Hanmi Financial (HAFC) - 2023 Q2 - Quarterly Report

Part I – Financial Information Financial Statements The company's financial position remained stable with slight asset decrease, while net income declined in Q2 2023 due to higher interest expense, yet capital ratios stayed strong Consolidated Balance Sheets Total assets slightly decreased to $7.34 billion at June 30, 2023, primarily due to reduced borrowings, while stockholders' equity increased Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2023 (Unaudited) (in thousands) | December 31, 2022 (in thousands) | | :--- | :--- | :--- | | Total Assets | $7,344,924 | $7,378,262 | | Cash and due from banks | $344,907 | $352,421 | | Securities available for sale | $836,650 | $853,838 | | Loans receivable, net | $5,894,147 | $5,895,610 | | Total Liabilities | $6,676,364 | $6,740,747 | | Total deposits | $6,315,768 | $6,168,072 | | Borrowings | $125,000 | $350,000 | | Total Stockholders' Equity | $668,560 | $637,515 | Consolidated Statements of Income Net income for Q2 2023 decreased to $20.6 million due to a significant rise in interest expense, impacting net interest income Key Income Statement Data (in thousands, except per share data) | Metric | Q2 2023 (in thousands) | Q2 2022 (in thousands) | Six Months 2023 (in thousands) | Six Months 2022 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $55,422 | $59,044 | $113,276 | $110,000 | | Credit Loss Expense (Recovery) | $(77) | $1,596 | $2,056 | $220 | | Noninterest Income | $7,935 | $9,310 | $16,271 | $17,829 | | Noninterest Expense | $34,280 | $31,475 | $67,072 | $63,167 | | Net Income | $20,620 | $25,050 | $42,612 | $45,745 | | Diluted EPS ($) | $0.67 | $0.82 | $1.39 | $1.50 | Notes to Consolidated Financial Statements Notes provide detailed accounting policies, portfolio breakdowns, and credit quality, confirming the company's 'well capitalized' status despite increased nonperforming loans Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q2 2023 net income decline due to compressed net interest margin, stable loan portfolio, increased nonperforming loans, and sustained strong liquidity and capital - Net income for Q2 2023 was $20.6 million, or $0.67 per diluted share, a decrease from $25.1 million, or $0.82 per diluted share, in Q2 2022. The decline was primarily driven by a $3.6 million decrease in net interest income and a $2.8 million increase in noninterest expense[148] - For the six months ended June 30, 2023, net income was $42.6 million, or $1.39 per diluted share, compared to $45.7 million, or $1.50 per diluted share, for the same period in 2022. This decrease was mainly due to higher noninterest expense, increased credit loss expense, and lower noninterest income, partially offset by higher net interest income[149] Results of Operations Q2 2023 net interest income declined to $55.4 million due to surging interest expense, compressing net interest margin, while noninterest income and expense also saw notable changes Q2 2023 vs Q2 2022 Change in Net Interest Income (in thousands) | Component | Change due to Volume (in thousands) | Change due to Rate (in thousands) | Total Change (in thousands) | | :--- | :--- | :--- | :--- | | Total interest and dividend income | $4,138 | $23,412 | $27,550 | | Total interest expense | $1,234 | $29,938 | $31,172 | | Change in net interest income | $2,904 | $(6,526) | $(3,622) | - Noninterest income for Q2 2023 decreased by $1.4 million to $7.9 million, primarily due to a $1.9 million net loss on securities sales and a $1.6 million decrease in gain on SBA loan sales, partially offset by a $1.9 million legal settlement[176] - Noninterest expense for Q2 2023 increased by $2.8 million to $34.3 million, mainly driven by a $1.6 million increase in salaries and employee benefits due to merit increases and lower capitalized loan origination costs[179] Financial Condition The company's financial condition remained stable with $7.34 billion in total assets, flat loan portfolio, increased deposits, and significantly reduced borrowings - Loans receivable remained stable at $5.89 billion as of June 30, 2023. New loan production of $562.9 million was offset by $296.5 million in loan sales and payoffs and $269.1 million in amortization and other reductions[186] - Total deposits increased by $147.7 million (2.4%) to $6.32 billion at June 30, 2023, from year-end 2022. This was driven by a $475.7 million increase in time deposits, offset by a $328.0 million decrease in other deposit types[217] - As of June 30, 2023, the aggregate amount of uninsured deposits (over $250,000) was $2.58 billion, down from $2.65 billion at December 31, 2022[218] Loan Quality Credit quality deteriorated with nonperforming loans increasing to $22.2 million, primarily from one commercial loan, while criticized loans decreased and the allowance for credit losses remained stable - Nonperforming loans increased to $22.2 million at June 30, 2023, from $9.8 million at December 31, 2022. The increase primarily reflects the addition of a $10.0 million commercial and industrial loan in the health-care industry[200] Criticized Loan Activity (in thousands) | Loan Category | Balance at Jan 1, 2023 (in thousands) | Additions (in thousands) | Reductions (in thousands) | Balance at June 30, 2023 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Special Mention | $79,013 | $26,699 | $(61,079) | $44,633 | | Classified | $46,192 | $16,850 | $(24,202) | $38,840 | Allowance for Credit Losses Ratios | Ratio | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Allowance for credit losses to loans receivable | 1.19 % | 1.20 % | | Allowance for credit losses to nonaccrual loans | 320.23 % | 726.42 % | Capital Resources and Liquidity The company and Hanmi Bank remain 'well capitalized' with strong capital ratios and robust liquidity, supported by deposits and significant borrowing capacity Capital Ratios as of June 30, 2023 | Ratio | Hanmi Financial (Actual) (%) | Hanmi Bank (Actual) (%) | Minimum to be "Well Capitalized" (Bank) (%) | | :--- | :--- | :--- | :--- | | Total capital (to risk-weighted assets) | 15.11 % | 14.45 % | 10.00 % | | Tier 1 capital (to risk-weighted assets) | 12.25 % | 13.39 % | 8.00 % | | Common equity Tier 1 capital | 11.90 % | 13.39 % | 6.50 % | | Tier 1 capital (to average assets) | 10.22 % | 11.21 % | 5.00 % | - The Board of Directors declared a quarterly cash dividend of $0.25 per share for Q2 2023, consistent with recent quarters[229] - As of June 30, 2023, the Bank had remaining available borrowing capacity of $1.29 billion from the FHLB and $25.6 million from the Federal Reserve Discount Window and BTFP[128][131] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, with simulations showing NII and EVE sensitivity to hypothetical rate changes, indicating some liability sensitivity Interest Rate Sensitivity Analysis (as of June 30, 2023) | Change in Interest Rates (bps) | % Change in Net Interest Income (1-12 Months) | % Change in Economic Value of Equity (EVE) | | :--- | :--- | :--- | | +300 | 3.96 % | (6.31 %) | | +200 | 2.22 % | (4.48 %) | | +100 | 1.49 % | (0.84 %) | | -100 | (2.28 %) | (1.87 %) | | -200 | (5.35 %) | (7.44 %) | | -300 | (9.02 %) | (15.11 %) | Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2023, with no material changes to internal control over financial reporting - The Corporation's Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of June 30, 2023[239] - There were no changes in the Corporation's internal control over financial reporting during the quarter ended June 30, 2023 that materially affected, or are reasonably likely to materially affect, the Corporation's internal control over financial reporting[240] Part II – Other Information Legal Proceedings The company is involved in routine litigation, which management believes will not materially impact its financial condition or results - In the opinion of management, the resolution of any litigation arising in the ordinary course of business would not have a material adverse impact on the financial condition, results of operations, or liquidity of Hanmi Financial or its subsidiaries[243] Risk Factors No material changes to the company's risk factors have occurred since previous disclosures in the 2022 Form 10-K and Q1 2023 Form 10-Q - There have been no material changes in risk factors applicable to the Corporation from those described in the 2022 Form 10-K and the Q1 2023 Form 10-Q[244] Issuer Purchases of Equity Securities The company repurchased 100,000 shares of common stock in Q2 2023 at an average price of $14.44, with 559,972 shares remaining for future repurchase Common Stock Repurchases in Q2 2023 | Period | Total Shares Purchased | Average Price Paid Per Share ($) | | :--- | :--- | :--- | | May 1 - May 31, 2023 | 100,000 | $14.44 | | Total Q2 2023 | 100,000 | $14.44 | - As of June 30, 2023, 559,972 shares remained available for future purchases under the company's stock repurchase program announced in January 2019[245]