference herein from Exhibit 4.2 to Hanmi Financial Corporation’s Current Report on Form 8-K, filed with the SEC on March 21,
2017).
Description of Registrant’s Capital Stock (incorporated by reference herein from Exhibit 4.7 to Hanmi Financial’s Annual Report on Form 10-K for the
year ended December 31, 2019, filed with the SEC on March 2, 2020).
Form of Indemnity Agreement (incorporated by reference herein from Exhibit 10.35 to Hanmi Financial's Annual Report on Form 10-K for the year ended
December 31, 2010, filed with the SEC on March 16, 2011).
Hanmi Financial Corporation 2007 Equity Compensation Plan (incorporated by reference herein from Hanmi Financial’s Current Report on Form 8-K, filed
with the SEC on June 26, 2007). †
Form of Notice of Stock Option Grant and Agreement Pursuant to 2007 Equity Compensation Plan (incorporated by reference herein from Hanmi
Financial’s Annual Report on Form 10-K/A for the year ended December 31, 2008, filed with the SEC on April 9, 2009). †
107
10.4
10.5
10.6
10.7
10.8
10.9
10.10
21.1
23.1
23.2
31.1
31.2
32.1
32.2
Form of Notice of Grant and Restricted Stock Agreement Pursuant to 2007 Equity Compensation Plan (incorporated by reference herein from Hanmi
Financial’s Annual Report on Form 10-K/A for the year ended December 31, 2008, filed with the SEC on April 9, 2009). †
Hanmi Financial Corporation Amended and Restated 2013 Equity Compensation Plan (incorporated by reference herein from Exhibit 4.2 to Hanmi
Financial Corporation’s Registration Statement on Form S-8 (No. 333-191855), filed with the SEC on October 23, 2013).†
Form of Incentive Stock Option Agreement (incorporated by reference herein from Exhibit 4.3 to Hanmi Financial Corporation’s Registration Statement on
Form S-8 (No. 333-191855), filed with the SEC on October 23, 2013).†
Form of Non-Qualified Stock Option Agreement (incorporated by reference herein from Exhibit 4.4 to Hanmi Financial Corporation’s Registration
Statement on Form S-8 (No. 333-191855), filed with the SEC on October 23, 2013).†
Form of Restricted Stock Agreement (incorporated by reference herein from Exhibit 4.5 to Hanmi Financial Corporation’s Registration Statement on Form
S-8 (No. 333-191855), filed with the SEC on October 23, 2013).†
Amended and Restated Employment Agreement by and among Hanmi Financial Corporation, Hanmi Bank and Bonita I. Lee dated February 26, 2020
(incorporated by reference herein from Exhibit 10.9 to Hanmi Financial's Annual Report on Form 10-K for the year ended December 31, 2019, filed with
the SEC on March 2, 2020).†
Amended and Restated Employment Agreement by and among Hanmi Financial Corporation, Hanmi Bank and Romolo C. Santarosa dated February 26,
2020 (incorporated by reference herein from Exhibit 10.10 to Hanmi Financial's Annual Report on Form 10-K for the year ended December 31, 2019, filed
with the SEC on March 2, 2020).†
List of Subsidiaries
Consent of Independent Registered Public Accounting Firm - Consent of Crowe LLP.
Consent of Independent Registered Public Accounting Firm - Consent of KPMG LLP.
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act, as amended, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief 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.
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
Inline XBRL Instance Document *
101.SCH
Inline XBRL Taxonomy Extension Schema Document *
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document *
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document *
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document *
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document *
104
†
*
The cover page from the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, has been formatted in Inline XBRL
Constitutes a management contract or compensatory plan or arrangement.
Attached as Exhibit 101 to this report are documents formatted in Inline XBRL (Extensible Business Reporting Language).
108
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the
Signatures
undersigned, thereunto duly authorized.
Date: March 1, 2021
Hanmi Financial Corporation
By:
/s/ Bonita I. Lee
Bonnie Lee
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the
capacities indicated as of March 1, 2021.
/s/ Bonita I. Lee
Bonnie Lee
Chief Executive Officer; Director
(Principal Executive Officer)
/s/ Patrick Carr
Patrick Carr
Senior Vice President and Chief Accounting Officer
(Principal Accounting Officer)
/s/ Kiho Choi
Kiho Choi
Director
/s/ Harry H. Chung
Harry H. Chung
Director
/s/ Thomas J. Williams
Thomas J. Williams
Director
/s/ Scott R. Diehl
Scott R. Diehl
Director
/s/ Romolo C. Santarosa
Romolo C. Santarosa
Senior Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ John J. Ahn
John J. Ahn
Chairman of the Board
/s/ Christine K. Chu
Christie K. Chu
Director
/s/ David L. Rosenblum
David L. Rosenblum
Director
/s/ Michael M. Yang
Michael M. Yang
Director
/s/ Gideon Yu
Gideon Yu
Director
109
Name of Subsidiary
Hanmi Bank
Central Bancorp Statutory Trust
Jurisdiction of Incorporation or Organization
California
Texas
Hanmi Financial Corporation
List of Subsidiaries
Exhibit 21.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 23.1
We consent to the incorporation by reference in Registration Statements No. 333-149858 and No. 333-191855 on Form S-8 and No. 333-164690, No. 333-
216668, and No. 333-251393 on Form S-3 of Hanmi Financial Corporation of our report dated March 1, 2021 relating to the financial statements and
effectiveness of internal control over financial reporting, appearing in this Annual Report on Form 10-K.
/s/ Crowe LLP
Los Angeles, California
March 1, 2021
Consent of Independent Registered Public Accounting Firm
Exhibit 23.2
The Board of Directors
Hanmi Financial Corporation:
We consent to the incorporation by reference in the registration statement (Nos. 333-164690, 333-216668 and 333-251393) on Form S-3 and (Nos. 333-
149858 and 333-191855) on Form S-8 of Hanmi Financial Corporation of our report dated March 1, 2019, with respect to the consolidated statements of
income, comprehensive income, changes in stockholders’ equity, and cash flows of Hanmi Financial Corporation and subsidiaries for the year ended
December 31, 2018, and the related notes (collectively, the consolidated financial statements), which report appears in the December 31, 2020 annual report
on Form 10‑K of Hanmi Financial Corporation.
/s/ KPMG LLP
Los Angeles, California
March 1, 2021
Certification of Principal Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.1
I, Bonita I. Lee, President and Chief Executive Officer, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Hanmi Financial Corporation;
2. Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Report;
3. Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all material respects the financial condition,
results of operations and cash flows of the Registrant as of, and for, the periods presented in this Report;
4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-
15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this Report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
(c) evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this Report based on such evaluation; and
(d) disclosed in this Report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the
Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal
control over financial reporting; and
5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors
and the Audit Committee of the Registrant’s Board of Directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely
affect the Registrant’s ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial
reporting.
Date:
March 01, 2021
/s/ Bonita I. Lee
Bonita I. Lee
President and Chief Executive Officer
(Principal Executive Officer)
Certification of Principal Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2
I, Romolo C. Santarosa, Senior Executive Vice President and Chief Financial Officer, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Hanmi Financial Corporation;
2. Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Report;
3. Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all material respects the financial condition,
results of operations and cash flows of the Registrant as of, and for, the periods presented in this Report;
4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-
15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this Report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
(c) evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this Report based on such evaluation; and
(d) disclosed in this Report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the
Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal
control over financial reporting; and
5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors
and the Audit Committee of the Registrant’s Board of Directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely
affect the Registrant’s ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial
reporting.
Date:
March 01, 2021
/s/ Romolo C. Santarosa
Romolo C. Santarosa
Senior Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
Certification Pursuant To
18 U.S.C. Section 1350,
As Adopted Pursuant To
Section 906 of The Sarbanes-Oxley Act of 2002
Exhibit 32.1
In connection with the Quarterly Report of Hanmi Financial Corporation (the “Company”) on Form 10-K for the period ended December 31, 2020, as filed with the
Securities and Exchange Commission (the “SEC”) on the date hereof (the “Report”), I, Bonita I. Lee, President and Chief Executive Officer of the Company, certify pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge that:
(1)
(2)
The Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of, and
for, the period presented.
Date:
March 01, 2021
/s/ Bonita I. Lee
Bonita I. Lee
President and Chief Executive Officer
The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure statement.
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the SEC or its staff
upon request.
Certification Pursuant To
18 U.S.C. Section 1350,
As Adopted Pursuant To
Section 906 of The Sarbanes-Oxley Act of 2002
Exhibit 32.2
In connection with the Quarterly Report of Hanmi Financial Corporation (the “Company”) on Form 10-K for the period ended December 31, 2020, as filed with the
Securities and Exchange Commission (the “SEC”) on the date hereof (the “Report”), I, Romolo C. Santarosa, Senior Executive Vice President and Chief Financial Officer of the
Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge that:
(1)
(2)
The Report fully complies with the requirements of Section13(a) or Section 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of, and
for, the periods presented.
Date:
March 01, 2021
/s/ Romolo C. Santarosa
Romolo C. Santarosa
Senior Executive Vice President and Chief Financial Officer
The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure statement.
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the SEC or its staff
upon request.