Hanmi Financial (HAFC) - 2023 Q1 - Quarterly Report

Part I – Financial Information Item 1. Financial Statements This section presents Hanmi Financial Corporation's unaudited consolidated financial statements and detailed notes for the periods ended March 31, 2023 Consolidated Balance Sheets As of March 31, 2023, total assets increased to $7.43 billion from $7.38 billion at year-end 2022, driven by increases in cash and securities, while total deposits saw a slight increase to $6.20 billion, and total stockholders' equity grew to $662.2 million from $637.5 million, primarily due to net income and a reduction in accumulated other comprehensive loss Consolidated Balance Sheet Highlights (Unaudited) | Balance Sheet Item | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | | :--- | :--- | :--- | | Total Assets | $7,434,130 | $7,378,262 | | Loans receivable, net | $5,908,209 | $5,895,610 | | Total Deposits | $6,201,038 | $6,168,072 | | Total Liabilities | $6,771,965 | $6,740,747 | | Total Stockholders' Equity | $662,165 | $637,515 | Consolidated Statements of Income For the first quarter of 2023, net income rose to $22.0 million from $20.7 million in the prior-year period, driven by a significant increase in net interest income to $57.9 million, partially offset by a $2.1 million credit loss expense compared to a $1.4 million recovery in Q1 2022, with diluted earnings per share increasing to $0.72 from $0.68 year-over-year Q1 2023 vs. Q1 2022 Income Statement Highlights (Unaudited) | Financial Metric | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | | :--- | :--- | :--- | | Net Interest Income | $57,853 | $50,956 | | Credit Loss Expense (Recovery) | $2,133 | $(1,375) | | Net Income | $21,991 | $20,695 | | Diluted Earnings Per Share | $0.72 | $0.68 | Consolidated Statements of Cash Flows For the three months ended March 31, 2023, net cash provided by operating activities was $36.1 million, with net cash used in investing activities at $27.4 million and net cash provided by financing activities at $25.0 million, resulting in a net increase in cash and due from banks of $33.8 million Cash Flow Summary (Unaudited) | Cash Flow Activity | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $36,128 | $20,134 | | Net cash used in investing activities | $(27,395) | $(206,884) | | Net cash provided by (used in) financing activities | $25,047 | $(109,724) | | Net increase (decrease) in cash | $33,780 | $(296,474) | Notes to Consolidated Financial Statements The notes provide detailed information on the company's financial position and performance, covering securities, loan portfolio, deposit composition, and regulatory capital, highlighting unrealized losses, increased nonperforming loans, and a strong capital position - The securities portfolio had gross unrealized losses of $111.7 million as of March 31, 2023. However, the company does not expect to realize credit losses as it has the ability and intent to hold these securities, which are primarily U.S. government-backed[29][31] - Total loans receivable stood at $5.98 billion as of March 31, 2023, with commercial real estate loans comprising the largest segment at $3.67 billion (61.4% of total loans)[33] - Nonperforming loans increased to $20.1 million at March 31, 2023, from $9.8 million at year-end 2022, raising the nonperforming loans to total loans ratio to 0.34% from 0.17%[54] - As of March 31, 2023, time deposits exceeding the $250,000 FDIC insurance limit amounted to $1.05 billion[64] - Both Hanmi Financial Corporation and Hanmi Bank exceeded all minimum regulatory capital requirements to be considered "well capitalized" as of March 31, 2023[80][83] - On April 27, 2023, the Board of Directors declared a quarterly cash dividend of $0.25 per share[138] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the financial results for Q1 2023, highlighting a year-over-year increase in net income to $22.0 million, driven by higher net interest income, covering loan growth, deposit shifts, increased nonperforming assets, and the company's strong capital and liquidity position while managing interest rate risk Executive Overview Net income for Q1 2023 was $22.0 million ($0.72 per diluted share), up from $20.7 million ($0.68 per diluted share) in Q1 2022, primarily due to a $6.9 million increase in net interest income, partially offset by a $3.5 million swing from a credit loss recovery to an expense, with key balance sheet metrics showing stable loans and deposits and increased stockholders' equity Q1 2023 Financial Highlights | Metric | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Net Income | $22.0 million | $20.7 million | | Diluted EPS | $0.72 | $0.68 | | Return on Average Assets | 1.21% | N/A | | Return on Average Equity | 12.19% | N/A | Results of Operations Net interest income increased by $6.9 million year-over-year to $57.9 million, as higher yields on assets outpaced the rise in funding costs, expanding net interest margin to 3.28%, while a $2.1 million credit loss expense was recorded, noninterest income decreased slightly, and noninterest expense rose 3.5% on higher salary and benefit costs - Net interest income increased by $6.9 million YoY, driven by a $30.4 million increase in interest income, partially offset by a $23.5 million increase in interest expense[155] - The average yield on interest-earning assets increased by 150 basis points to 4.96% in Q1 2023, while the average cost of interest-bearing liabilities rose by 216 basis points to 2.85% YoY[157][159] - A credit loss expense of $2.1 million was recorded in Q1 2023, a reversal from a $1.4 million recovery in Q1 2022, primarily due to a $2.5 million specific reserve on a nonperforming commercial and industrial loan[160] - Noninterest expense increased by $1.1 million (3.5%) YoY, mainly due to a $2.9 million rise in salaries and employee benefits from merit increases and higher headcount[163] Financial Condition As of March 31, 2023, the company's financial condition remained stable, with the loan portfolio flat at $5.91 billion, an increase in nonperforming loans to $20.1 million, stable allowance for credit losses at 1.21% of loans, slight deposit growth to $6.20 billion with a shift to time deposits, and increased stockholders' equity to $662.2 million - Loans receivable were $5.91 billion, with $303.6 million in new loan production offset by payoffs and sales. The portfolio has significant concentration in 'Lessor of nonresidential buildings' (29.8%) and 'Hospitality' (11.8%)[168][174] - Nonperforming loans increased to $20.1 million (0.34% of loans) from $9.8 million (0.17% of loans) at year-end, driven by a $10.0 million C&I loan in the health-care industry[182] - The allowance for credit losses was $72.2 million, or 1.21% of loans receivable, compared to $71.5 million, or 1.20%, at December 31, 2022[192][194] - Total deposits increased by $33.0 million to $6.20 billion, with a shift from noninterest-bearing and money market accounts into time deposits. Uninsured deposits were $2.60 billion[198][199] Interest Rate Risk Management The company actively manages interest rate risk through simulation modeling, projecting that an immediate 100 basis point rate increase would raise net interest income by 2.27% over 12 months, while a decrease would lower it by 3.07%, with economic value of equity also showing sensitivity to rate changes Interest Rate Sensitivity Analysis (as of March 31, 2023) | Change in Interest Rate | % Change in Net Interest Income (1-12 Months) | % Change in Economic Value of Equity (EVE) | | :--- | :--- | :--- | | +300 bps | +6.24% | -4.05% | | +200 bps | +3.84% | -2.69% | | +100 bps | +2.27% | +0.07% | | -100 bps | -3.07% | -2.99% | | -200 bps | -6.92% | -9.25% | Capital Resources and Liquidity The company maintains a strong capital position, with all regulatory capital ratios exceeding "well-capitalized" standards, and the Board of Directors increased the quarterly dividend to $0.25 per share, reflecting stable financial condition and managed liquidity through deposit gathering and access to wholesale funding sources - At March 31, 2023, Hanmi Bank's capital ratios significantly exceeded the thresholds for being "well capitalized," with a Total risk-based capital ratio of 14.15% (vs. 10.00% minimum)[212] - The Board of Directors has progressively increased the quarterly cash dividend, reaching $0.25 per share for Q1 2023, reflecting improved company results and financial condition[210] - The company has access to significant liquidity, including $1.15 billion in remaining borrowing capacity from the FHLB as of March 31, 2023[123] Quantitative and Qualitative Disclosures about Market Risk This section refers to the 'Interest Rate Risk Management' discussion within the MD&A, detailing the company's primary market risk exposure to interest rate fluctuations and its use of simulation modeling to assess impacts on net interest income and economic value of equity - The company's primary market risk is interest rate risk. Disclosures and analysis are provided in the "Interest Rate Risk Management" section of the MD&A[218] Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of March 31, 2023, with no material changes to internal control over financial reporting during the first quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by this report (March 31, 2023)[219] - There were no changes in internal control over financial reporting during the quarter that materially affected, or are reasonably likely to materially affect, the company's internal controls[220] Part II – Other Information Legal Proceedings The company is party to litigation arising in the ordinary course of business, which management does not believe will have a material adverse impact on its financial condition, results of operations, or liquidity - Hanmi Financial and its subsidiaries are involved in routine litigation, which is not expected to have a material adverse financial impact[222] Risk Factors This section highlights new and heightened risks following recent banking industry failures, including negative impacts on stock price and depositor confidence, potential for realized losses on the securities portfolio, and erosion of customer confidence in the broader banking system - Recent bank failures (Silvergate, Silicon Valley Bank, Signature Bank) have created market volatility and questions about depositor confidence, which could negatively impact the company's stock price and operations[224] - Rapidly rising interest rates have created significant unrealized losses in the company's securities portfolio. A forced sale of these securities to meet liquidity needs could result in realized losses, impairing capital and profitability[226] - Eroded customer confidence in the banking system could lead to deposit outflows, adversely impacting the company's liquidity, funding capacity, and results of operations[227] Unregistered Sales of Equity Securities and Use of Proceeds The company did not repurchase any shares of its common stock under its publicly announced program during the first quarter of 2023, with 659,972 shares remaining available for future repurchase under the existing authorization Stock Repurchase Activity Q1 2023 | Period | Total Shares Purchased | Average Price Paid Per Share | Shares Remaining in Program | | :--- | :--- | :--- | :--- | | Jan 2023 | 0 | $— | 659,972 | | Feb 2023 | 0 | $— | 659,972 | | Mar 2023 | 0 | $— | 659,972 | | Total Q1 2023 | 0 | $— | 659,972 | - The Company acquired 14,628 shares from employees to satisfy tax withholding obligations related to vested stock awards, which are not part of the public repurchase program[229]