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HANMI FINANCIAL CORP - Annual Report: 2019 (Form 10-K)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Fiscal Year Ended December 31, 2019

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Transition Period From                      To

Commission File Number: 000-30421

HANMI FINANCIAL CORPORATION

(Exact Name of Registrant as Specified in its Charter)

 

Delaware

 

95-4788120

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

 

3660 Wilshire Boulevard, Penthouse Suite A

Los Angeles, California

 

90010

(Address of Principal Executive Offices)

 

(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

 

Trading Symbol

 

Name of Each Exchange on Which Registered

Common Stock, $0.001 Par Value

 

HAFC

 

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

 

Accelerated Filer

Non-Accelerated Filer

 

Smaller Reporting Company

Emerging Growth Company

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).   Yes      No  

As of June 30, 2019, the aggregate market value of the common stock held by non-affiliates of the Registrant was approximately $598,155,000. 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 26, 2020 was 30,728,745 shares.

Documents Incorporated By Reference Herein: Sections of the Registrant’s Definitive Proxy Statement for its 2020 Annual Meeting of Stockholders, which will be filed within 120 days of the fiscal year ended December 31, 2019, 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, 2019

Table of Contents

 

Cautionary Note Regarding Forward-Looking Statements

2

 

Part I

 

 

 

Item 1.

Business

3

Item 1A.

Risk Factors

16

Item 1B.

Unresolved Staff Comments

25

Item 2.

Properties

25

Item 3.

Legal Proceedings

25

Item 4.

Mine Safety Disclosures

25

 

Part II

 

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

26

Item 6.

Selected Financial Data

28

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

30

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

50

Item 8.

Financial Statements and Supplementary Data

50

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosures

50

Item 9A.

Controls and Procedures

50

Item 9B.

Other Information

55

 

Part III

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

56

Item 11.

Executive Compensation

56

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

56

Item 13.

Certain Relationships and Related Transactions, and Director Independence

56

Item 14.

Principal Accounting Fees and Services

56

 

Part IV

 

 

 

Item 15.

Exhibits, Financial Statement Schedules

57

Item 16.

Form 10-K Summary

57

 

Index to Consolidated Financial Statements

58

 

Report of Independent Registered Public Accounting Firm

59

 

Consolidated Balance Sheets as of December 31, 2019 and 2018

63

 

Consolidated Statements of Income for the Years Ended December 31, 2019, 2018 and 2017

64

 

Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2019, 2018 and 2017

65

 

Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2019, 2018 and 2017

66

 

Consolidated Statements of Cash Flows for the Years Ended December 31, 2019, 2018 and 2017

67

 

 

Exhibit Index

111

 

 

Signatures

113

 

 

1


 

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 expectation and statements of assumption 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 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 from private and government sources; demographic changes; competition for loans and deposits and failure to attract or retain loans and deposits; fluctuations in interest rates and a decline in the level of our interest rate spread 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; 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; 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; ability to identify a suitable strategic partner or to consummate a strategic transaction; adequacy of our allowance for loan and lease losses; credit quality and the effect of credit quality on our provision for loan and lease losses and allowance for loan and lease 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. 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


 

Part I

Item 1.

Business

General

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 (“BHCA”). Our principal office is located at 3660 Wilshire Boulevard, Penthouse Suite A, Los Angeles, California 90010, 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 (“FDIA”) up to applicable limits thereof. The California Department of Business Oversight (the “DBO”) 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 and leases, interest and dividends on securities portfolio, and service charges on deposit accounts.

A summary of revenues for the periods indicated follows:

 

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

Interest and fees on loans and leases

 

$

229,402

 

 

 

83.6

%

 

$

219,590

 

 

 

84.8

%

 

$

195,790

 

 

 

80.7

%

Interest and dividends on securities

 

 

15,808

 

 

 

5.8

%

 

 

14,230

 

 

 

5.5

%

 

 

13,082

 

 

 

5.4

%

Other interest income

 

 

1,562

 

 

 

0.6

%

 

 

577

 

 

 

0.2

%

 

 

449

 

 

 

0.2

%

Service charges, fees and other income

 

 

21,006

 

 

 

7.7

%

 

 

19,907

 

 

 

7.7

%

 

 

22,933

 

 

 

9.4

%

Gain on sale of SBA loans

 

 

5,251

 

 

 

1.9

%

 

 

4,954

 

 

 

1.9

%

 

 

8,734

 

 

 

3.6

%

Subtotal

 

 

273,029

 

 

 

99.5

%

 

 

259,258

 

 

 

100.1

%

 

 

240,988

 

 

 

99.3

%

Net gain (loss) on sale of securities

 

 

1,295

 

 

 

0.5

%

 

 

(341

)

 

 

(0.1

)%

 

 

1,748

 

 

 

0.7

%

Total revenues

 

$

274,324

 

 

 

100.0

%

 

$

258,917

 

 

 

100.0

%

 

$

242,736

 

 

 

100.0

%

 

Market Area

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 and leases 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, consumer loans and Small Business Administration (“SBA”) loans.

3


 

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 generally 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 seeks an adjustable rate of interest indexed to the prime rate appearing in The Wall Street Journal (“WSJ Prime Rate”) or the Bank’s prime rate (“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, a quarterly 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, low-income housing, 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;

 

a reserve of anticipated interest costs during construction or an advance of fees;

4


 

 

a first lien position on the underlying real estate;

 

loan-to-value ratios at time of origination that do not exceed 75 percent; and

 

recourse against the borrower or 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 inherent uncertainty in estimating construction costs, which are often beyond the borrower’s control;

 

construction delays and cost overruns;

 

possible difficulties encountered in connection with municipal, state or other governmental ordinances or regulations during construction;

 

the difficulty in accurately evaluating the market value of the completed project; and

 

the disbursement of substantial funds with repayment dependent, in part, on the ultimate uncertain success of the project rather than the ability of the borrower or guarantor to repay principal and interest.

Because of these uncertainties, construction lending often involves the disbursement of substantial funds where repayment of the loan is dependent, in part, 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 lending 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.

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 of a business to be co-obligors on all loan instruments and all significant stockholders of corporations to execute a specific debt guaranty. 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.

5


 

Commercial Term

The Bank offers term loans for a variety of needs, including loans for working capital, purchases of equipment, machinery or inventory, business acquisitions, renovation of facilities, 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 or less.

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 also obtains a commercial guaranty of the business and generally 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.

Consumer Loans

Consumer loans are extended for a variety of purposes, including automobile loans, secured and unsecured personal loans, home improvement loans, home equity lines of credit, unsecured lines of credit and credit cards. Management assesses the borrower’s creditworthiness and ability to repay the debt through a review of credit history and ratings, verification of employment and other income, review of debt-to-income ratios and other measures of repayment ability. Although creditworthiness of the applicant is of primary importance, the underwriting process also includes a comparison of the value of the collateral, if any, to the proposed loan amount. Most of the Bank’s loans to individual consumers are repayable on an installment basis.

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 75 percent to 85 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 generally 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 of purchase 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, 2019, the Bank had $6.0 million of SBA loans held for sale, $176.9 million of SBA loans in its loan portfolio, and was servicing $422.3 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 and leases 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 loan and lease losses, capital notes and any debentures, or 25 percent on a secured and unsecured basis. At December 31, 2019, the Bank’s authorized legal lending limits for loans to one borrower was $108.0 million for unsecured loans and an additional $72.0 million for secured and unsecured loans combined.

The Bank seeks to mitigate the risks inherent in its loan and lease portfolio by adhering to strict underwriting practices. The review of each loan and lease 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 Loan and Lease Losses, Allowance for Off-Balance Sheet Items and Provision for Loan and Lease Losses

The Bank maintains an allowance for loan and lease losses at an appropriate level considered by management to be adequate to cover the inherent risks of loss associated with its loan and lease portfolio under prevailing economic conditions. In addition, the Bank maintains an allowance for 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 loan and lease losses for adequacy on a quarterly basis and more frequently as needed. The DBO and the FDIC may require the Bank to recognize additions to the allowance for loan and lease losses through a provision for loan and lease 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.

Employees

As of December 31, 2019, the Bank had 633 full-time equivalent employees. 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.

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 and leases, 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 services.

Many of our competitors are larger financial institutions that offer some services, such as more extensive and established branch networks and trust services, which the Bank does not provide.

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 and leases 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 DBO. 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 and leases, 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.

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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.

(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.

Regulations and regulatory oversight have increased significantly since 2008, primarily as a result of the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank” or “Dodd-Frank Act”), which was signed into law on July 21, 2010. The Dodd-Frank Act comprehensively reformed the regulation of financial institutions, products, and services, including revising the deposit insurance assessment base for FDIC insurance and increasing coverage to $250,000, revising the permissibility of paying interest on business checking accounts, removing barriers to interstate branching, requiring disclosure and shareholder advisory votes on executive compensation, imposing limitations on certain short-term proprietary trading and investments in and relationships with certain private investment funds, amending the Truth in Lending Act with respect to mortgage originations, creating the Consumer Financial Protection Bureau (“CFPB”), and providing for new capital standards. The full impact of Dodd-Frank on our business may not be known for months or years.

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.

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On February 3, 2017, President Trump signed an executive order calling for the Secretary of the Treasury to consult with other Financial Stability Oversight Council (“FSOC”) member agencies, which includes the Federal Reserve, to report on the extent which existing U.S. financial laws, regulations, guidance and other authorities are consistent with a set of “core principles” of financial policy. The core financial principles identified in the executive order include: empowering Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth; preventing taxpayer-funded bailouts; fostering economic growth and vibrant financial markets through more rigorous regulatory impact analysis that addresses systemic risk and market failures, such as moral hazard and information asymmetry; enabling American companies to be competitive with foreign firms in domestic and foreign markets; advancing American interests in international financial regulatory negotiations and meetings; making regulation efficient, effective, and appropriately tailored; and restoring public accountability within Federal financial regulatory agencies and rationalizing the Federal financial regulatory framework. Although the order does not specifically identify any existing laws, regulations, guidance or other authorities that the administration considers to be inconsistent with the core principles, areas that the mandated agency report may ultimately identify for reform include the Volcker Rule; and the powers, structure and funding arrangements of the FSOC, the Office of Financial Research, the prudential bank regulators, the SEC, U.S. Commodity Futures Trading Commission, and CFPB.

(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 (the “New Capital Rules”) provide for a capital measure “Common Equity Tier 1”; narrowed the definition of regulatory capital; revise the capital levels at which banks and their parent companies would be subject to prompt corrective action; expand the scope of the deductions or adjustments from capital; exclude from Tier 1 capital non-exempt trust preferred securities and cumulative perpetual preferred stock; impose additional constraints on the inclusion in Tier 1 capital (and stricter risk-weights) for mortgage servicing rights, certain deferred tax assets, and minority interests; and impose stricter risk-weights for certain assets, including for high volatility commercial real estate acquisition, development and construction loans, certain past due non-residential mortgage loans and certain mortgage-backed and other securities exposures. Under the New Capital Rules, the Company and the Bank made a one-time election to remove certain components of accumulated other comprehensive income from the computation of common equity regulatory capital.

The New 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, as fully-phased in on January 1, 2019, the New 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 leases, 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. To the extent that the new rules are not fully phased in, the prior capital rules continue to apply.

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At December 31, 2019, the Company and the Bank’s total risk-based capital ratios were 15.11 percent and 14.64 percent, respectively; Tier 1 risk-based capital ratios were 11.78 percent and 13.39 percent, respectively; Common Equity Tier 1 capital ratios were 11.36 percent and 13.39 percent, respectively, and the Company’s and Bank’s Tier 1 leverage capital ratios were 10.15 percent and 11.56 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 6.64 percent and 6.19 percent, and the Company’s capital conservation buffer was 5.78 percent and 5.74 percent as of December 31, 2019 and 2018, 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.

The federal banking agencies, including the Federal Reserve, adopted a rule, effective January 1, 2020, pursuant to the Economic Growth, Regulatory Relief and Consumer Protection Act of 2018, for institutions with assets of less than $10 billion that meet other specified criteria, a “community bank leverage ratio” (the ratio of a bank’s tangible Tier 1 equity capital to average total consolidated assets) of 9.0 percent, that such institution may elect to utilize in lieu of the generally applicable leverage and risk-based capital requirements under Basel III.  A “qualifying community bank” with capital exceeding 9.0 percent will be considered compliant with all applicable regulatory capital and leverage requirements, including the requirement to be “well capitalized”.

While the New Capital Rules set higher regulatory capital requirements for the Company and the Bank, bank regulators may also continue their past policies of expecting banks to maintain additional capital beyond the new minimum requirements. The implementation of the New Capital Rules or 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, 2019, the Company and the Bank met all applicable capital requirements under the New Capital Rules on a fully phased-in basis if such requirements were currently in effect.

(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, 2019 and 2018 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:

 

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;

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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 DBO. The DBO approvals may also be required for certain mergers and acquisitions.

(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 DBO is the Bank’s primary state bank regulator. The Bank is subject to comprehensive supervision, regulation, examination and enforcement by the FDIC and the DBO. 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. 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.

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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 and lease 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 and lease 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 DBO 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 DBO and the FDIC have residual authority to:

 

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;

 

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 DBO.

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.

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(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.

The prompt corrective action standards were changed when the New Capital Rule ratios became effective. In order to be considered well-capitalized under the prompt corrective action standards, the Bank is required to meet the new 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).

(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 New Capital rules may restrict dividends by the Bank if the additional capital conservation buffer is not achieved.

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 DBO, 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.

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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 and leases, 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 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, 2019, 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, 2019 were $1.11 billion and $878.4 million, respectively.

(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 and leases, investments, and deposits, and also affect interest rates charged on loans and leases, 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.

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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 value and 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 Relating to our Business

Deteriorating business and economic conditions can adversely affect our industry and business. Our financial performance generally, and the ability of borrowers to pay interest on and repay the principal of outstanding loans and leases and the value of the collateral securing those loans and leases, is highly dependent upon the business and economic conditions in the markets in which we operate and in the United States as a whole. While the U.S. economy has been expanding, there can be no assurance that it will continue to grow. 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:

 

Problem assets and foreclosures may increase;

 

Demand for our products and services may decline;

 

Low cost or noninterest-bearing deposits may decrease;

 

The value of our securities portfolio may decrease; and

 

Collateral for loans and leases made by us, especially real estate, may decline in value.

Our banking operations are concentrated primarily in California, Illinois and Texas. Adverse economic conditions in these regions in particular could impair borrowers’ ability to repay their loans and leases, decrease the level and duration of deposits by customers, and erode the value of loan and lease 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 efforts to collect our non-performing loans and leases or otherwise liquidate our non-performing assets (including other real estate owned) on terms favorable to us, if at all, and could also cause a decline in demand for our products and services, or a lack of growth or a decrease in deposits, 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 or a pandemic virus or disease in these market areas, could have a material adverse effect on the quality of the Bank’s loan and lease portfolio, the demand for our products and services, and on our overall financial condition and results of operations.

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, classify our assets, and determine the level of our allowance for loan 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.  Any change 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, 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 firms. These changes could materially impact, potentially retroactively, how we report our financial condition and results of operations. Further, compliance with such regulation may increase our costs and limit our ability to pursue business opportunities.

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Our concentrations of loans and leases in certain industries could have adverse effects on credit quality. As of December 31, 2019, the Bank’s loan and lease portfolio included loans to: (i) lessors of non-residential buildings of $1.33 billion, or 28.9 percent of total loans and leases; and (ii) borrowers in the hospitality industry of $942.6 million, or 20.4 percent of total gross loans and leases. Because of these concentrations of loans in specific industries, a deterioration within these industries could affect the ability of borrowers, guarantors and related parties to perform in accordance with the terms of their loans and leases, which could have material and adverse consequences for the Bank.

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 important customer sector, our results of operations and financial condition and the value of our common stock may be adversely affected. Moreover, a portion of these loans have been made by us in recent years and the borrowers may not have experienced a complete business or economic cycle and therefore does not provide us with 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. These loans may have delinquency or charge-off levels above our historical experience, which could adversely affect our future performance. Furthermore, the deterioration of our borrowers’ businesses may hinder their ability to repay their loans and leases with us, which could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

Our use of appraisals in deciding whether to make loans secured by real property does not ensure that the value of the real property collateral will be sufficient to repay our loans. In considering whether to make a loan secured by real property, we require an appraisal of the property. However, an appraisal is only an estimate of the value of the property at the time the appraisal is made and requires the exercise of a considerable degree of judgment and adherence to professional standards. If the appraisal does not reflect the amount that may be obtained upon sale or foreclosure of the property, whether due to declines in property values after the date of the original appraisal or defective preparation, we may not realize an amount equal to the indebtedness secured by the property and may suffer losses.

Our loan and lease 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 virus or 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, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases 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 common law 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.

Our allowance for loan and lease losses may not be adequate to cover actual losses. 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 and leases. 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 loan and lease losses to provide for loan and lease defaults and non-performance. The allowance is also increased for new loan and lease 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 loan losses, we rely on our experience and our evaluation of economic conditions.  If our assumptions prove to be incorrect, our allowance for loan losses may not be sufficient to cover losses inherent in our loan

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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 DBO and the FDIC review our allowance for loan losses and as a result of such reviews, they may require us to adjust our allowance for loan losses or recognize loan charge-offs.  Material additions to the allowance would materially decrease our net income.

We are required to adopt a new accounting standard, which requires measurement of certain financial assets (including loans and certain investments) using the current expected credit losses (“CECL”) beginning in calendar year 2020. Current U.S. generally accepted accounting principles (“GAAP”) requires an incurred loss methodology for recognizing credit losses that delays recognition until it is probable a loss has been incurred. The Financial Accounting Standards Board’s amendment replaces the current incurred loss methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonableness and supportable information to inform credit loss estimates. We are in the process of evaluating the impact of the adoption of this guidance on our financial statements; however, it is anticipated that the allowance will increase upon the adoption of CECL and that the increased allowance level will decrease shareholders’ equity and the Company’s and Bank’s regulatory capital ratios.

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:

 

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 ultimately affect 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.

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 leases, 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.

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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, interest rates for customers, and new and inconsistent consumer protection regulations and mortgage regulation, among others. 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. To the extent the CFPB has authority over us, if we fail to comply with the rules and regulations promulgated by the CFPB, we may be subject to adverse enforcement actions, fines or penalties against us.

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 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 would 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. Any of these results could materially and adversely affect our business, financial condition and results of operations.

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 and could have a material adverse effect on the value of, or market for, our common stock.

The impact of the Basel III capital standards imposed enhanced capital adequacy standards on us. The application of more stringent capital requirements could, among other things, result in lower returns on invested capital and result in regulatory actions if we were to be unable to comply with such requirements. In addition, more stringent capital requirements could require us to raise additional capital on terms which may not be favorable. The federal banking agencies have adopted a rule, effective January 1, 2020, that authorizes institutions with assets of less than $10 billion and that meet other specified criteria, to elect to comply with a “community bank leverage ratio” (the ratio of a bank’s Tier 1 equity capital to average total consolidated assets) of 9.0 percent in lieu of the generally applicable leverage and risk-based capital requirements under Basel III.  A “qualifying community bank” with capital exceeding 9.0 percent will be considered compliant with all applicable regulatory capital and leverage requirements, including the requirement to be “well capitalized.”

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 leases, 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, and 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.  If we are unable to effectively compete in our market area, our profitability would be negatively affected.  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.

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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 on a continuous basis. 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 systems or 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.

The occurrence of breaches or failures of our information security controls, cybersecurity-related incidents or data breaches could also have a material adverse effect on our business, financial condition and results of operations. 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, 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 even 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 its operations. In addition, to access our products and services, our customers may use personal smart-phones, tablet PC’s, 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 Bank’s or our customers’ confidential, proprietary and other information, or otherwise disrupt Bank’s or its customers’ or other third parties’ business operations.

To date we have not experienced any material losses relating to cyber attacks or other information security breaches, but there can be no assurance that we will not suffer such losses in the future. Our risk and exposure to these matters 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 to serve our customers when and how they want to be served, 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. For example, financial institutions continue to be the target of various evolving and adaptive cyber attacks, including malware, ransomware and denial-of-service, as part of an effort to disrupt the operations of financial institutions, potentially test their cybersecurity capabilities, or obtain confidential, proprietary or other information. Consistent with industry trends, we are exposed to an increase in attempted security breaches and cybersecurity-related incidents in recent periods. Moreover, in recent periods, several large corporations, including financial institutions and retail companies, have suffered major data breaches, in some cases exposing not only confidential and proprietary corporate information, but also sensitive financial and other personal information of their customers and employees and subjecting them to potential fraudulent activity. Some of our clients or vendors may have been affected by these breaches, which increase their risks of identity theft, credit card fraud and other fraudulent activity that could involve their accounts with us. 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.

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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 in order to provide functionality and security at an appropriate level. 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. Such sanctions could include fines and suspension of trading in our stock. In addition, future system enhancements could have higher than expected costs and/or result in operating inefficiencies, which could increase the costs associated with the implementation as well as ongoing operations.

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 but not limited to 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.

 

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 including but not limited to the one-month LIBOR, three-month LIBOR, one-year LIBOR, and the ten-year constant maturing swap rate. The LIBOR yield curve is also utilized in the fair value calculation of many of these instruments. The reform of major interest benchmarks led to the announcement of the United Kingdom’s Financial Conduct Authority, the regulator of the LIBOR index, that LIBOR would 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 FRB and Federal Reserve Bank of New York have identified the 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.

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, 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. In recent periods, there

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continues to be a rise in electronic fraudulent activity within the financial services industry, and, consistent with industry trends, we have also experienced an increase in attempted electronic fraudulent activity in recent periods. The occurrence of fraudulent activity could have a material adverse effect on our business, financial condition and results of operations.

Negative publicity could damage our reputation. Reputation risk, or the risk to our earnings and capital from negative publicity or public opinion, is inherent in our business. Negative publicity or public opinion could adversely affect our ability to keep and attract customers and expose us to adverse legal and regulatory consequences. Negative public opinion could result from our actual or perceived conduct in any number of activities, including lending practices, corporate governance, regulatory compliance, mergers and acquisitions, sharing or inadequate protection of customer information, and from actions taken by government regulators and community organizations in response to that conduct.

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. In addition, legislation and regulations which impose restrictions on executive compensation may make it more difficult for us to retain and recruit key personnel. Our success depends to a significant degree upon our ability to attract and retain qualified management, loan and lease 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.

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. These changes and their impacts on us can be hard to predict and may result in unexpected and materially adverse impacts on our reported financial condition and results of operations.

We are required to assess the recoverability of our deferred tax assets on an ongoing basis. 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.

Changes to tax regulations could negatively impact our earnings. We are subject to income taxes in the U.S. In particular, although the passage of the Tax Cut and Jobs Act of 2017 reduced the U.S. tax rate to 21.0 percent effective January 1, 2018, 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.

We may become subject to regulatory restrictions in the event that our capital levels decline. We cannot provide assurance that our total risk-based capital ratio or other capital ratios will not decline in the future such that the Bank may be considered to be “undercapitalized” for regulatory purposes. If a state nonmember bank, like the Bank, is classified as undercapitalized, the bank is required to submit a capital restoration plan to the FDIC. Pursuant to the Federal Deposit Insurance Corporation Improvement Act (“FDICIA”), an undercapitalized bank is prohibited from increasing its assets, engaging in a new line of business, acquiring any interest in any company or insured depository institution, or opening or acquiring a new branch office, except under certain circumstances, including the acceptance by the FDIC of a capital restoration plan for the bank. The FDIC also has the discretion to impose certain other corrective actions.

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If a bank is classified as significantly undercapitalized, the FDIC would be required to take one or more prompt corrective actions. These actions would include, among other things, requiring sales of new securities to bolster capital; improvements in management; limits on interest rates paid; prohibitions on transactions with affiliates; termination of certain risky activities and restrictions on compensation paid to executive officers. These actions may also be taken by the FDIC at any time on an undercapitalized bank if it determines those restrictions are necessary. If a bank is classified as critically undercapitalized, in addition to the foregoing restrictions, the FDICIA prohibits payment on any subordinated debt and requires the bank to be placed into conservatorship or receivership within 90 days, unless the FDIC determines that other action would better achieve the purposes of the FDICIA regarding prompt corrective action with respect to undercapitalized banks.

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. In particular, the economic disruption caused by the spread of the coronavirus/COVID-19 may adversely and materially effect our financial performance in future periods. If economic conditions in South Korea change, we could experience an outflow of deposits by those of our customers with connections to South Korea and a significant decrease in deposits could have a material adverse effect on our financial condition and results of operations.

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 and leases 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. Unlike a bank with a customer base that is more geographically diversified, we are vulnerable to greater 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. Global market disruptions may affect our business liquidity. 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, 2020, the Bank had the ability to pay $23.1 million of dividends without the prior approval of the Commissioner of Business Oversight.

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 in the share prices and trading volumes that affect the market prices of the shares of many companies. 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 quarterly 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;

23


 

 

strategic actions by us or our competitors, such as acquisitions or restructurings;

 

actions by institutional stockholders;

 

fluctuations in the stock price and operating results of our competitors;

 

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. As a result, the market price of our common stock may be volatile. In addition, the trading volume in our common stock may fluctuate more than usual and cause significant price variations to occur. 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.

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 through public or private debt or equity financings for a number of 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 further be reduced, the new equity securities may have rights, preferences and privileges superior to those of our common stock, and the market of our common stock could decline.

In addition, we maintain the 2013 Equity Compensation Plan that provides for the granting of awards to our directors, executive officers and other employees. The plan provides awards of any options, stock appreciation right, restricted stock award, restricted stock unit award, share granted as a bonus or in lieu of another award, dividend equivalent, other stock-based award or performance award. As of December 31, 2019, 156,438 shares of our common stock were issuable under options granted in connection with our stock option plans. It is probable that the stock options will be exercised during their respective terms if the fair market value of our common stock exceeds the exercise price of the particular option. If the stock options are exercised, your share ownership will be diluted.

Furthermore, as of December 31, 2019, our Amended and Restated Certificate of Incorporation authorizes the issuance of up to 62,500,000 shares of common stock. Our Amended and Restated Certificate of Incorporation does not provide for preemptive rights to the holders of our common stock. Any authorized but unissued shares are available for issuance by our Board of Directors. As a result, if we issue additional shares of common stock to raise additional capital or for other corporate purposes, you may be unable to maintain your pro rata ownership in the Company.

Future sales of common stock by existing stockholders may have an adverse impact on the market price of our common stock. Sales of a substantial number of shares of our common stock in the public market by existing stockholders, or the perception that large sales could occur, could cause the market price of our common stock to decline or limit our future ability to raise capital through an offering of equity securities.

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 voting 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.

24


 

Risks Relating to Acquisitions

We may experience adverse effects from acquisitions. We have acquired other banking companies in the past and will consider additional acquisitions as opportunities arise. If we do not adequately address the financial and operational risks associated with acquisitions of other companies, we may incur material unexpected costs and disruption of our business. Risks involved in acquisitions of other companies, include:

 

the risk of failure to adequately evaluate the asset quality of the acquired company;

 

difficulty in assimilating and integrating the operations, technology and personnel of the acquired company;

 

diversion of management’s attention from other important business activities;

 

unfamiliarity with the characteristics and business dynamics of new markets, increased marketing and administrative expenses and operational difficulties arising from our efforts to attract business in new markets, manage operations in noncontiguous geographic markets, comply with local laws and regulations and effectively and consistently manage our non-California personnel and business;

 

the risk that the acquired business will not perform according to management’s expectations because of our inability to realize projected revenue increases, cost savings, improved geographic presence or other projected benefits;

 

the possible loss of key employees of the target institution;

 

difficulty in maintaining good relations with the loan and deposit customers of the acquired company;

 

inability to maintain uniform standards, controls, procedures and policies, especially considering geographic diversification;

 

potentially dilutive issuances of equity securities or the incurrence of debt and contingent liabilities; and

 

amortization of expenses related to acquired intangible assets that have finite lives.

Item 1B.

Unresolved Staff Comments

None.

Item 2.

Properties

Hanmi Financial’s principal office is located at 3660 Wilshire Boulevard, Penthouse Suite A, Los Angeles, California. As of December 31, 2019, we had 44 properties consisting of 35 branch offices and 9 loan production offices. We own 16 locations and the remaining properties are leased.

As of December 31, 2019, our consolidated investment in premises and equipment, net of accumulated depreciation and amortization, was $26.1 million. Our lease expense was $7.9 million for the year ended December 31, 2019. We consider our present facilities to be sufficient for our current operations.

Item 3.

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


 

Part II

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 26, 2020, there were approximately 794 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”); and (iii) the SNL U.S. Bank $1B-$5B Index, which was compiled by SNL Financial LC of Charlottesville, Virginia. 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.

 

 

 

 

December 31,

 

 

 

2014

 

 

2015

 

 

2016

 

 

2017

 

 

2018

 

 

2019

 

Hanmi Financial Corporation

 

$

100.00

 

 

$

108.76

 

 

$

160.02

 

 

$

139.16

 

 

$

90.33

 

 

$

91.70

 

NASDAQ Composite

 

$

100.00

 

 

$

105.73

 

 

$

113.66

 

 

$

145.76

 

 

$

140.10

 

 

$

189.45

 

S&P 500 Financials

 

$

100.00

 

 

$

96.52

 

 

$

115.96

 

 

$

139.19

 

 

$

118.77

 

 

$

153.42

 

SNL Bank $1B-$5B

 

$

100.00

 

 

$

109.91

 

 

$

155.04

 

 

$

162.98

 

 

$

140.71

 

 

$

167.70

 

 

Source: S&P Global, New York, NY

26


 

Recent Unregistered Sales of Equity Securities

There were no unregistered sales of Hanmi Financial’s equity securities during the year ended December 31, 2019.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

During 2019, the Company acquired 26,846 shares from employees in connection with the satisfaction of income tax withholding obligations incurred through vesting of Company stock awards. 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. The program is ongoing as of December 31, 2019. The table below provides information on purchases made during the three months ended December 31, 2019:

 

Purchase Date:

 

Average

Price

Paid Per

Share

 

 

Total

Number

of Shares

Purchased as

Part of

Publicly

Announced

Program

 

 

Maximum

Shares That

May Yet Be

Purchased

Under the

Program

 

October 1, 2019 - October 31, 2019

 

$

 

 

 

 

 

 

 

November 1, 2019 - November 30, 2019

 

$

19.63

 

 

 

310,000

 

 

 

1,190,000

 

December 1, 2019 - December 31, 2019

 

$

19.61

 

 

 

65,000

 

 

 

1,125,000

 

Total

 

$

19.63

 

 

 

375,000

 

 

 

1,125,000

 

 

 

27


 

Item 6.

Selected Financial Data

The following table presents selected historical financial information. This selected historical financial data should be read in conjunction with our Consolidated Financial Statements and the Notes thereto appearing elsewhere in this Report and the information contained in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The selected historical financial data as of December 31, 2019 and 2018 and for each of the years in the three-year period ended December 31, 2019 was derived from our audited financial statements that appear in this Form 10-K. The selected historical financial data as of December 31, 2017, 2016 and 2015 and for the two-year period ended December 31, 2016 was derived from our audited financial statements that do not appear in this Form 10-K. In the opinion of management, the information presented reflects all adjustments, including normal and recurring accruals, considered necessary for a fair presentation of the results of such periods.

 

 

 

As of and For the Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

 

(in thousands, except share and per share data)

 

Summary statements of operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and dividend income

 

$

246,772

 

 

$

234,397

 

 

$

209,321

 

 

$

178,471

 

 

$

164,226

 

Interest expense

 

 

70,900

 

 

 

53,384

 

 

 

32,519

 

 

 

18,274

 

 

 

16,109

 

Net interest income

 

 

175,872

 

 

 

181,013

 

 

 

176,802

 

 

 

160,197

 

 

 

148,117

 

Loan and lease loss provision (income)

 

 

30,170

 

 

 

3,990

 

 

 

831

 

 

 

(4,339

)

 

 

(11,614

)

Noninterest income

 

 

27,552

 

 

 

24,520

 

 

 

33,415

 

 

 

33,075

 

 

 

47,602

 

Noninterest expense

 

 

125,906

 

 

 

117,573

 

 

 

114,102

 

 

 

108,223

 

 

 

115,328

 

Income before provision for income taxes

 

 

47,348

 

 

 

83,970

 

 

 

95,284

 

 

 

89,388

 

 

 

92,005

 

Provision for income taxes

 

 

14,560

 

 

 

26,102

 

 

 

40,624

 

 

 

32,899

 

 

 

38,182

 

Net income

 

$

32,788

 

 

$

57,868

 

 

$

54,660

 

 

$

56,489

 

 

$

53,823

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Summary balance sheets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

121,678

 

 

$

155,376

 

 

$

153,826

 

 

$

147,235

 

 

$

164,364

 

Securities

 

 

634,477

 

 

 

574,908

 

 

 

578,804

 

 

 

516,964

 

 

 

698,296

 

Loans and leases receivable, net (1)

 

 

4,548,739

 

 

 

4,568,566

 

 

 

4,273,415

 

 

 

3,812,340

 

 

 

3,140,381

 

Assets

 

 

5,538,184

 

 

 

5,502,219

 

 

 

5,210,485

 

 

 

4,701,346

 

 

 

4,234,521

 

Deposits

 

 

4,698,962

 

 

 

4,747,235

 

 

 

4,348,654

 

 

 

3,809,737

 

 

 

3,509,976

 

Liabilities

 

 

4,974,917

 

 

 

4,949,651

 

 

 

4,648,008

 

 

 

4,170,321

 

 

 

3,740,603

 

Stockholders’ equity

 

 

563,267

 

 

 

552,568

 

 

 

562,477

 

 

 

531,025

 

 

 

493,918

 

Tangible equity (4)

 

 

551,394

 

 

 

540,386

 

 

 

549,933

 

 

 

518,136

 

 

 

492,217

 

Average loans and leases receivable (2)

 

 

4,507,975

 

 

 

4,456,202

 

 

 

4,039,346

 

 

 

3,423,292

 

 

 

2,901,698

 

Average securities

 

 

618,610

 

 

 

587,916

 

 

 

583,971

 

 

 

614,749

 

 

 

788,156

 

Average assets

 

 

5,475,935

 

 

 

5,357,965

 

 

 

4,952,466

 

 

 

4,372,698

 

 

 

4,076,669

 

Average deposits

 

 

4,690,959

 

 

 

4,461,045

 

 

 

4,160,072

 

 

 

3,607,585

 

 

 

3,502,886

 

Average stockholders’ equity

 

 

565,314

 

 

 

574,764

 

 

 

548,135

 

 

 

518,867

 

 

 

476,401

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per share data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share – basic

 

$

1.06

 

 

$

1.80

 

 

$

1.70

 

 

$

1.76

 

 

$

1.69

 

Earnings per share – diluted

 

$

1.06

 

 

$

1.79

 

 

$

1.69

 

 

$

1.75

 

 

$

1.68

 

Book value per share (3)

 

$

18.29

 

 

$

17.87

 

 

$

17.34

 

 

$

16.42

 

 

$

15.45

 

Tangible book value per share (4)

 

$

17.90

 

 

$

17.47

 

 

$

16.96

 

 

$

16.03

 

 

$

15.39

 

Cash dividends per share

 

$

0.96

 

 

$

0.96

 

 

$

0.80

 

 

$

0.66

 

 

$

0.47

 

Common shares outstanding

 

 

30,799,624

 

 

 

30,928,437

 

 

 

32,431,627

 

 

 

32,330,747

 

 

 

31,974,359

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performance ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on average assets (5) (12)

 

 

0.60

%

 

 

1.08

%

 

 

1.10

%

 

 

1.29

%

 

 

1.32

%

Return on average stockholders’ equity (6) (12)

 

 

5.80

%

 

 

10.07

%

 

 

9.97

%

 

 

10.89

%

 

 

11.30

%

Net interest margin (7)

 

 

3.37

%

 

 

3.57

%

 

 

3.82

%

 

 

3.95

%

 

 

3.90

%

Efficiency ratio (8)

 

 

61.89

%

 

 

57.20

%

 

 

54.28

%

 

 

56.00

%

 

 

58.93

%

Dividend payout ratio (9)

 

 

90.57

%

 

 

53.33

%

 

 

47.06

%

 

 

37.57

%

 

 

27.81

%

Average stockholders’ equity to average assets

 

 

10.32

%

 

 

10.73

%

 

 

11.07

%

 

 

11.87

%

 

 

11.69

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset quality ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-performing loans and leases to loans and leases, net (10)

 

 

1.40

%

 

 

0.34

%

 

 

0.37

%

 

 

0.30

%

 

 

0.60

%

Non-performing assets to assets (11)

 

 

1.15

%

 

 

0.29

%

 

 

0.34

%

 

 

0.40

%

 

 

0.65

%

Net loan and lease (charge-offs) recoveries to average loans and leases

 

 

(0.02

)%

 

 

(0.07

)%

 

 

(0.05

)%

 

 

(0.18

)%

 

 

0.06

%

Allowance for loan and lease losses to loans and leases

 

 

1.33

%

 

 

0.70

%

 

 

0.73

%

 

 

0.85

%

 

 

1.37

%

Allowance for loan and lease losses to nonperforming loans and leases

 

 

96.31

%

 

 

205.90

%

 

 

196.41

%

 

 

284.32

%

 

 

224.58

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total risk-based capital:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hanmi Financial

 

 

15.11

%

 

 

14.54

%

 

 

15.50

%

 

 

13.86

%

 

 

14.91

%

Hanmi Bank

 

 

14.64

%

 

 

14.19

%

 

 

15.20

%

 

 

13.64

%

 

 

14.86

%

Tier 1 risk-based capital:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hanmi Financial

 

 

11.78

%

 

 

11.74

%

 

 

12.55

%

 

 

13.02

%

 

 

13.65

%

Hanmi Bank

 

 

13.39

%

 

 

13.47

%

 

 

14.47

%

 

 

12.80

%

 

 

13.60

%

Common equity tier 1 capital:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hanmi Financial

 

 

11.36

%

 

 

11.32

%

 

 

12.19

%

 

 

12.73

%

 

 

13.65

%

Hanmi Bank

 

 

13.39

%

 

 

13.47

%

 

 

14.47

%

 

 

12.80

%

 

 

13.60

%

Tier 1 leverage:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hanmi Financial

 

 

10.15

%

 

 

10.18

%

 

 

10.79

%

 

 

11.53

%

 

 

11.31

%

Hanmi Bank

 

 

11.56

%

 

 

11.67

%

 

 

12.44

%

 

 

11.33

%

 

 

11.27

%

 

(1)

Excludes loans held for sale and net of allowance for loan and lease losses.

(2)

Includes loans held for sale and before allowance for loan and lease losses.

28


 

(3)

Stockholders’ equity divided by shares of common stock outstanding.

(4)

Tangible equity divided by common shares outstanding. Tangible equity is a "Non-GAAP" financial measure, as discussed in the following section.

(5)

Net income divided by average assets.

(6)

Net income divided by average stockholders’ equity.

(7)

Net interest income divided by average interest-earning assets. Computed on a tax-equivalent basis using the statutory federal tax rate.

(8)

Noninterest expense divided by the sum of net interest income and noninterest income.

(9)

Dividends declared per share divided by basic earnings per share.

(10)

Nonperforming loans and leases, excluding loans held for sale, consist of nonaccrual loans and leases, and loans and leases past due 90 days or more still accruing interest.

(11)

Nonperforming assets consist of nonperforming loans and leases and other real estate owned.

(12)

Amounts calculated on net income.

 

Non-GAAP Financial Measures

The Company calculates certain supplemental financial information determined by methods other than in accordance with U.S. GAAP, including tangible assets, tangible stockholders' equity and tangible book value per share. These non-GAAP measures are used by management in analyzing Hanmi Financial’s capital strength without the impact of acquisitions.

Tangible equity is calculated by subtracting goodwill and other intangible assets from stockholders’ equity. Banking and financial institution regulators also exclude goodwill and other intangible assets from stockholders’ equity when assessing the capital adequacy of a financial institution.

Management believes the presentation of these financial measures excluding the impact of items described in the preceding paragraph provide useful supplemental information that is essential for a proper understanding of the capital strength of Hanmi Financial. These disclosures should not be viewed as a substitution for results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.

Tangible Stockholders’ Equity and Tangible Book Value Per Share

The following table reconciles these non-GAAP performance measure to the GAAP performance measure for the periods indicated:

 

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

 

(in thousands, except per share data)

 

Total assets

 

$

5,538,184

 

 

$

5,502,219

 

 

$

5,210,485

 

 

$

4,701,346

 

 

$

4,234,521

 

Less goodwill and other intangible assets

 

 

(11,873

)

 

 

(12,182

)

 

 

(12,544

)

 

 

(12,889

)

 

 

(1,701

)

Tangible assets

 

$

5,526,311

 

 

$

5,490,037

 

 

$

5,197,941

 

 

$

4,688,457

 

 

$

4,232,820

 

Total stockholders' equity (1)

 

$

563,267

 

 

$

552,568

 

 

$

562,477

 

 

$

531,025

 

 

$

493,918

 

Less goodwill and other intangible assets

 

 

(11,873

)

 

 

(12,182

)

 

 

(12,544

)

 

 

(12,889

)

 

 

(1,701

)

Tangible stockholders' equity (1)

 

$

551,394

 

 

$

540,386

 

 

$

549,933

 

 

$

518,136

 

 

$

492,217

 

Stockholders' equity to assets

 

 

10.17

%

 

 

10.04

%

 

 

10.80

%

 

 

11.30

%

 

 

11.66

%

Tangible common equity to tangible assets (1)

 

 

9.98

%

 

 

9.84

%

 

 

10.58

%

 

 

11.05

%

 

 

11.63

%

Common shares outstanding

 

 

30,799,624

 

 

 

30,928,437

 

 

 

32,431,627

 

 

 

32,330,747

 

 

 

31,974,359

 

Book value per share

 

$

18.29

 

 

$

17.87

 

 

$

17.34

 

 

$

16.42

 

 

$

15.45

 

Effect of goodwill and other intangible assets

 

 

(0.39

)

 

 

(0.40

)

 

 

(0.38

)

 

 

(0.39

)

 

 

(0.06

)

Tangible common equity per common share

 

$

17.90

 

 

$

17.47

 

 

$

16.96

 

 

$

16.03

 

 

$

15.39

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) There were no preferred shares outstanding at the periods indicated.

 

 

29


 

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, 2019, 2018 and 2017. 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 Loan and Lease Losses and Allowance for Off-Balance Sheet Items

Our allowance for loan and lease losses methodologies incorporate a variety of risk considerations, both quantitative and qualitative, in establishing an allowance for loan and lease losses that management believes is appropriate at each reporting date. Quantitative factors include our historical loss experiences on loan pools segmented by type and risk rating, delinquency and charge-off trends, collateral values, changes in nonperforming loans and leases, and other factors. Qualitative factors include the general economic environment in our markets, delinquency and charge-off trends, and the change in nonperforming loans and leases. Concentration of credit, change of lending management and staff, quality of the loan and lease review system, and changes in interest rates are other qualitative factors that are considered in our methodologies. See “Financial Condition — Allowance for Loan and Lease Losses and Allowance for 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 loan and lease losses and the allowance for off-balance sheet items.

Executive Overview

For the years ended December 31, 2019, 2018 and 2017, net income was $32.8 million, $57.9 million and $54.7 million, respectively. 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 and lease losses relating to a troubled loan relationship and impaired leases receivable.

The increase of $3.2 million, or 5.9 percent, in net income for the year ended December 31, 2018 as compared with the year ended December 31, 2017, was primarily due to an increase in interest and fees on loans and leases offset by a decrease in noninterest expenses. A decrease in income tax expense of $14.5 million, or 35.7 percent, mainly resulting from the Tax Cuts and Jobs Act enacted in December 2017 further increased net income.

For the years ended December 31, 2019, 2018 and 2017, our earnings per diluted share were $1.06, $1.79 and $1.69, respectively.

Significant financial highlights include:

 

Loans and leases receivable decreased by $19.8 million, or 0.4 percent, to $4.55 billion as of December 31, 2019, compared with $4.57 billion as of December 31, 2018.

 

Deposits were $4.70 billion at December 31, 2019 compared with $4.75 billion at December 31, 2018 as time deposits decreased $245.6 million, or 13.6 percent and interest-bearing demand deposits decreased $3.3 million, or 3.7 percent, offset by an increase in interest-bearing money market and savings accounts of $93.5 million, or 5.9 percent and noninterest-bearing demand deposits of $107.1 million, or 8.3 percent.

 

Cash dividends of $0.96 per share of common stock were declared for the years ended December 31, 2019, and 2018 compared with $0.80 per share of common stock for the year ended December 31, 2017.

30


 

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 and leases are affected principally by changes to market interest rates, the demand for such loans and leases, 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.

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.

 

 

 

For the Year Ended

 

 

 

December 31, 2019

 

 

December 31, 2018

 

 

December 31, 2017

 

 

 

 

 

 

 

Interest

 

 

Average

 

 

 

 

 

 

Interest

 

 

Average

 

 

 

 

 

 

Interest

 

 

Average

 

 

 

Average

 

 

Income /

 

 

Yield /

 

 

Average

 

 

Income /

 

 

Yield /

 

 

Average

 

 

Income /

 

 

Yield /

 

 

 

Balance

 

 

Expense

 

 

Rate

 

 

Balance

 

 

Expense

 

 

Rate

 

 

Balance

 

 

Expense

 

 

Rate

 

Assets

 

(dollars in thousands)

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans and leases receivable (1)

 

$

4,507,975

 

 

$

229,402

 

 

 

5.09

%

 

$

4,456,202

 

 

$

219,590

 

 

 

4.93

%

 

$

4,039,346

 

 

$

195,790

 

 

 

4.85

%

Securities (2)

 

 

618,610

 

 

 

14,806

 

 

 

2.39

%

 

 

587,916

 

 

 

13,528

 

 

 

2.30

%

 

 

583,971

 

 

 

13,771

 

 

 

2.36

%

FHLB stock

 

 

16,385

 

 

 

1,147

 

 

 

7.00

%

 

 

16,385

 

 

 

1,413

 

 

 

8.62

%

 

 

16,385

 

 

 

1,232

 

 

 

7.52

%

Interest-bearing deposits in other banks

 

 

73,906

 

 

 

1,562

 

 

 

2.11

%

 

 

31,478

 

 

 

577

 

 

 

1.83

%

 

 

40,333

 

 

 

449

 

 

 

1.11

%

Total interest-earning assets

 

 

5,216,876

 

 

 

246,917

 

 

 

4.73

%

 

 

5,091,981

 

 

 

235,108

 

 

 

4.62

%

 

 

4,680,035

 

 

 

211,242

 

 

 

4.51

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

 

103,475

 

 

 

 

 

 

 

 

 

 

 

122,925

 

 

 

 

 

 

 

 

 

 

 

116,716

 

 

 

 

 

 

 

 

 

Allowance for loan and lease losses

 

 

(41,933

)

 

 

 

 

 

 

 

 

 

 

(31,880

)

 

 

 

 

 

 

 

 

 

 

(33,277

)

 

 

 

 

 

 

 

 

Other assets

 

 

197,517

 

 

 

 

 

 

 

 

 

 

 

174,939

 

 

 

 

 

 

 

 

 

 

 

188,992

 

 

 

 

 

 

 

 

 

Total assets

 

$

5,475,935

 

 

 

 

 

 

 

 

 

 

$

5,357,965

 

 

 

 

 

 

 

 

 

 

$

4,952,466

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and stockholders' equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand: interest-bearing

 

$

83,613

 

 

$

116

 

 

 

0.14

%

 

$

91,495

 

 

$

106

 

 

 

0.12

%

 

$

93,184

 

 

$

74

 

 

 

0.08

%

Money market and savings

 

 

1,566,403

 

 

 

23,556

 

 

 

1.50

%

 

 

1,444,674

 

 

 

16,182

 

 

 

1.12

%

 

 

1,495,378

 

 

 

12,515

 

 

 

0.84

%

Time deposits

 

 

1,752,642

 

 

 

39,433

 

 

 

2.25

%

 

 

1,609,403

 

 

 

26,792

 

 

 

1.66

%

 

 

1,322,352

 

 

 

13,500

 

 

 

1.02

%

Total interest-bearing deposits

 

 

3,402,658

 

 

 

63,105

 

 

 

1.85

%

 

 

3,145,572

 

 

 

43,080

 

 

 

1.37

%

 

 

2,910,914

 

 

 

26,089

 

 

 

0.90

%

Borrowings

 

 

40,374

 

 

 

763

 

 

 

1.89

%

 

 

174,452

 

 

 

3,379

 

 

 

1.94

%

 

 

119,041

 

 

 

1,077

 

 

 

0.90

%

Subordinated debentures

 

 

118,079

 

 

 

7,032

 

 

 

5.96

%

 

 

117,524

 

 

 

6,925

 

 

 

5.88

%

 

 

95,811

 

 

 

5,353

 

 

 

5.57

%

Total interest-bearing liabilities

 

 

3,561,111

 

 

 

70,900

 

 

 

1.99

%

 

 

3,437,548

 

 

 

53,384

 

 

 

1.55

%

 

 

3,125,766

 

 

 

32,519

 

 

 

1.04

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing liabilities and equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits: noninterest-bearing

 

 

1,288,301

 

 

 

 

 

 

 

 

 

 

 

1,315,473

 

 

 

 

 

 

 

 

 

 

 

1,249,158

 

 

 

 

 

 

 

 

 

Other liabilities

 

 

61,209

 

 

 

 

 

 

 

 

 

 

 

30,180

 

 

 

 

 

 

 

 

 

 

 

29,407

 

 

 

 

 

 

 

 

 

Stockholders' equity

 

 

565,314

 

 

 

 

 

 

 

 

 

 

 

574,764

 

 

 

 

 

 

 

 

 

 

 

548,135

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders' equity

 

$

5,475,935

 

 

 

 

 

 

 

 

 

 

$

5,357,965

 

 

 

 

 

 

 

 

 

 

$

4,952,466

 

 

 

 

 

 

 

 

 

Net interest income (taxable equivalent basis)

 

 

 

 

 

$

176,017

 

 

 

 

 

 

 

 

 

 

$

181,724

 

 

 

 

 

 

 

 

 

 

$

178,723

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of deposits (3)

 

 

 

 

 

 

 

 

 

 

1.35

%

 

 

 

 

 

 

 

 

 

 

0.97

%

 

 

 

 

 

 

 

 

 

 

0.63

%

Net interest spread (taxable equivalent basis) (4)

 

 

 

 

 

 

 

 

 

 

2.74

%

 

 

 

 

 

 

 

 

 

 

3.07

%

 

 

 

 

 

 

 

 

 

 

3.47

%

Net interest margin (taxable equivalent basis)(5)

 

 

 

 

 

 

 

 

 

 

3.37

%

 

 

 

 

 

 

 

 

 

 

3.57

%

 

 

 

 

 

 

 

 

 

 

3.82

%

 

(1)

Loans and leases include loans held for sale and exclude the allowance for loan and lease losses. Nonaccrual loans and leases are included in the average loan and lease balance.

(2)

Amounts calculated on a fully equivalent basis using the current statutory federal tax rate.

31


 

(3)

Represents interest expense on deposits as a percentage of all interest-bearing and noninterest-bearing deposits.

(4)

Represents the average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities.

(5)

Represents net interest income as a percentage of average interest-earning assets.

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.

 

 

 

Year Ended December 31,

 

 

 

2019 vs 2018

 

 

2018 vs 2017

 

 

 

Increases (Decreases) Due to Change In

 

 

Increases (Decreases) Due to Change In

 

 

 

Volume

 

 

Rate

 

 

Total

 

 

Volume

 

 

Rate

 

 

Total

 

 

 

(in thousands)

 

Interest and dividend income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans and leases receivable (1)

 

$

2,573

 

 

$

7,239

 

 

$

9,812

 

 

$

20,600

 

 

$

3,200

 

 

$

23,800

 

Securities (2)

 

 

722

 

 

 

556

 

 

 

1,278

 

 

 

95

 

 

 

(338

)

 

 

(243

)

FHLB stock

 

 

 

 

 

(266

)

 

 

(266

)

 

 

 

 

 

181

 

 

 

181

 

Interest-bearing deposits in other banks

 

 

885

 

 

 

100

 

 

 

985

 

 

 

(115

)

 

 

243

 

 

 

128

 

Total interest and dividend income (taxable equivalent) (2)

 

$

4,180

 

 

$

7,629

 

 

$

11,809

 

 

$

20,580

 

 

$

3,286

 

 

$

23,866

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand: interest-bearing

 

$

 

 

$

10

 

 

$

10

 

 

$

 

 

$

32

 

 

$

32

 

Money market and savings

 

 

1,457

 

 

 

5,917

 

 

 

7,374

 

 

 

143

 

 

 

3,524

 

 

 

3,667

 

Time

 

 

2,554

 

 

 

10,087

 

 

 

12,641

 

 

 

3,398

 

 

 

9,894

 

 

 

13,292

 

Borrowings

 

 

(2,536

)

 

 

(80

)

 

 

(2,616

)

 

 

664

 

 

 

1,638

 

 

 

2,302

 

Subordinated debentures

 

 

27

 

 

 

80

 

 

 

107

 

 

 

1,265

 

 

 

307

 

 

 

1,572

 

Total interest expense

 

$

1,502

 

 

$

16,014

 

 

$

17,516

 

 

$

5,470

 

 

$

15,395

 

 

$

20,865

 

Change in net interest income (taxable equivalent) (2)

 

$

2,678

 

 

$

(8,385

)

 

$

(5,707

)

 

$

15,110

 

 

$

(12,109

)

 

$

3,001

 

 

(1)

Loans and leases include loans held for sale and exclude the allowance for loan and lease losses. Nonaccrual loans and leases are included in the average loan and lease balance.

(2)

Amounts calculated on a fully equivalent basis using the current statutory federal tax rate.

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.

Average loans and leases increased $51.8 million, or 1.2 percent, to $4.51 billion in 2019 from $4.46 billion in 2018. Average securities increased $30.7 million, or 5.2 percent, to $618.6 million in 2019 from $587.9 million in 2018. Average 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 average loans and leases was due mainly to new loan production. Average 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 average 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.

32


 

2018 Compared to 2017

Interest income, on a taxable equivalent basis, increased $23.9 million, or 11.3 percent, to $235.1 million for the year ended December 31, 2018 from $211.2 million for the year ended December 31, 2017. Interest expense increased $20.9 million or 64.2 percent, to $53.4 million in 2018 from $32.5 million in 2017. Net interest income, on a taxable equivalent basis, was $181.7 million and $178.7 million in 2018 and 2017, respectively. The increase in net interest income was primarily attributable to the growth in average loans and leases and the higher percentage of loans and leases in the mix of interest-earning assets. Average loans and leases were 87.5 percent of average interest earning assets for 2018, up from 86.3 percent for 2017. The net interest spread and net interest margin, on a taxable equivalent basis, for the year ended December 31, 2018 were 3.07 percent and 3.57 percent, respectively, compared with 3.47 percent and 3.82 percent, respectively, for the same period in 2017.

Average loans and leases increased $416.9 million, or 10.3 percent, to $4.46 billion in 2018 from $4.04 billion in 2017. Average securities increased $3.9 million, or 0.7 percent, to $587.9 million in 2018 from $584.0 million in 2017. Average interest earning assets increased $411.9 million, or 8.8 percent, to $5.09 billion for the year ended December 31, 2018 from $4.68 billion for 2017. The increase in average loans and leases was due mainly to new loan production. Average interest-bearing liabilities increased $311.8 million, or 10.0 percent, to $3.44 billion in 2018 compared to $3.13 billion in 2017. The increase in average interest-bearing liabilities resulted primarily from an increase in time deposits, borrowings and subordinated debentures, offset mainly by a decrease in money market and savings.

The average yield on loans and leases increased to 4.93 percent for the year ended December 31, 2018 from 4.85 percent in 2017, primarily due to an increase in market interest rates and change in composition of the loan portfolio. The average yield on securities, on a taxable equivalent basis, decreased to 2.30 percent in 2018 from 2.36 percent in 2017, attributable primarily to the lower taxable-equivalent yield 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 4.62 percent in 2018 from 4.51 percent in 2017, due mainly to the increase in the yields on the loan and lease portfolio. The average cost of interest-bearing liabilities increased by 51 basis points to 1.55 percent in 2018 from 1.04 percent in 2017. The increase was due to increases in the market interest rates and competition.

Provision for Loan and Lease Losses

As a result of credit risks inherent in our lending business, we set aside an allowance for loan and lease losses through charges to earnings. These charges are made not only for our outstanding loan and lease portfolio, but also for off-balance sheet items, such as commitments to extend credit, or letters of credit. The charges made for our outstanding loan and lease portfolio are recorded to the allowance for loan and lease losses, whereas charges for off-balance sheet items are recorded to the allowance for off-balance sheet items, and are presented as a component of other liabilities.

2019 Compared to 2018

A loan and lease loss provision of $30.2 million was recorded for the year ended December 31, 2019, compared with a loan and lease 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.

Net loan and lease charge-offs were $736,000, or 0.02 percent of average loans and leases, for the year ended December 31, 2019 compared with net loan and lease charge-offs of $3.1 million, or 0.07 percent of average loans and leases, for the year ended December 31, 2018.

Classified loans and leases increased by $64.5 million, or 218.3 percent, to $94.0 million for the year ended December 31, 2019 from $29.5 million for the year ended December 31, 2018. The increase in classified loans reflected the addition of the previously-mentioned $39.7 million troubled loan relationship and the addition of a $10.7 million branded hotel construction loan due to project delays.

2018 Compared to 2017

A loan and lease loss provision of $4.0 million was recorded for the year ended December 31, 2018, compared with a loan and lease loss provision of $831,000 for the year ended December 31, 2017. The charge to other noninterest expense for losses on off-balance sheet items was $143,000 in 2018 compared to a credit of $112,000 for the same period in 2017.

33


 

Net loan and lease charge-offs were $3.1 million, or 0.07 percent of average loans and leases, for the year ended December 31, 2018 compared with net loan and lease charge-offs of $2.2 million, or 0.05 percent of average loans and leases, for the year ended December 31, 2017.

Classified loans and leases decreased by $1.7 million, or 5.3 percent, to $29.5 million for the year ended December 31, 2018 from $31.2 million for the year ended December 31, 2017.

See “Nonperforming Assets” and “Allowance for Loan and Lease Losses and Allowance for Off-Balance Sheet Items” for further details.

Noninterest Income

The following table sets forth the various components of noninterest income for the years indicated:

 

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

 

(in thousands)

 

Service charges on deposit accounts

 

$

9,951

 

 

$

10,000

 

 

$

10,396

 

Trade finance and other service charges and fees

 

 

4,786

 

 

 

4,616

 

 

 

4,495

 

Servicing income

 

 

1,798

 

 

 

2,385

 

 

 

2,631

 

Bank-owned life insurance income

 

 

1,121

 

 

 

1,107

 

 

 

1,113

 

All other operating income

 

 

2,114

 

 

 

1,799

 

 

 

4,298

 

Service charges, fees and other

 

 

19,770

 

 

 

19,907

 

 

 

22,933

 

Gain on sale of SBA loans

 

 

5,252

 

 

 

4,954

 

 

 

8,734

 

Net gain (loss) on sales of securities

 

 

1,295

 

 

 

(341

)

 

 

1,748

 

Gain on sale of bank premises

 

 

1,235

 

 

 

 

 

 

 

Total noninterest income

 

$

27,552

 

 

$

24,520

 

 

$

33,415

 

 

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.

 

2018 Compared to 2017

For the year ended December 31, 2018 noninterest income was $24.5 million, a decrease of $8.9 million, or 26.6 percent, compared with $33.4 million in 2017. The decrease was primarily attributable to decreases in gain on sale of SBA loans, disposition gains on PCI loans and gain on sale of securities. Sales of SBA loans resulted in a net gain of $5.0 million for the year ended December 31, 2018 compared with $8.7 million in 2017. Securities resulted in a net loss of $341,000 for the year ended December 31, 2018 compared to gains of $1.7 million in 2017.

34


 

Noninterest Expense

The following table sets forth various components of noninterest expense for the years indicated:

 

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

 

(in thousands)

 

Salaries and employee benefits

 

$

67,900

 

 

$

69,435

 

 

$

67,944

 

Occupancy and equipment

 

 

17,064

 

 

 

15,944

 

 

 

15,740

 

Data processing

 

 

8,755

 

 

 

6,870

 

 

 

6,960

 

Professional fees

 

 

9,060

 

 

 

6,178

 

 

 

5,464

 

Supplies and communications

 

 

2,936

 

 

 

3,003

 

 

 

2,912

 

Advertising and promotion

 

 

3,797

 

 

 

4,041

 

 

 

3,952

 

Merger and integration costs

 

 

 

 

 

846

 

 

 

(40

)

All other operating expenses

 

 

13,263

 

 

 

11,606

 

 

 

10,756

 

Subtotal

 

 

122,774

 

 

 

117,923

 

 

 

113,688

 

Provision (income) for off-balance sheet items

 

 

958

 

 

 

143

 

 

 

112

 

Other real estate owned expense (income)

 

 

439

 

 

 

(493

)

 

 

302

 

Impairment loss on bank premises

 

 

1,734

 

 

 

 

 

 

 

Total noninterest expense

 

$

125,906

 

 

$

117,573

 

 

$

114,102

 

 

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.

 

2018 Compared to 2017

For the year ended December 31, 2018, noninterest expense was $117.6 million, an increase of $3.5 million, or 3.0 percent, compared with $114.1 million in 2017. The increase was due primarily to increases in salaries and employee benefits, merger and integration costs and other operating expenses, offset by a decrease in OREO expense.

Income Tax Expense

For the years ended December 31, 2019, 2018 and 2017, income tax expense was $14.6 million, $26.1 million and $40.6 million, respectively. The effective tax rate for the years ended December 31, 2019, 2018 and 2017 was 30.8 percent, 31.1 percent and 42.6 percent, respectively. The lower effective tax rate in 2019 and 2018 compared to 2017 was due mainly to the decreased federal statutory income tax rate to 21 percent from 35 percent. The higher effective tax rate in 2017 also included a $3.9 million charge arising from a one-time revaluation adjustment to reduce the Company’s deferred tax asset due to a change in the Federal corporate tax in connection with the passage of the Tax Cuts and Jobs Act on December 22, 2017.

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

Securities are classified as held to maturity, available for sale, or trading in accordance with GAAP. Those securities that we have the ability and the intent to hold to maturity are classified as “held to maturity.” All other securities are classified either as “available for sale” or “trading.” There were no held to maturity or trading securities as of December 31, 2019 and 2018. Securities classified as held to maturity are stated at cost, adjusted for amortization of premiums and accretion of discounts, and available for sale and trading securities are stated at fair value. The composition of our securities portfolio reflects our investment strategy of providing a relatively stable source of interest income while maintaining an appropriate level of liquidity. Our securities portfolio also provides a source of liquidity by pledging as collateral or through repurchase agreement and collateral for certain public funds deposits.

35


 

As of December 31, 2019, our securities portfolio was primarily composed of mortgage-backed securities and collateralized mortgage obligations 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, 2019, 2018 or 2017.

The following table summarizes the amortized cost, fair value and distribution of securities as of the dates indicated:

 

 

 

December 31, 2019

 

 

December 31, 2018

 

 

December 31, 2017

 

 

 

 

 

 

 

Estimated

 

 

Unrealized

 

 

 

 

 

 

Estimated

 

 

Unrealized

 

 

 

 

 

 

Estimated

 

 

Unrealized

 

 

 

Amortized

 

 

Fair

 

 

Gain

 

 

Amortized

 

 

Fair

 

 

Gain

 

 

Amortized

 

 

Fair

 

 

Gain

 

 

 

Cost

 

 

Value

 

 

(Loss)

 

 

Cost

 

 

Value

 

 

(Loss)

 

 

Cost

 

 

Value

 

 

(Loss)

 

 

 

(in thousands)

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

34,946

 

 

$

35,205

 

 

$

258

 

 

$

39,768

 

 

$

39,830

 

 

$

62

 

 

$

152

 

 

$

152

 

 

$

 

U.S. government agency and sponsored agency obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

 

406,813

 

 

 

410,800

 

 

 

3,987

 

 

 

300,957

 

 

 

295,034

 

 

 

(5,923

)

 

 

306,166

 

 

 

303,609

 

 

 

(2,557

)

Collateralized mortgage obligations

 

 

164,232

 

 

 

164,592

 

 

 

360

 

 

 

124,550

 

 

 

122,292

 

 

 

(2,258

)

 

 

119,658

 

 

 

117,768

 

 

 

(1,890

)

Debt securities

 

 

23,733

 

 

 

23,879

 

 

 

146

 

 

 

7,499

 

 

 

7,402

 

 

 

(97

)

 

 

7,499

 

 

 

7,414

 

 

 

(85

)

Total U.S. government agency and sponsored agency obligations

 

 

594,778

 

 

 

599,272

 

 

 

4,494

 

 

 

433,006

 

 

 

424,728

 

 

 

(8,278

)

 

 

433,323

 

 

 

428,791

 

 

 

(4,532

)

Municipal bonds-tax exempt

 

 

 

 

 

 

 

 

 

 

 

110,670

 

 

 

110,350

 

 

 

(320

)

 

 

125,601

 

 

 

127,475

 

 

 

1,874

 

Mutual funds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

22,916

 

 

 

22,386

 

 

 

(530

)

Total securities available for sale

 

$

629,725

 

 

$

634,477

 

 

$

4,752

 

 

$

583,444

 

 

$

574,908

 

 

$

(8,536

)

 

$

581,992

 

 

$

578,804

 

 

$

(3,188

)

 

As of December 31, 2019, securities available for sale increased 10.4 percent to $634.5 million from $574.9 million as of December 31, 2018. The increase was mainly due to purchases of mortgage-backed securities and collateralized mortgage obligations. The following table summarizes the contractual maturity schedule for securities, at amortized cost, and their weighted-average yield as of December 31, 2019:

 

 

 

 

 

 

After One

Year But

 

 

After Five

Years But

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Within One

Year

 

 

Within Five

Years

 

 

Within Ten

Years

 

 

After Ten

Years

 

 

Total

 

 

 

Amount

 

 

Yield

 

 

Amount

 

 

Yield

 

 

Amount

 

 

Yield

 

 

Amount

 

 

Yield

 

 

Amount

 

 

Yield

 

 

 

(dollars in thousands)

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

24,954

 

 

 

2.57

%

 

$

9,993

 

 

 

2.67

%

 

$

 

 

 

0.00

%

 

$

 

 

 

0.00

%

 

$

34,946

 

 

 

2.60

%

U.S. government agency and sponsored agency obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

 

9,956

 

 

 

2.30

%

 

 

46,871

 

 

 

2.19

%

 

 

136,144

 

 

 

2.49

%

 

 

213,841

 

 

 

2.47

%

 

 

406,813

 

 

 

2.44

%

Collateralized mortgage obligations

 

 

 

 

 

0.00

%

 

 

3,030

 

 

 

1.52

%

 

 

23,735

 

 

 

2.09

%

 

 

137,468

 

 

 

2.16

%

 

 

164,232

 

 

 

2.14

%

Debt securities

 

 

3,000

 

 

 

1.50

%

 

 

17,730

 

 

 

2.08

%

 

 

3,003

 

 

 

2.83

%

 

 

 

 

 

 

 

 

23,733

 

 

 

2.10

%

Total U.S. government agency and sponsored agency obligations

 

 

12,956

 

 

 

2.12

%

 

 

67,631

 

 

 

2.13

%

 

 

162,882

 

 

 

2.43

%

 

 

351,309

 

 

 

2.35

%

 

 

594,778

 

 

 

2.34

%

Total securities available for sale

 

$

37,910

 

 

 

2.42

%

 

$

77,624

 

 

 

2.20

%

 

$

162,882

 

 

 

2.43

%

 

$

351,309

 

 

 

2.35

%

 

$

629,725

 

 

 

2.36

%

 

Loan and Lease Portfolio

Real estate loans are secured by commercial or residential properties for the purpose of financing a purchase, refinancing debt, or making building improvements. These loans are either owner-occupied or non-owner occupied. The Bank originates these loans using underwriting guidelines, which include minimum debt service ability, maximum loan to value ratios, and analyzing the borrower’s future capacity to repay the loan.

Commercial and industrial loans are extended to businesses on a term or line of credit basis. The Bank provides commercial term loans for the purposes of purchasing business, equipment, leasehold improvements or working capital, with maturities ranging from three to seven years. The Bank also provides commercial lines of credit for the purposes of short-term working capital, financing trading assets, or import and export financing. These lines of credit usually have maturities of one year.

36


 

Leases receivable include equipment finance agreements with terms ranging from one to seven years. 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 flow of the borrower’s business.

The following sets forth the amount of total loans and leases outstanding in each category as of the dates indicated, excluding loans held for sale:

 

 

 

As of December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

 

(in thousands)

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial property

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 

$

869,302

 

 

$

906,260

 

 

$

915,273

 

Hospitality

 

 

922,288

 

 

 

830,679

 

 

 

681,325

 

Other (1)

 

 

1,358,432

 

 

 

1,449,270

 

 

 

1,417,273

 

Total commercial property loans

 

 

3,150,022

 

 

 

3,186,209

 

 

 

3,013,871

 

Construction

 

 

76,455

 

 

 

71,583

 

 

 

55,190

 

Residential property

 

 

402,028

 

 

 

500,563

 

 

 

521,853

 

Total real estate loans

 

 

3,628,505

 

 

 

3,758,355

 

 

 

3,590,914

 

Commercial and industrial loans:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial term

 

 

227,652

 

 

 

206,691

 

 

 

182,685

 

Commercial lines of credit

 

 

228,033

 

 

 

194,032

 

 

 

181,894

 

International loans

 

 

28,409

 

 

 

29,180

 

 

 

34,622

 

Total commercial and industrial loans

 

 

484,093

 

 

 

429,903

 

 

 

399,201

 

Leases receivable

 

 

483,879

 

 

 

398,858

 

 

 

297,284

 

Consumer loans (2)

 

 

13,670

 

 

 

13,424

 

 

 

17,059

 

Loans and leases receivable

 

 

4,610,147

 

 

 

4,600,540

 

 

 

4,304,458

 

Allowance for loan and lease losses

 

 

(61,408

)

 

 

(31,974

)

 

 

(31,043

)

Loans and leases receivable, net

 

$

4,548,739

 

 

$

4,568,566

 

 

$

4,273,415

 

 

(1)

Includes, among other property types, mixed-use, gas station, apartment, office, industrial, faith-based facilities, land, medical and warehouse; the remaining real estate categories individually represent less than one percent of the Company’s total loans and leases.

(2)

Consumer loans include home equity lines of credit.

As of December 31, 2019, 2018 and 2017, loans and leases receivable (excluding loans held for sale), net of deferred loan costs, discounts and allowance for loan and lease losses, were $4.55 billion, $4.57 billion and $4.27 billion, respectively, representing a decrease of $19.8 million or 0.4 percent in 2019, and an increase of $295.2 million, or 6.9 percent in 2018. The $19.8 million decrease in loans and leases in 2019 was attributable primarily to an increase in the allowance for loan and lease losses.

During the year ended December 31, 2019, total loan and lease disbursements consisted of $415.1 million in commercial real estate loans, $265.4 million in leases receivable, $228.5 million in commercial and industrial loans, $117.7 million in SBA loans and $4.2 million in consumer loans, offset by $1.02 billion in pay-offs and other net reductions.

37


 

The following table sets forth the percentage distribution of loans and leases in each category as of the dates indicated:

 

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial property

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 

 

18.9

%

 

 

19.7

%

 

 

21.3

%

Hospitality

 

 

20.0

%

 

 

18.1

%

 

 

15.8

%

Other

 

 

29.5

%

 

 

31.4

%

 

 

33.0

%

Total commercial property loans

 

 

68.4

%

 

 

69.2

%

 

 

70.1

%

Construction

 

 

1.7

%

 

 

1.6

%

 

 

1.3

%

Residential property

 

 

8.7

%

 

 

10.9

%

 

 

12.1

%

Total real estate loans

 

 

78.8

%

 

 

81.7

%

 

 

83.5

%

Commercial and industrial loans:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial term

 

 

4.9

%

 

 

4.5

%

 

 

4.2

%

Commercial lines of credit

 

 

4.9

%

 

 

4.2

%

 

 

4.2

%

International loans

 

 

0.6

%

 

 

0.6

%

 

 

0.8

%

Total commercial and industrial loans

 

 

10.4

%

 

 

9.3

%

 

 

9.2

%

Leases receivable

 

 

10.5

%

 

 

8.7

%

 

 

6.9

%

Consumer loans

 

 

0.3

%

 

 

0.3

%

 

 

0.4

%

Loans and leases receivable

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

The table below shows the maturity distribution of outstanding loans and leases as of December 31, 2019. In addition, the table shows the distribution of such loans and leases between those with floating or variable interest rates and those with fixed or predetermined interest rates.

 

 

 

Within One

Year

 

 

After One

Year but

Within Five

Years

 

 

After Five

Years

 

 

Total

 

 

 

(in thousands)

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial property

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 

$

101,344

 

 

$

635,573

 

 

$

132,385

 

 

$

869,302

 

Hospitality

 

 

84,627

 

 

 

681,904

 

 

 

155,758

 

 

 

922,288

 

Other

 

 

249,960

 

 

 

877,072

 

 

 

231,400

 

 

 

1,358,432

 

Total commercial property loans

 

 

435,931

 

 

 

2,194,549

 

 

 

519,543

 

 

 

3,150,022

 

Construction

 

 

76,454

 

 

 

2

 

 

 

 

 

 

76,455

 

Residential property

 

 

 

 

 

1,248

 

 

 

400,779

 

 

 

402,028

 

Total real estate loans

 

 

512,384

 

 

 

2,195,799

 

 

 

920,322

 

 

 

3,628,505

 

Commercial and industrial loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial term

 

 

20,841

 

 

 

139,975

 

 

 

66,836

 

 

 

227,652

 

Commercial lines of credit

 

 

145,776

 

 

 

82,256

 

 

 

 

 

 

228,033

 

International loans

 

 

28,409

 

 

 

 

 

 

 

 

 

28,409

 

Total commercial and industrial loans

 

 

195,026

 

 

 

222,232

 

 

 

66,836

 

 

 

484,093

 

Leases receivable

 

 

13,376

 

 

 

427,087

 

 

 

43,415

 

 

 

483,879

 

Consumer loans

 

 

5,264

 

 

 

210

 

 

 

8,196

 

 

 

13,670

 

Loans and leases receivable

 

$

726,051

 

 

$

2,845,328

 

 

$

1,038,769

 

 

$

4,610,147

 

Loans and leases with predetermined interest rates

 

$

409,725

 

 

$

1,751,662

 

 

$

226,814

 

 

$

2,388,201

 

Loans and leases with variable interest rates

 

 

316,326

 

 

 

1,093,665

 

 

 

811,955

 

 

 

2,221,947

 

 

38


 

As of December 31, 2019, the loan and leases portfolio included the following concentrations of loans to one type of industry that were greater than 10 percent of loans and leases receivable:

 

 

 

 

 

 

 

Percentage of

Loans and

 

 

 

Balance as of

 

 

Leases

 

 

 

December 31, 2019

 

 

Outstanding

 

 

 

(in thousands)

 

Lessor of nonresidential buildings

 

$

1,332,766

 

 

 

28.9

%

Hospitality

 

$

942,622

 

 

 

20.4

%

 

39


 

Loan and Lease Quality Indicators

 

As of December 31, 2019 and 2018, pass/pass-watch, special mention and classified loan and leases, disaggregated by loan class, were as follows:

 

 

 

Pass/Pass-

Watch

 

 

Special

Mention

 

 

Classified

 

 

Total

 

 

 

(in thousands)

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial property

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 

$

859,739

 

 

$

2,835

 

 

$

6,728

 

 

$

869,302

 

Hospitality

 

 

915,834

 

 

 

939

 

 

 

5,515

 

 

 

922,288

 

Other

 

 

1,329,817

 

 

 

7,807

 

 

 

20,809

 

 

 

1,358,432

 

Total commercial property loans

 

 

3,105,390

 

 

 

11,580

 

 

 

33,052

 

 

 

3,150,022

 

Construction

 

 

36,956

 

 

 

1,613

 

 

 

37,886

 

 

 

76,455

 

Residential property

 

 

398,737

 

 

 

2,512

 

 

 

779

 

 

 

402,028

 

Total real estate loans

 

 

3,541,082

 

 

 

15,705

 

 

 

71,718

 

 

 

3,628,505

 

Commercial and industrial loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial term

 

 

210,026

 

 

 

2,139

 

 

 

15,487

 

 

 

227,652

 

Commercial lines of credit

 

 

222,348

 

 

 

5,485

 

 

 

200

 

 

 

228,033

 

International loans

 

 

25,810

 

 

 

2,598

 

 

 

 

 

 

28,409

 

Total commercial and industrial loans

 

 

458,184

 

 

 

10,222

 

 

 

15,687

 

 

 

484,093

 

Leases receivable

 

 

477,977

 

 

 

 

 

 

5,902

 

 

 

483,879

 

Consumer loans

 

 

12,247

 

 

 

705

 

 

 

718

 

 

 

13,670

 

Total loans and leases receivable

 

$

4,489,491

 

 

$

26,632

 

 

$

94,025

 

 

$

4,610,147

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial property

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 

$

901,354

 

 

$

16

 

 

$

4,890

 

 

$

906,260

 

Hospitality

 

 

821,542

 

 

 

168

 

 

 

8,969

 

 

 

830,679

 

Other

 

 

1,441,219

 

 

 

2,723

 

 

 

5,328

 

 

 

1,449,270

 

Total commercial property loans

 

 

3,164,115

 

 

 

2,907

 

 

 

19,187

 

 

 

3,186,209

 

Construction

 

 

71,583

 

 

 

 

 

 

 

 

 

71,583

 

Residential property

 

 

500,424

 

 

 

 

 

 

139

 

 

 

500,563

 

Total real estate loans

 

 

3,736,122

 

 

 

2,907

 

 

 

19,326

 

 

 

3,758,355

 

Commercial and industrial loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial term

 

 

197,992

 

 

 

4,977

 

 

 

3,722

 

 

 

206,691

 

Commercial lines of credit

 

 

172,338

 

 

 

21,107

 

 

 

587

 

 

 

194,032

 

International loans

 

 

29,180

 

 

 

 

 

 

 

 

 

29,180

 

Total commercial and industrial loans

 

 

399,510

 

 

 

26,084

 

 

 

4,309

 

 

 

429,903

 

Leases receivable

 

 

393,729

 

 

 

 

 

 

5,129

 

 

 

398,858

 

Consumer loans

 

 

12,454

 

 

 

191

 

 

 

779

 

 

 

13,424

 

Total loans and leases receivable

 

$

4,541,815

 

 

$

29,182

 

 

$

29,543

 

 

$

4,600,540

 

 

Classified loans and leases increased by $64.5 million, or 218.3 percent, to $94.0 million at December 31, 2019, from $29.5 million at December 31, 2018, principally due to the $39.7 million troubled loan relationship placed on nonaccrual status during the three months ended June 30, 2019. At December 31, 2019, the $76.5 million of construction loans included four land loans totaling $37.4 million ($27.2 million classified and $10.2 million pass/watch), one completed construction loan for $20.9 million (pass), and seven active construction loans totaling $18.2 million (one for $1.6 million categorized as

40


 

special mention, one for $10.7 million categorized as classified and five totaling $5.9 million categorized as pass) with project completion ranging from 9 percent to 99 percent.  In addition, two construction loans with outstanding commitments aggregating $1.7 million had no advances outstanding at December 31, 2019.

Nonperforming Assets

Nonperforming loans and leases consist of loans and leases on nonaccrual status and loans and leases 90 days or more past due and still accruing interest. Nonperforming assets consist of nonperforming loans and leases and OREO. Loans and leases 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 and leases not meeting the criteria for nonaccrual. OREO consists of properties acquired by foreclosure or similar means that management intends to offer for sale.

Except for nonperforming loans and leases set forth below, management is not aware of any loans and leases as of December 31, 2019 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.

The following table provides information with respect to the components of nonperforming assets as of the dates indicated:

 

 

 

As of December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

 

(in thousands)

 

Nonperforming loans and leases:

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial property

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 

$

277

 

 

$

865

 

 

$

224

 

Hospitality

 

 

225

 

 

 

3,625

 

 

 

5,263

 

Other

 

 

14,864

 

 

 

1,641

 

 

 

2,462

 

Total commercial property loans

 

 

15,366

 

 

 

6,131

 

 

 

7,949

 

Construction

 

 

27,201

 

 

 

 

 

 

 

Residential property

 

 

1,124

 

 

 

182

 

 

 

591

 

Total real estate loans

 

 

43,691

 

 

 

6,313

 

 

 

8,540

 

Commercial and industrial loans

 

 

13,479

 

 

 

3,337

 

 

 

1,892

 

Leases receivable

 

 

5,902

 

 

 

5,129

 

 

 

4,452

 

Consumer loans

 

 

689

 

 

 

746

 

 

 

921

 

Total nonperforming loans and leases

 

 

63,761

 

 

 

15,525

 

 

 

15,805

 

Loans and leases 90 days or more past due and still accruing

 

 

 

 

 

4

 

 

 

 

Total nonaccrual loans and leases (1)

 

 

63,761

 

 

 

15,529

 

 

 

15,805

 

Other real estate owned

 

 

63

 

 

 

663

 

 

 

1,946

 

Total nonperforming assets

 

$

63,824

 

 

$

16,192

 

 

$

17,751

 

Nonperforming loans and leases as a percentage of loans and leases receivable

 

 

1.40

%

 

 

0.34

%

 

 

0.37

%

Nonperforming assets as a percentage of assets

 

 

1.15

%

 

 

0.29

%

 

 

0.34

%

Performing troubled debt restructured loans and leases

 

$

830

 

 

$

6,029

 

 

$

7,259

 

 

(1)

Includes troubled debt restructured nonperforming loans of $55.5 million, $4.3 million and $8.1 million as of December 31, 2019, 2018 and 2017, respectively.

41


 

Nonaccrual loans and leases were $63.8 million, $15.5 million and $15.8 million as of December 31, 2019, 2018 and 2017, respectively, representing an increase of $48.3 million, or 310.6 percent, in 2019 and a decrease of $280,000 or 1.8 percent, in 2018. The increase in nonaccrual loans in 2019 was primarily due to a $39.7 million troubled loan relationship and a $10.7 million branded hotel construction loan.

Delinquent loans and leases (defined as 30 to 89 days past due and still accruing) were $10.3 million, $10.7 million and $8.6 million as of December 31, 2019, 2018 and 2017, respectively, representing a decrease of $427,000 or 4.0 percent, in 2019 and an increase of $2.1 million, or 24.6 percent, in 2018.

The ratio of nonperforming loans and leases to loans and leases receivable increased to 1.40 percent at December 31, 2019 from 0.34 percent at December 31, 2018, and decreased from 0.37 percent at December 31, 2017. All of the $63.8 million nonperforming loans and leases as of December 31, 2019 were impaired and resulted in aggregate impairment allowances of $25.8 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, 2019, OREO consisted of two properties with a combined carrying value of $63,000. As of December 31, 2018, there were seven properties with a combined carrying value of $663,000 in OREO.

Impaired Loans and Leases

We evaluate loan impairment in accordance with applicable GAAP. Loans are considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as an expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent, less costs to sell. If the measure of the impaired loan is less than the recorded investment in the loan, the deficiency will be charged off against the allowance for loan and lease losses or, alternatively, a specific allocation will be established. Additionally, impaired loans are specifically excluded from the analysis when determining the general portion of the allowance for loan and lease losses required for the period.

The following table provides information on impaired loans and leases as of the dates indicated:

 

 

 

As of December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

 

Recorded

Investment

 

 

Percentage

 

 

Recorded

Investment

 

 

Percentage

 

 

Recorded

Investment

 

 

Percentage

 

 

 

(dollars in thousands)

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial property

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 

$

434

 

 

 

0.7

%

 

$

2,166

 

 

 

8.6

%

 

$

1,403

 

 

 

5.2

%

Hospitality

 

 

244

 

 

 

0.4

%

 

 

4,282

 

 

 

17.0

%

 

 

6,184

 

 

 

22.7

%

Other

 

 

14,864

 

 

 

22.9

%

 

 

7,525

 

 

 

30.1

%

 

 

8,513

 

 

 

31.3

%

Total commercial property loans

 

 

15,542

 

 

 

24.0

%

 

 

13,973

 

 

 

55.7

%

 

 

16,100

 

 

 

59.2

%

Construction

 

 

27,201

 

 

 

42.0

%

 

 

 

 

 

0.0

%

 

 

 

 

 

0.0

%

Residential property

 

 

1,124

 

 

 

1.7

%

 

 

788

 

 

 

3.1

%

 

 

2,563

 

 

 

9.4

%

Total real estate loans

 

 

43,867

 

 

 

67.7

%

 

 

14,761

 

 

 

58.8

%

 

 

18,663

 

 

 

68.6

%

Commercial and industrial loans

 

 

13,700

 

 

 

21.2

%

 

 

4,396

 

 

 

17.5

%

 

 

3,039

 

 

 

11.2

%

Leases receivable

 

 

5,902

 

 

 

9.1

%

 

 

5,129

 

 

 

20.4

%

 

 

4,452

 

 

 

16.4

%

Consumer loans

 

 

1,297

 

 

 

2.0

%

 

 

839

 

 

 

3.3

%

 

 

1,029

 

 

 

3.8

%

Total

 

$

64,766

 

 

 

100.0

%

 

$

25,125

 

 

 

100.0

%

 

$

27,183

 

 

 

100.0

%

 

Impaired loans and leases were $64.8 million, $25.1 million and $27.2 million as of December 31, 2019, 2018 and 2017, respectively, representing an increase of $39.6 million, or 157.8 percent, in 2019, and a decrease of $2.1 million, or 7.6 percent, in 2018. Specific allowance allocations associated with impaired loans increased $24.0 million to $25.8 million as of December 31, 2019, compared with $1.8 million as of December 31, 2018.

42


 

During the year ended December 31, 2019, 2018 and 2017 interest income that would have been recognized had impaired loans performed in accordance with their original terms would have been $3.4 million, $2.8 million and $2.6 million, respectively. Of these amounts, actual interest recognized on impaired loans was $1.1 million, $1.7 million and $1.8 million for the year ended December 31, 2019, 2018 and 2017, respectively.

The following table provides information on troubled debt restructuring (“TDR”) loans as of dates indicated:

 

 

 

As of December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

 

Nonaccrual

TDRs

 

 

Accrual

TDRs

 

 

Total

 

 

Nonaccrual

TDRs

 

 

Accrual

TDRs

 

 

Total

 

 

Nonaccrual

TDRs

 

 

Accrual

TDRs

 

 

Total

 

 

 

(in thousands)

 

Real estate loans

 

$

41,798

 

 

$

 

 

$

41,798

 

 

$

2,059

 

 

$

5,234

 

 

$

7,293

 

 

$

5,760

 

 

$

6,033

 

 

$

11,793

 

Commercial and industrial loans

 

 

12,991

 

 

 

222

 

 

 

13,213

 

 

 

1,471

 

 

 

702

 

 

 

2,173

 

 

 

1,529

 

 

 

1,118

 

 

 

2,647

 

Consumer loans

 

 

689

 

 

 

608

 

 

 

1,297

 

 

 

746

 

 

 

93

 

 

 

839

 

 

 

811

 

 

 

108

 

 

 

919

 

Total

 

$

55,478

 

 

$

830

 

 

$

56,308

 

 

$

4,276

 

 

$

6,029

 

 

$

10,305

 

 

$

8,100

 

 

$

7,259

 

 

$

15,359

 

 

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. For the year ended December 31, 2018, we restructured monthly payments for two loans, with a net carrying value of $664,000 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, 2019 and 2018, TDRs on accrual status were $830,000 and $6.0 million, respectively, all of which were temporary interest rate and payment reductions or extensions of maturity, and a $29,000 and $57,000 allowance relating to these loans, respectively, was included in the allowance for loan and lease losses. As of December 31, 2019 and 2018, restructured loans on nonaccrual status were $55.5 million and $4.3 million, respectively, and a $22.7 million and $256,000 allowance relating to these loans, respectively, was included in the allowance for loan and lease losses.

As of December 31, 2017, TDRs on accrual status were $7.3 million, all of which were temporary interest rate and payment reductions or extensions of maturity, and a $21,000 allowance relating to these loans was included in the allowance for loan and lease losses. As of December 31, 2017, restructured loans on nonaccrual status were $8.1 million and a $2.2 million allowance relating to these loans, was included in the allowance for loan and lease losses.

Allowance for Loan and Lease Losses and Allowance for Off-Balance Sheet Items

The Bank charges or credits the income statement for provisions to the allowance for loan and lease losses and the allowance for off-balance sheet items at least quarterly (and more frequently as needed) based upon the allowance need. The allowance is determined through an analysis involving quantitative calculations based on historic loss rates and qualitative adjustments for general allowances and individual impairment calculations for specific allocations. The Bank charges the allowance for actual losses and credits the allowance for recoveries on loans and leases previously charged-off.

The Bank evaluates the allowance methodology at least annually. For the fourth quarter of 2019, the Bank utilized a 35-quarter look-back period anchored to the first quarter of 2011, with equal weighting to all quarters. Management determined it was appropriate to anchor the look-back period in consideration of a prolonged period of low losses and the procyclical nature of provisioning. The anchoring will allow the Bank to better capture the economic cycle while improving the ability to measure losses. For the fourth quarters of 2018 and 2017, the Bank utilized 31- and 27-quarter look-back periods, respectively. In addition, the estimated loss emergence period utilized in the Bank’s loss migration analysis was 2.5 years in 2019, 2018 and 2017. Moreover, the Bank reevaluated the qualitative adjustments, adjusting to current conditions in light of the lengthening of the business cycle and changes in credit metrics.

To determine general allowance requirements, existing loans were divided into eleven pools of risk-rated loans as well as three homogeneous loan pools. For risk-rated loans, migration analysis allocates historical losses by loan pool and risk grade to determine risk factors for potential losses inherent in the current outstanding loan portfolio. Since the homogeneous loans are bulk graded, the risk grade is not factored into the historical loss analysis. In addition, specific allowances are allocated for loans deemed “impaired.”

43


 

When determining the appropriate level for allowance for loan and lease losses, management considers qualitative adjustments for any factors that are likely to cause estimated loan and lease losses associated with the Bank’s current 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 and lease trends.

To systematically quantify the credit risk impact of trends and changes within the loan and lease portfolio, a credit risk matrix is utilized. The qualitative factors are considered on a loan pool by loan pool basis subsequent to, and in conjunction with, a loss migration analysis. The credit risk matrix provides various scenarios with positive or negative impact on the portfolio along with corresponding basis points for qualitative adjustments.

The following table reflects our allocation of the allowance for loan and lease losses by loan category as well as the loans receivable for each loan type:

 

 

 

As of December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

 

Allowance

 

 

 

 

 

 

Total

 

 

Allowance

 

 

 

 

 

 

Total

 

 

Allowance

 

 

 

 

 

 

Total

 

 

 

Amount

 

 

Percentage

 

 

Loans

 

 

Amount

 

 

Percentage

 

 

Loans

 

 

Amount

 

 

Percentage

 

 

Loans

 

 

 

(dollars in thousands)

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial property

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 

$

4,911

 

 

 

8.0

%

 

$

869,302

 

 

$

3,652

 

 

 

11.4

%

 

$

906,260

 

 

$

2,729

 

 

 

8.8

%

 

$

915,273

 

Hospitality

 

 

6,686

 

 

 

10.9

%

 

 

922,288

 

 

 

5,486

 

 

 

17.2

%

 

 

830,679

 

 

 

5,922

 

 

 

19.1

%

 

 

681,325

 

Other

 

 

8,060

 

 

 

13.1

%

 

 

1,358,432

 

 

 

6,723

 

 

 

21.0

%

 

 

1,449,270

 

 

 

5,722

 

 

 

18.4

%

 

 

1,417,273

 

Total commercial property loans

 

 

19,657

 

 

 

32.0

%

 

 

3,150,022

 

 

 

15,861

 

 

 

49.6

%

 

 

3,186,209

 

 

 

14,373

 

 

 

46.3

%

 

 

3,013,871

 

Construction

 

 

15,003

 

 

 

24.4

%

 

 

76,455

 

 

 

1,143

 

 

 

3.6

%

 

 

71,583

 

 

 

796

 

 

 

2.6

%

 

 

55,190

 

Residential property

 

 

1,695

 

 

 

2.8

%

 

 

402,028

 

 

 

1,380

 

 

 

4.3

%

 

 

500,563

 

 

 

1,843

 

 

 

5.9

%

 

 

521,853

 

Total real estate loans

 

 

36,355

 

 

 

59.2

%

 

 

3,628,505

 

 

 

18,384

 

 

 

57.5

%

 

 

3,758,355

 

 

 

17,012

 

 

 

54.8

%

 

 

3,590,914

 

Commercial and industrial loans:

 

 

 

 

 

 

0.0

%

 

 

 

 

 

 

 

 

 

 

0.0

%

 

 

 

 

 

 

 

 

 

 

0.0

%

 

 

 

 

Commercial term

 

 

14,077

 

 

 

22.9

%

 

 

227,652

 

 

 

5,416

 

 

 

16.9

%

 

 

206,691

 

 

 

5,001

 

 

 

16.1

%

 

 

182,685

 

Commercial lines of credit

 

 

1,887

 

 

 

3.1

%

 

 

228,033

 

 

 

1,532

 

 

 

4.8

%

 

 

194,032

 

 

 

2,070

 

 

 

6.7

%

 

 

181,894

 

International loans

 

 

242

 

 

 

0.4

%

 

 

28,409

 

 

 

214

 

 

 

0.7

%

 

 

29,180

 

 

 

329

 

 

 

1.1

%

 

 

34,622

 

Total commercial and industrial loans

 

 

16,206

 

 

 

26.4

%

 

 

484,093

 

 

 

7,162

 

 

 

22.4

%

 

 

429,903

 

 

 

7,400

 

 

 

23.9

%

 

 

399,201

 

Leases receivable

 

 

8,767

 

 

 

14.3

%

 

 

483,879

 

 

 

6,303

 

 

 

19.7

%

 

 

398,858

 

 

 

6,279

 

 

 

20.2

%

 

 

297,284

 

Consumer loans

 

 

80

 

 

 

0.1

%

 

 

13,670

 

 

 

98

 

 

 

0.3

%

 

 

13,424

 

 

 

122

 

 

 

0.4

%

 

 

17,059

 

Unallocated

 

 

 

 

 

0.0

%

 

 

 

 

 

27

 

 

 

0.1

%

 

 

 

 

 

230

 

 

 

0.7

%

 

 

 

Total

 

$

61,408

 

 

 

100.0

%

 

$

4,610,147

 

 

$

31,974

 

 

 

100.0

%

 

$

4,600,540

 

 

$

31,043

 

 

 

100.0

%

 

$

4,304,458

 

 

44


 

The following table sets forth certain information regarding our allowance for loan and lease losses and allowance for off-balance sheet items for the periods presented. Allowance for 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:

 

 

 

As of and for the Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

 

(dollars in thousands)

 

Allowance for loan and lease losses:

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

31,974

 

 

$

31,043

 

 

$

32,429

 

Loans and leases charged off

 

 

(4,588

)

 

 

(7,310

)

 

 

(5,899

)

Recoveries on loans and leases previously charged off

 

 

3,852

 

 

 

4,251

 

 

 

3,682

 

Net (charge-offs) recoveries

 

 

(736

)

 

 

(3,059

)

 

 

(2,217

)

Loan and lease loss provision

 

 

30,170

 

 

 

3,990

 

 

 

831

 

Balance at end of period

 

$

61,408

 

 

$

31,974

 

 

$

31,043

 

Allowance for off-balance sheet items:

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

1,439

 

 

$

1,296

 

 

$

1,184

 

Loan and lease loss provision

 

 

958

 

 

 

143

 

 

 

112

 

Balance at end of period

 

$

2,397

 

 

$

1,439

 

 

$

1,296

 

Ratios:

 

 

 

 

 

 

 

 

 

 

 

 

Net (charge-offs) recoveries to average loans and leases

 

 

(0.02

%)

 

 

(0.07

%)

 

 

(0.05

%)

Net (charge-offs) recoveries to loans and leases

 

 

(0.02

%)

 

 

(0.07

%)

 

 

(0.05

%)

Allowance for loan and lease losses to average loans and leases

 

 

1.36

%

 

 

0.72

%

 

 

0.77

%

Allowance for loan and lease losses to loans and leases

 

 

1.33

%

 

 

0.70

%

 

 

0.72

%

Net (charge-offs) recoveries to allowance for loans and leases

 

 

(1.20

%)

 

 

(9.57

%)

 

 

(7.14

%)

Allowance for loan and lease losses to nonperforming loans and leases

 

 

96.31

%

 

 

205.90

%

 

 

196.42

%

Balance:

 

 

 

 

 

 

 

 

 

 

 

 

Average loans and leases during period

 

$

4,507,975

 

 

$

4,456,202

 

 

$

4,039,346

 

Loans and leases at end of period

 

$

4,610,147

 

 

$

4,600,540

 

 

$

4,304,458

 

Nonperforming loans and leases at end of period

 

$

63,761

 

 

$

15,529

 

 

$

15,805

 

 

The allowance for loan and lease losses was $61.4 million, $32.0 million and $31.0 million, respectively, as of December 31, 2019, 2018 and 2017, representing an increase of $29.4 million, or 92.1 percent, in 2019 and an increase  of $931,000, or 3.0 percent, in 2018. The allowance for loan and lease losses as a percentage of loans and leases increased to 1.33 percent as of December 31, 2019 from 0.70 percent as of December 31, 2018. The increase in the allowance for loan and lease losses was mainly due to a $22.6 million specific allowance related to a $39.7 million troubled loan relationship as of December 31, 2019.

The allowance for off-balance sheet exposure, primarily unfunded loan commitments, as of December 31, 2019, 2018 and 2017 was $2.4 million, $1.4 million and $1.3 million, respectively, representing an increase of $958,000, or 66.6 percent, in 2019, and an increase of $143,000, or 11.0 percent, in 2018. 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 and lease portfolio and off-balance sheet exposure as of December 31, 2019.

The following table presents a summary of net (charge-offs) recoveries for the loan and lease portfolio:

 

 

 

For the year ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

 

Charge-

offs

 

 

Recoveries

 

 

Net (Charge-

offs)

Recoveries

 

 

Charge-

offs

 

 

Recoveries

 

 

Net (Charge-

offs)

Recoveries

 

 

Charge-offs

 

 

Recoveries

 

 

Net (Charge-

offs)

Recoveries

 

 

 

(in thousands)

 

Real estate loans

 

$

131

 

 

$

2,190

 

 

$

2,059

 

 

$

3,897

 

 

$

2,511

 

 

$

(1,386

)

 

$

2,150

 

 

$

1,527

 

 

$

(623

)

Commercial and industrial loans

 

 

1,293

 

 

 

1,241

 

 

 

(53

)

 

 

815

 

 

 

1,370

 

 

 

555

 

 

 

2,516

 

 

 

1,901

 

 

 

(615

)

Leases receivable

 

 

3,162

 

 

 

422

 

 

 

(2,741

)

 

 

2,598

 

 

 

368

 

 

 

(2,230

)

 

 

1,233

 

 

 

239

 

 

 

(994

)

Consumer loans

 

 

1

 

 

 

0

 

 

 

(1

)

 

 

 

 

 

2

 

 

 

2

 

 

 

 

 

 

15

 

 

 

15

 

Total

 

$

4,588

 

 

$

3,852

 

 

$

(736

)

 

$

7,310

 

 

$

4,251

 

 

$

(3,059

)

 

$

5,899

 

 

$

3,682

 

 

$

(2,217

)

 

45


 

For the year ended December 31, 2019, charge-offs were $4.6 million, a decrease of $2.7 million, or 37.2 percent, from $7.3 million for the same period in 2018, and recoveries were $3.9 million, a decrease of $399,000, or 9.4 percent, from $4.3 million in 2018. For the year ended December 31, 2019, net loan and lease charge-offs were $736,000, compared with net charge-offs of $3.1 million for 2018.

Deposits

The following table shows the composition of deposits by type as of the dates indicated:

 

 

 

As of December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

 

Balance

 

 

Percent

 

 

Balance

 

 

Percent

 

 

Balance

 

 

Percent

 

 

 

(dollars in thousands)

 

Demand – noninterest-bearing

 

$

1,391,624

 

 

 

29.6

%

 

$

1,284,530

 

 

 

27.1

%

 

$

1,312,274

 

 

 

30.2

%

Interest-bearing:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand

 

 

84,323

 

 

 

1.8

%

 

 

87,582

 

 

 

1.8

%

 

 

92,948

 

 

 

2.1

%

Money market and savings

 

 

1,667,096

 

 

 

35.5

%

 

 

1,573,622

 

 

 

33.2

%

 

 

1,527,100

 

 

 

35.1

%

Time deposits of $100,000 or more

 

 

1,402,063

 

 

 

29.8

%

 

 

1,601,648

 

 

 

33.7

%

 

 

1,131,789

 

 

 

26.0

%

Other time deposits

 

 

153,856

 

 

 

3.3

%

 

 

199,853

 

 

 

4.2

%

 

 

284,543

 

 

 

6.6

%

Total deposits

 

$

4,698,962

 

 

 

100.0

%

 

$

4,747,235

 

 

 

100.0

%

 

$

4,348,654

 

 

 

100.0

%

 

Total deposits were $4.70 billion, $4.75 billion and $4.35 billion as of December 31, 2019, 2018 and 2017, respectively, representing a decrease of $48.3 million, or 1.0 percent, in 2019, and an increase of $398.6 million, or 9.2 percent, in 2018. The decrease in total deposits for 2019 was mainly attributable to a $199.1 million decrease in time deposits of $100,000 or more, offset by increases of $93.5 million in money market and savings accounts and $107.1 million in noninterest bearing demand accounts.

Time deposits of $100,000 or more were $1.40 billion, $1.60 billion and $1.13 billion as of December 31, 2019, 2018 and 2017, respectively, representing a decrease of $199.1 million, or 12.4 percent, in 2019 and an increase of $469.9 million, or 41.5 percent, in 2018. Noninterest-bearing demand deposits represented 29.6 percent of total deposits at December 31, 2019, compared with 27.1 percent and 30.2 percent of total deposits at December 31, 2018 and 2017, respectively.

The following table shows the distribution of average deposits and the average rates paid for dates indicated:

 

 

 

As of December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

 

Average

Balance

 

 

Average

Rate

 

 

Average

Balance

 

 

Average

Rate

 

 

Average

Balance

 

 

Average

Rate

 

 

 

(dollars in thousands)

 

Demand – noninterest-bearing

 

$

1,288,301

 

 

 

 

 

 

$

1,315,473

 

 

 

 

 

 

$

1,249,158

 

 

 

 

 

Interest-bearing:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand

 

 

83,613

 

 

 

0.14

%

 

 

91,495

 

 

 

0.12

%

 

 

93,184

 

 

 

0.08

%

Money market and savings

 

 

1,566,403

 

 

 

1.50

%

 

 

1,444,674

 

 

 

1.12

%

 

 

1,495,378

 

 

 

0.84

%

Time deposits of $100,000 or more

 

 

1,575,413

 

 

 

2.34

%

 

 

1,369,486

 

 

 

1.76

%

 

 

1,012,099

 

 

 

1.03

%

Other time deposits

 

 

177,229

 

 

 

1.45

%

 

 

239,917

 

 

 

1.12

%

 

 

310,253

 

 

 

0.98

%

Total deposits

 

$

4,690,959

 

 

 

1.35

%

 

$

4,461,045

 

 

 

0.97

%

 

$

4,160,072

 

 

 

0.63

%

 

Average deposits for the years ended December 31, 2019, 2018 and 2017 were $4.69 billion, $4.46 billion and $4.16 billion, respectively. Average deposits increased 5.2 percent in 2019 and 7.2 percent in 2018.

46


 

The following table summarizes the maturity of time deposits of $100,000 or more at December 31, 2019, 2018 and 2017, respectively.

 

 

 

As of December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

 

(in thousands)

 

Three months or less

 

$

376,661

 

 

$

266,221

 

 

$

237,683

 

Over three months through six months

 

 

303,287

 

 

 

284,125

 

 

 

402,535

 

Over six months through twelve months

 

 

572,184

 

 

 

723,827

 

 

 

359,314

 

Over twelve months

 

 

149,931

 

 

 

327,475

 

 

 

132,257

 

Total time deposits

 

$

1,402,063

 

 

$

1,601,648

 

 

$

1,131,789

 

 

Borrowings and Subordinated Debentures

Borrowings mostly take the form of advances from the FHLB. At December 31, 2019, advances from the FHLB were $90.0 million, an increase of $35.0 million from $55.0 million at December 31, 2018. At December 31, 2019, the Bank had $75.0 million in term advances and $15.0 million in overnight advances from the FHLB.  Borrowings increased during the second half of the year primarily due to favorable borrowing rates, as the Federal Reserve lowered the federal funds rate by 75 basis points, and to supplement the decrease in deposits.

The following is a summary of contractual maturities of FHLB advances:

 

 

 

As of December 31,

 

 

 

2019

 

 

2018

 

 

 

Outstanding

Balance

 

 

Weighted

Average

Rate

 

 

Outstanding

Balance

 

 

Weighted

Average

Rate

 

 

 

(dollars in thousands)

 

Overnight advances

 

$

15,000

 

 

 

1.66

%

 

$

55,000

 

 

 

2.56

%

Advances due within 12 months

 

 

25,000

 

 

 

1.75

%

 

 

 

 

 

 

Advances due over 12 months through 24 months

 

 

25,000

 

 

 

1.66

%

 

 

 

 

 

 

Advances due over 24 months through 36 months

 

 

25,000

 

 

 

1.72

%

 

 

 

 

 

 

Outstanding advances

 

$

90,000

 

 

 

1.70

%

 

$

55,000

 

 

 

2.56

%

 

The following is financial data pertaining to FHLB advances:

 

 

 

As of December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

 

(dollars in thousands)

 

Weighted-average interest rate at end of year

 

 

1.70

%

 

 

2.56

%

 

 

1.41

%

Weighted-average interest rate during the year

 

 

1.89

%

 

 

1.94

%

 

 

0.90

%

Average balance of FHLB advances

 

$

40,374

 

 

$

174,452

 

 

$

119,041

 

Maximum amount outstanding at any month-end

 

$

285,000

 

 

$

300,000

 

 

$

330,000

 

 

Subordinated debentures increased $569,000 to $118.4 million as of December 31, 2019, from $117.8 million as of December 31, 2018 due to the amortization of discount. Subordinated debentures are comprised of fixed-to-floating subordinated notes of $98.3 million and $98.1 million as of December 31, 2019 and 2018, respectively, and junior subordinated deferrable interest debentures of $20.0 million and $19.7 million as of December 31, 2019 and 2018, respectively. See “Note 10 - Subordinated Debentures” to the consolidated financial statements for more details.

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.

47


 

The Company performs simulation modeling to estimate the potential effects of interest rate changes. The following table summarizes one of the stress simulations performed to forecast the impact of changing interest rates on net interest income and the value of interest-earning assets and interest-bearing liabilities reflected on our balance sheet (i.e., an instantaneous parallel shift in the yield curve of the magnitude indicated below). 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.

 

 

 

 

 

Net Interest Income Simulation

 

Change in

 

 

1- to 12-Month Horizon

 

 

13- to 24-Month Horizon

 

Interest

 

 

Dollar

 

 

Percentage

 

 

Dollar

 

 

Percentage

 

Rate

 

 

Change

 

 

Change

 

 

Change

 

 

Change

 

 

 

 

 

(dollars in thousands)

 

300%

 

 

$

3,321

 

 

1.79%

 

 

$

22,240

 

 

11.79%

 

200%

 

 

$

2,231

 

 

1.21%

 

 

$

14,920

 

 

7.91%

 

100%

 

 

$

1,615

 

 

0.87%

 

 

$

8,560

 

 

4.54%

 

(100%)

 

 

$

(6,074

)

 

(3.28%)

 

 

$

(16,778

)

 

(8.89%)

 

 

 

 

 

 

 

 

Economic Value of Equity (EVE)

 

Change in

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest

 

 

 

 

 

 

Dollar

 

 

Percentage

 

Rate

 

 

 

 

 

 

Change

 

 

Change

 

 

 

 

 

 

 

 

 

(dollars in thousands)

 

300%

 

 

 

 

 

 

$

54,074

 

 

10.23%

 

200%

 

 

 

 

 

 

$

42,408

 

 

8.02%

 

100%

 

 

 

 

 

 

$

29,246

 

 

5.53%

 

(100%)

 

 

 

 

 

 

$

(49,595

)

 

(9.38%)

 

 

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 leases and securities, pricing strategies on loans and leases 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.

At December 31, 2019, the Bank’s total risk-based capital ratio of 14.64 percent, Tier 1 risk-based capital ratio of 13.39 percent, common equity Tier 1 capital ratio of 13.39 percent, and Tier 1 leverage capital ratio of 11.56 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 10.00 percent, Tier 1 risk-based capital ratio equal to or greater than 8.00 percent, common equity Tier 1 capital ratio of 6.50 percent, and Tier 1 leverage capital ratio equal to or greater than 5.00 percent.

At December 31, 2019, 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 15.11 percent, 11.78 percent, 11.36 percent, and 10.15 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.

48


 

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 21 - 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.

Contractual Obligations

Our contractual obligations, excluding accrued interest payments, as of December 31, 2019 are as follows:

 

 

 

Less Than

One Year

 

 

More Than

One Year

and Less

Than Three

Years

 

 

More Than

Three Years

and Less

Than Five

Years

 

 

More Than

Five Years

 

 

Total

 

 

 

(in thousands)

 

Time deposits

 

$

1,390,606

 

 

$

162,671

 

 

$

2,643

 

 

$

 

 

$

1,555,919

 

Federal Home Loan Bank advances

 

 

40,000

 

 

 

50,000

 

 

 

 

 

 

 

 

 

90,000

 

Commitments to extend credit

 

 

250,150

 

 

 

79,538

 

 

 

20,294

 

 

 

21,305

 

 

 

371,287

 

Standby letter of credit

 

 

29,267

 

 

 

2,105

 

 

 

 

 

 

 

 

 

31,372

 

Operating lease obligations

 

 

6,374

 

 

 

9,971

 

 

 

9,016

 

 

 

17,445

 

 

 

42,807

 

Total

 

$

1,716,398

 

 

$

304,285

 

 

$

31,952

 

 

$

38,750

 

 

$

2,091,386

 

 

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 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, 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 should apply the amendments in this ASU on a prospective basis. An entity is required to disclose the nature of and reason for the change in accounting principle upon transition. That disclosure should be provided in the first annual period and in the interim period within the first annual period when the entity initially adopts the amendments in this standard. Public business entities should adopt the amendments in this ASU for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact of this ASU.

 

49


 

FASB ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, introduces new guidance for the accounting for credit losses on instruments within its scope. The new guidance introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. The CECL model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost; and (2) certain off-balance sheet credit exposures. This includes loans, held-to-maturity debt securities, loan commitments, financial guarantees, and net investments in leases, as well as reinsurance and trade receivables. Upon initial recognition of the exposure, the CECL model requires an entity to estimate the credit losses expected over the life of an exposure (or pool of exposures). The estimate of expected credit losses (“ECL”) should consider historical information, current information, and reasonable and supportable forecasts, including estimates of prepayments. Financial instruments with similar risk characteristics should be grouped together when estimating ECL. ASU 2016-13 is effective for public entities for interim and annual periods beginning after December 15, 2019. On July 2, 2019, the FASB voted to delay CECL’s effective date for non-public companies and Smaller Reporting Companies who are public filers. Due to the Company’s categorization as a large accelerated filer, this delay will not have any impact on its adoption of ASU 2016-13. The Company has established a steering committee comprised of senior executives from the Accounting and Credit Risk functions and has engaged third party consultants to support CECL adoption activities.

 

The Company expects to adopt CECL during the first quarter of 2020. The Company is currently engaged in CECL implementation activities and has completed development of its methodologies, data/input gathering and validation, and initial testing of its designed models. The Company plans to leverage three loss rate methodologies across the Bank's four major loan and lease segments. In addition, the Company has devised risk documentation and policies and procedures associated with CECL to support the ongoing estimation activities and the continuous assessment of risks related to the methodology and its models, and data governance. The Company completed parallel processing and review of the model outputs during the three-month period ended June 30, 2019, September 30, 2019 and December 31, 2019.

 

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 58 through 110.

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, 2019, 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 and accounting 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.

Based upon that evaluation, the Company’s principal executive officer and principal financial officer concluded that as of December 31, 2019, due to the identification of a material weakness in our internal control over financial reporting, as further described below, the Company’s disclosure controls and procedures were not 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.

50


 

Notwithstanding the identified material weakness related to the Company’s control environment, the Company believes the consolidated financial statements included in this Annual Report on Form 10-K fairly represent in all material respects our financial condition, results of operations and cash flows at and for the periods presented in accordance with U.S. GAAP.

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, 2019. 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 did not maintain effective internal control over financial reporting as of December 31, 2019 due to the fact that a material weakness existed in the Company’s internal control over financial reporting as further described below. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

Material Weakness Identified Relating to Information Technology General Controls

During the fourth quarter of 2019, we identified a material weakness in internal control related to ineffective information technology general controls (“ITGCs”) in the area of user access and segregation of duties over certain information technology (“IT”) systems that support the Company’s recording of transactions and financial reporting processes. We believe that this control deficiency was a result of insufficient training of personnel around changes in our IT environment. The material weakness did not result in any identified misstatements to the financial statements, and there were no changes to previously released financial results. Based on this material weakness, the Company’s management concluded that at December 31, 2019, the Company’s internal control over financial reporting was not effective.

The Company’s independent registered public accounting firm, Crowe LLP has issued an adverse audit report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019 which appears in Item 8 of this Form 10-K.

Following identification of the material weakness and prior to filing this Annual Report on Form 10-K, we completed procedures for the year ended December 31, 2019. Based on these procedures, management believes that our consolidated financial statements included in this Form 10-K have been prepared in accordance with U.S. GAAP. Our Chief Executive Officer and Chief Financial Officer have certified that, based on their knowledge, the financial statements, and other financial information included in this Form 10-K, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this Form 10-K. Crowe LLP has issued an unqualified opinion on our financial statements, which is included in Item 8 of this Form 10-K.

51


 

Remediation

Management has been implementing and continues to implement measures designed to ensure that control deficiencies contributing to the material weakness are remediated, such that these controls are designed, implemented, and operating effectively. The remediation actions include: (i) changing access to impacted financial systems to ensure access is limited to appropriate users with appropriate functionality; (ii) enhancing the IT management review and testing plan to monitor ITGCs, with a specific focus on systems supporting our financial reporting processes; (iii) developing a training program addressing ITGCs and policies that enforce segregation of duties, including educating control owners concerning the principles and requirements of each control, with a focus on those related to user access over IT system changes impacting financial reporting; and (iv) enhancing quarterly reporting on the remediation measures to the Audit Committee of the Board of Directors.

We believe that these actions will remediate the material weakness. The weakness will not be considered remediated, however, until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We expect that the remediation of this material weakness will be completed prior to the end of fiscal 2020.

Material Weakness Identified Relating to Inadequate Review of the Fair Value of Collateral Dependent Impaired Loans

As disclosed in our 10-Q, as of June 30, 2019, our management determined the lack of operating effectiveness of a control that allowed for the inadequate review of the fair value of collateral dependent impaired loans gave rise to a material weakness. The material weakness was identified through evaluation of a non-real estate collateral dependent impaired loan. Specifically, our existing control for determining whether a fair value review of collateral dependent impaired loans should occur to facilitate the timely measurement of a specific allowance did not operate effectively.

During 2019, management implemented our previously disclosed remediation plan that included strengthening our policy documentation describing the criteria for when collateral dependent impaired loan fair value review is required, developing and implementing additional training on our collateral dependent impaired loan review process, and reinforcing the required documentation when concluding a fair value review is not warranted.

During the fourth quarter of 2019, we completed our testing of the operating effectiveness of the implemented controls and found them to be effective. As a result we have concluded this material weakness has been remediated as of December 31, 2019.

Changes in Internal Control Over Financial Reporting

Except for the material weakness identified during the quarter ended December 31, 2019, and the remediation of the material weakness identified as of June 30, 2019, there have been no other 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 2019 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, 2019 in accordance with the standards of Public Company Accounting Oversight Board (United States).

52


 

Report of Independent Registered Public Accounting Firm

Shareholders and the Board of Directors of Hanmi Financial Corporation and Subsidiaries

Los Angeles, California

Opinion on Internal Control Over Financial Reporting

We have audited Hanmi Financial Corporation and Subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2019, 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, because of the effects of the material weakness discussed in the following paragraph, the Company has not maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework: (2013) issued by COSO.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis.  A material weakness related to ineffective information technology general controls in the area of user access and segregation of duties over certain information technology systems that support the Company’s recording of transactions and financial reporting processes was identified and included in Management’s Report on Internal Control over Financial Reporting.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheet of the Company as of December 31, 2019, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for the year ended December 31, 2019, and the related notes (collectively referred to as the "financial statements") and our report dated March 2, 2020 expressed an unqualified opinion.  We considered the material weakness identified above in determining the nature, timing, and extent of audit procedures applied in our audit of the 2019 financial statements, and this report on Internal Control over Financial Reporting does not affect such report on the financial statements.

Basis for Opinion

The Company’s management is responsible 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 Report on Internal Control over Financial Reporting.  Our responsibility is to express an opinion on the Company’s internal control over financial reporting 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 effective internal control over financial reporting was maintained in all material respects. 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 audit also included performing such other procedures as we considered necessary in the circumstances.  We believe that our audit provides a reasonable basis for our opinion.

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 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.

53


 

/s/ Crowe LLP

Los Angeles, California

March 2, 2020

54


 

Item 9B.

Other Information

None.

55


 

Part III

Item 10.

Directors, Executive Officers and Corporate Governance

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 2020 Annual Meeting of Stockholders (the “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 3660 Wilshire Boulevard, Penthouse Suite A, Los Angeles, California 90010.

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 2020 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, 2019:

 

Plan Category

 

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))

 

Equity compensation plans approved by security holders

 

 

156,438

 

 

$

18.84

 

 

 

348,922

 

Equity compensation plans not approved by security holders

 

 

 

 

 

 

 

 

 

Total equity compensation plans

 

 

156,438

 

 

$

18.84

 

 

 

348,922

 

 

Item 13.

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 2020 Proxy Statement entitled “Ratification of the Appointment of the Independent Registered Public Accounting Firm” and “Audit and Non-Audit Fees.”

56


 

Part IV

Item 15.

Exhibits and Financial Statement Schedules

 

(1)

The financial statements are listed in the Index to consolidated financial statements on page 63 of this Report.

 

(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 111-112.

Item 16.

Form 10-K Summary

None.

57


 

Hanmi Financial Corporation and Subsidiaries

Index to Consolidated Financial Statements

 

 

Page

 

 

Report of Independent Registered Public Accounting Firm

59

 

 

Consolidated Balance Sheets as of December 31, 2019 and 2018

63

 

 

Consolidated Statements of Income for the Years Ended December 31, 2019, 2018 and 2017

64

 

 

Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2019, 2018 and 2017

65

 

 

Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2019, 2018 and 2017

66

 

 

Consolidated Statements of Cash Flows for the Years Ended December 31, 2019, 2018 and 2017

67

 

 

Notes to Consolidated Financial Statements

68

58


 

Report of Independent Registered Public Accounting Firm

 

 

Shareholders and the Board of Directors of Hanmi Financial Corporation and Subsidiaries

Los Angeles, California

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet of Hanmi Financial Corporation and Subsidiaries (the "Company") as of December 31, 2019, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for the year ended December 31, 2019, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019, and the results of its operations and its cash flows for the year ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 2, 2020 expressed an adverse opinion.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's 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 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 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 audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.  The communication of 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 separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Allowance for Loan Losses – Qualitative Adjustments

As described in Notes 1 and 3 to the consolidated financial statements, the Company’s allowance for loan and lease losses is a valuation account that reflects the Company’s estimation of probable losses inherent in the loan and lease portfolio. The allowance is determined through an analysis involving quantitative calculations based on historic loss rates and qualitative adjustments for general allowances and individual impairment calculations for specific allocations.  The Company’s consolidated allowance for loan and lease losses was $61,408,000 at December 31, 2019, which consists of $35,631,000 in general allowances.  

The allowance for loan and lease losses is an estimate that is inherently uncertain and depends on the outcome of future events.  Management’s estimates are based on: previous loss experience; volume; growth; size and composition of the loan portfolio; the value of collateral and current economic conditions.  Changes in these assumptions could have a material effect on the Company’s financial results.

59


 

When determining the appropriate level for allowance for loan and lease losses, management considers qualitative adjustments for any factors that are likely to cause estimated losses associated with the Bank’s current 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 and lease trends.  We identified the qualitative adjustments within the general allowances as a critical audit matter.  Auditing management’s qualitative adjustments involved our especially subjective judgment because management relies on a qualitative analysis to determine the quantitative impact the factors have on the allowance.  Management’s analysis of these factors required their significant judgment.

The primary procedures we performed to address this critical audit matter included:

 

Testing the effectiveness of controls over the qualitative adjustments within the general allowances, including controls addressing

 

o

The completeness and accuracy of the data used as the basis for the qualitative adjustments within the general allowances,

 

o

The mathematical accuracy of the underlying credit risk matrices against which the qualitative adjustments to the general allowances are calculated, and

 

o

Management’s judgments related to the data used in the determination of qualitative adjustments within the general allowances and the overall reasonableness of the adjustments.

 

Substantively testing management’s process, including evaluating their judgments and assumptions, for determining the qualitative adjustments within the general allowances, including:

 

o

Evaluation of the completeness and accuracy of the data used as a basis for the qualitative adjustments within the general allowances,

 

o

Evaluation of the mathematical accuracy of the underlying credit risk matrices against which the qualitative adjustments to the general allowances are calculated,

 

o

Evaluation of the reasonableness of management’s judgments related to the data used in the determination of qualitative adjustments within the general allowances,

 

o

Analytical evaluation of the directional consistency of the qualitative adjustments within the general allowances, with respect to the underlying trends, and

 

o

Analytical evaluation of the overall adequacy of the allowance for loan and lease losses, including the qualitative adjustments to the general allowances.

Impaired Loan Identification and Specific Allowance

As described in Notes 1 and 3 to the consolidated financial statements, management identifies and classifies loans as impaired when it is probable that not all amounts, including principal and interest, will be collected in accordance with the contractual terms of the loan agreement.  The Company considers whether the borrower is experiencing problems such as operating losses, marginal working capital, inadequate cash flows or business deterioration in realizable value.  Impaired loans are 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 (less costs to sell) if the loan is collateral dependent. In addition, management has an ongoing monitoring process and assigns a grade to reflect the identified credit risk.  The grades are pass and pass watch, special mention, substandard, doubtful and loss and are defined in Note 3 to the consolidated financial statements.  Determining the loan grade classification, when to classify a loan as impaired, determination of impairment methodology, and estimating a specific allocation requires significant management judgment.  A difference in the timing and valuation of impairment and loan grade classification could have a material impact on the Company’s financial results and disclosures.  

During June 2019, management graded a loan substandard and classified it as impaired. This was a single $40.7 million credit relationship (comprised of a $28.0 million construction loan and a $12.7 million commercial and industrial loan). The impairment classification was made as of June 30, 2019 resulting in a specific allowance on the relationship of $15.7 million.   At December 31, 2019 the loan relationship has a recorded investment of $39.7 million and a specific allowance of $22.6 million.

Auditing the appropriateness of the timing of the impairment classification required evaluation of the Company’s ability to collect all amounts according to the contractual terms of the loan agreement, including scheduled interest payments.  This evaluation involved especially challenging and subjective auditor judgment due to the nature of the credits, the sources of repayment (including liquidation of collateral), and the significant judgment necessary in evaluating the audit evidence obtained.  

60


 

Auditing the adequacy of the established specific allocation also involved especially challenging and subjective auditor judgment as the underlying collateral backing the commercial and industrial loan was unique in nature, has a limited resale market, and variability in the estimated fair value. Further, at the time of the impairment classification (June 30, 2019), management concluded a material weakness in their internal control over financial reporting existed. The material weakness resulted from the lack of operating effectiveness that allowed for the inadequate review of the fair value of collateral dependent impaired loans.  In addition, the evaluation of repayment sources also involved especially challenging and subjective auditor judgment.  

The primary procedures we performed to address this critical audit matter involved substantively testing management’s assertions, including evaluating their judgments and assumptions, when classifying the loan as substandard, identifying the impaired loan relationship, and developing its specific allocation estimate, including:

 

Verification of the liquidity of the borrower and occurrence, or lack thereof, for certain events to generate additional liquidity.

 

Utilization of an internal credit risk specialist to evaluate the history of the loan relationship and conclude on the appropriateness of the timing of the classification as substandard.

 

Evaluation of management’s methodology for determining impairment.

 

Testing of the appropriateness and consistency of management’s judgments related to the classification of the loan relationship as collateral dependent.

 

Testing the completeness and accuracy of data used as the basis for management’s calculation of the specific allowance.

 

Testing the mathematical accuracy of management’s calculation of the specific allocation.

 

Engaging a specialist (auditor engaged specialist) to evaluate the reasonableness of the appraisal obtained by management to support the collateral value of the construction loan.

 

Engaging a specialist to independently value the unique collateral supporting the commercial and industrial loan at the point of the impairment decision.

 

Evaluation of confirming and disconfirming evidence.

Audit Response to Material Weakness

As discussed in Management’s Annual Report on Internal Control Over Financial Reporting, the Company identified a material weakness in internal control related to ineffective information technology general controls (ITGCs) in the area of user access and segregation of duties over certain information technology (IT) systems that support the Company’s recording of transactions and financial reporting processes.

This material weakness impacts the Company’s controls over access to IT systems and financial reporting processes related to the recording of transactions in all the financial statement accounts and required us to increase the extent of our audit effort.  Significant auditor judgment was required to design and execute the incremental audit procedures and to assess the sufficiency of the procedures performed and the audit evidence obtained.

Addressing the matter involved performing expanded audit procedures beyond what would have been performed had the controls been designed and operating effectively and evaluating the audit evidence in connection with forming our overall opinion on the financial statements which included:

 

Evaluation of other controls impacting the processing of transactions recorded in the financial statements.

 

Performing incremental substantive audit procedures to address the identified risks for financial statement accounts impacted.

 

Performing computer assisted audit techniques at the transaction level to identify and test transactions that met certain risk characteristics for specific populations of transactions.

/s/ Crowe LLP

We have served as the Company’s auditor since 2019.

Los Angeles, California

March 2, 2020

 

 

61


 

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 balance sheet of Hanmi Financial Corporation and subsidiaries (the Company) as of December 31, 2018, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the two-year period 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 financial position of the Company as of December 31, 2018, and the results of its operations and its cash flows for each of the years in the two-year period 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 audits. 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 audits 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 audits 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 audits 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 audits provide 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

62


 

Hanmi Financial Corporation and Subsidiaries

Consolidated Balance Sheets

(in thousands except share data)

 

 

 

December 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Assets

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

121,678

 

 

$

155,376

 

Securities available for sale, at fair value (amortized cost of $629,725 as of December 31, 2019 and $583,444 as of December 31, 2018)

 

 

634,477

 

 

 

574,908

 

Loans held for sale, at the lower of cost or fair value

 

 

6,020

 

 

 

9,390

 

Loans and leases receivable, net of allowance for loan and lease losses of $61,408 as of December 31, 2019 and $31,974 as of December 31, 2018

 

 

4,548,739

 

 

 

4,568,566

 

Accrued interest receivable

 

 

11,742

 

 

 

13,331

 

Premises and equipment, net

 

 

26,070

 

 

 

27,752

 

Customers' liability on acceptances

 

 

66

 

 

 

173

 

Servicing assets

 

 

6,956

 

 

 

8,520

 

Goodwill and other intangible assets, net

 

 

11,873

 

 

 

12,182

 

Federal Home Loan Bank ("FHLB") stock, at cost

 

 

16,385

 

 

 

16,385

 

Deferred tax assets

 

 

36,787

 

 

 

27,441

 

Current tax assets

 

 

-

 

 

 

8,314

 

Bank-owned life insurance

 

 

52,782

 

 

 

51,661

 

Prepaid expenses and other assets

 

 

64,609

 

 

 

28,220

 

Total assets

 

$

5,538,184

 

 

$

5,502,219

 

Liabilities and stockholders' equity

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Noninterest-bearing

 

$

1,391,624

 

 

$

1,284,530

 

Interest-bearing

 

 

3,307,338

 

 

 

3,462,705

 

Total deposits

 

 

4,698,962

 

 

 

4,747,235

 

Accrued interest payable

 

 

11,215

 

 

 

11,379

 

Bank's liability on acceptances

 

 

66

 

 

 

173

 

Borrowings

 

 

90,000

 

 

 

55,000

 

Subordinated debentures

 

 

118,377

 

 

 

117,808

 

Accrued expenses and other liabilities

 

 

56,297

 

 

 

18,056

 

Total liabilities

 

 

4,974,917

 

 

 

4,949,651

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Preferred Stock, $0.001 par value; authorized 10,000,000 shares; no shares issued as of December 31, 2019 and December 31, 2018

 

 

 

 

 

 

Common stock, $0.001 par value; authorized 62,500,000 shares; issued 33,475,402 shares  (30,799,624 shares outstanding) as of December 31, 2019 and 33,202,369 shares (30,928,437 shares outstanding) as of December 31, 2018

 

 

33

 

 

 

33

 

Additional paid-in capital

 

 

575,816

 

 

 

569,712

 

Accumulated other comprehensive income (loss), net of tax benefit (expense) of ($1,370) as of December 31, 2019 and $2,457 as of December 31, 2018

 

 

3,382

 

 

 

(6,079

)

Retained earnings

 

 

100,551

 

 

 

97,539

 

Less: treasury stock; 2,675,778 shares as of December 31, 2019 and 2,273,932 shares as of December 31, 2018

 

 

(116,515

)

 

 

(108,637

)

Total stockholders' equity

 

 

563,267

 

 

 

552,568

 

Total liabilities and stockholders' equity

 

$

5,538,184

 

 

$

5,502,219

 

 

See Accompanying Notes to Consolidated Financial Statements.

63


 

Hanmi Financial Corporation and Subsidiaries

Consolidated Statements of Income

(in thousands, except share and per share data)

 

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

Interest and dividend income:

 

 

 

 

 

 

 

 

 

 

 

 

Interest and fees on loans and leases

 

$

229,402

 

 

$

219,590

 

 

$

195,790

 

Interest on securities

 

 

14,661

 

 

 

12,817

 

 

 

11,850

 

Dividends on FHLB stock

 

 

1,147

 

 

 

1,413

 

 

 

1,232

 

Interest on deposits in other banks

 

 

1,562

 

 

 

577

 

 

 

449

 

Total interest and dividend income

 

 

246,772

 

 

 

234,397

 

 

 

209,321

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

Interest on deposits

 

 

63,105

 

 

 

43,080

 

 

 

26,089

 

Interest on borrowings

 

 

763

 

 

 

3,379

 

 

 

1,077

 

Interest on subordinated debentures

 

 

7,032

 

 

 

6,925

 

 

 

5,353

 

Total interest expense

 

 

70,900

 

 

 

53,384

 

 

 

32,519

 

Net interest income before provision for loan and lease losses

 

 

175,872

 

 

 

181,013

 

 

 

176,802

 

Loan and lease loss provision

 

 

30,170

 

 

 

3,990

 

 

 

831

 

Net interest income after provision for loan and lease losses

 

 

145,702

 

 

 

177,023

 

 

 

175,971

 

Noninterest income:

 

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

 

9,951

 

 

 

10,000

 

 

 

10,396

 

Trade finance and other service charges and fees

 

 

4,786

 

 

 

4,616

 

 

 

4,495

 

Gain on sale of Small Business Administration ("SBA") loans

 

 

5,251

 

 

 

4,954

 

 

 

8,734

 

Net gain (loss) on sales of securities

 

 

1,295

 

 

 

(341

)

 

 

1,748

 

Other operating income

 

 

6,269

 

 

 

5,291

 

 

 

8,042

 

Total noninterest income

 

 

27,552

 

 

 

24,520

 

 

 

33,415

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

67,900

 

 

 

69,435

 

 

 

67,944

 

Occupancy and equipment

 

 

17,064

 

 

 

15,944

 

 

 

15,740

 

Data processing

 

 

8,755

 

 

 

6,870

 

 

 

6,960

 

Professional fees

 

 

9,060

 

 

 

6,178

 

 

 

5,464

 

Supplies and communications

 

 

2,936

 

 

 

3,003

 

 

 

2,912

 

Advertising and promotion

 

 

3,797

 

 

 

4,041

 

 

 

3,952

 

Merger and integration costs (income)

 

 

 

 

 

846

 

 

 

(40

)

Other operating expenses

 

 

16,394

 

 

 

11,256

 

 

 

11,170

 

Total noninterest expense

 

 

125,906

 

 

 

117,573

 

 

 

114,102

 

Income before income taxes

 

 

47,348

 

 

 

83,970

 

 

 

95,284

 

Income tax expense

 

 

14,560

 

 

 

26,102

 

 

 

40,624

 

Net income

 

$

32,788

 

 

$

57,868

 

 

$

54,660

 

Basic earnings per share

 

$

1.06

 

 

$

1.80

 

 

$

1.70

 

Diluted earnings per share

 

$

1.06

 

 

$

1.79

 

 

$

1.69

 

Weighted-average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

30,725,376

 

 

 

31,924,863

 

 

 

32,071,585

 

Diluted

 

 

30,760,422

 

 

 

32,051,333

 

 

 

32,249,918

 

 

See Accompanying Notes to Consolidated Financial Statements.

64


 

Hanmi Financial Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income

(in thousands)

 

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

Net income

 

$

32,788

 

 

$

57,868

 

 

$

54,660

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on securities:

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding gain (loss) arising during period

 

 

14,583

 

 

 

(5,790

)

 

 

2,649

 

Less: reclassification adjustment for net gain included in net income

 

 

(1,295

)

 

 

(87

)

 

 

(1,748

)

Income tax (expense) benefit related to items of other comprehensive income

 

 

(3,827

)

 

 

1,684

 

 

 

(376

)

Other comprehensive income (loss), net of tax

 

 

9,461

 

 

 

(4,193

)

 

 

525

 

Comprehensive income

 

$

42,249

 

 

$

53,675

 

 

$

55,185

 

 

See Accompanying Notes to Consolidated Financial Statements.

 

65


 

Hanmi Financial Corporation and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity

(in thousands, except share data)

 

 

 

Common Stock - Number of Shares

 

 

Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Other

 

 

 

 

 

 

Treasury

 

 

Total

 

 

 

Shares

 

 

Treasury

 

 

Shares

 

 

Common

 

 

Paid-in

 

 

Comprehensive

 

 

Retained

 

 

Stock,

 

 

Stockholders'

 

 

 

Issued

 

 

Shares

 

 

Outstanding

 

 

Stock

 

 

Capital

 

 

Income (Loss)

 

 

Earnings

 

 

at Cost

 

 

Equity

 

Balance at January 1, 2017

 

 

32,946,197

 

 

 

(615,450

)

 

 

32,330,747

 

 

$

33

 

 

$

562,446

 

 

$

(2,394

)

 

$

41,726

 

 

$

(70,786

)

 

$

531,025

 

Stock options exercised

 

 

23,813

 

 

 

 

 

 

23,813

 

 

 

 

 

 

288

 

 

 

 

 

 

 

 

 

 

 

 

288

 

Restricted stock awards, net of forfeitures

 

 

113,123

 

 

 

 

 

 

113,123

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,893

 

 

 

 

 

 

 

 

 

 

 

 

2,893

 

Restricted stock surrendered due to employee tax liability

 

 

 

 

 

(36,056

)

 

 

(36,056

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,103

)

 

 

(1,103

)

Cash dividends declared (common stock, $0.80/share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(25,811

)

 

 

 

 

 

(25,811

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

54,660

 

 

 

 

 

 

54,660

 

Change in unrealized gain (loss) on securities available for sale, net of income taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

525

 

 

 

 

 

 

 

 

 

525

 

Balance at December 31, 2017

 

 

33,083,133

 

 

 

(651,506

)

 

 

32,431,627

 

 

$

33

 

 

$

565,627

 

 

$

(1,869

)

 

$

70,575

 

 

$

(71,889

)

 

$

562,477

 

Adjustments related to adoption of new accounting standards:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ASU 2016-01 (See Notes 1 and 3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

382

 

 

 

(382

)

 

 

 

 

 

 

ASU 2018-02 (See Notes 1 and 11)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(399

)

 

 

399

 

 

 

 

 

 

 

Adjusted balance at January 1, 2018

 

 

33,083,133

 

 

 

(651,506

)

 

 

32,431,627

 

 

$

33

 

 

$

565,627

 

 

$

(1,886

)

 

$

70,592

 

 

$

(71,889

)

 

$

562,477

 

Stock options exercised

 

 

25,750

 

 

 

 

 

 

25,750

 

 

 

 

 

 

570

 

 

 

 

 

 

 

 

 

 

 

 

570

 

Restricted stock awards, net of forfeitures

 

 

93,486

 

 

 

 

 

 

93,486

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,515

 

 

 

 

 

 

 

 

 

 

 

 

3,515

 

Restricted stock surrendered due to employee tax liability

 

 

 

 

 

(22,426

)

 

 

(22,426

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(680

)

 

 

(680

)

Repurchase of common stock

 

 

 

 

 

(1,600,000

)

 

 

(1,600,000

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(36,068

)

 

 

(36,068

)

Cash dividends declared (common stock, $0.96/share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(30,921

)

 

 

 

 

 

(30,921

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

57,868

 

 

 

 

 

 

57,868

 

Change in unrealized gain (loss) on securities available for sale, net of income taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,193

)

 

 

 

 

 

 

 

 

(4,193

)

Balance at December 31, 2018

 

 

33,202,369

 

 

 

(2,273,932

)

 

 

30,928,437

 

 

$

33

 

 

$

569,712

 

 

$

(6,079

)

 

$

97,539

 

 

$

(108,637

)

 

$

552,568

 

Stock options exercised

 

 

181,900

 

 

 

 

 

 

181,900

 

 

 

 

 

 

2,979

 

 

 

 

 

 

 

 

 

 

 

 

2,979

 

Restricted stock awards, net of forfeitures

 

 

91,133

 

 

 

 

 

 

91,133

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,125

 

 

 

 

 

 

 

 

 

 

 

 

3,125

 

Restricted stock surrendered due to employee tax liability

 

 

 

 

 

(26,846

)

 

 

(26,846

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(517

)

 

 

(517

)

Repurchase of common stock

 

 

 

 

 

(375,000

)

 

 

(375,000

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,362

)

 

 

(7,362

)

Cash dividends declared (common stock, $0.96/share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(29,776

)

 

 

 

 

 

 

(29,776

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

32,788

 

 

 

 

 

 

32,788

 

Change in unrealized gain (loss) on securities available for sale, net of income taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9,461

 

 

 

 

 

 

 

 

 

9,461

 

Balance at December 31, 2019

 

 

33,475,402

 

 

 

(2,675,778

)

 

 

30,799,624

 

 

$

33

 

 

$

575,816

 

 

$

3,382

 

 

$

100,551

 

 

$

(116,515

)

 

$

563,267

 

 

See Accompanying Notes to Consolidated Financial Statements

 

66


 

Hanmi Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

 

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

32,788

 

 

$

57,868

 

 

$

54,660

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

9,532

 

 

 

11,111

 

 

 

12,854

 

Share-based compensation expense

 

 

3,125

 

 

 

3,515

 

 

 

2,893

 

Loan and lease loss provision

 

 

30,170

 

 

 

3,990

 

 

 

831

 

(Gain) loss on sales of securities

 

 

(1,295

)

 

 

341

 

 

 

(1,748

)

Gain on sales of SBA loans

 

 

(5,251

)

 

 

(4,954

)

 

 

(8,734

)

Origination of SBA loans held for sale

 

 

(76,765

)

 

 

(79,146

)

 

 

(109,111

)

Proceeds from sales of SBA loans

 

 

74,866

 

 

 

82,133

 

 

 

117,780

 

Increase in cash surrender value of bank-owned life insurance

 

 

(1,121

)

 

 

(1,107

)

 

 

(1,114

)

Change in prepaid expenses and other assets

 

 

(5,770

)

 

 

404

 

 

 

98

 

Change in current tax assets

 

 

8,314

 

 

 

(2,490

)

 

 

(4,109

)

Change in deferred tax assets

 

 

(13,173

)

 

 

6,698

 

 

 

13,501

 

Change in accrued expenses and other liabilities

 

 

3,376

 

 

 

(1,728

)

 

 

3,855

 

Net cash provided by operating activities

 

 

58,796

 

 

 

76,635

 

 

 

81,656

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Purchases of securities available for sale

 

 

(320,815

)

 

 

(141,351

)

 

 

(242,369

)

Proceeds from matured, called and repayment of securities

 

 

159,942

 

 

 

99,253

 

 

 

79,878

 

Proceeds from sales of securities available for sale

 

 

113,306

 

 

 

34,751

 

 

 

97,271

 

Purchases of loans and leases receivable

 

 

 

 

 

(66,966

)

 

 

(266,275

)

Purchases of premises and equipment

 

 

(1,579

)

 

 

(3,696

)

 

 

(843

)

Proceeds from disposition of premises and equipment

 

 

5,655

 

 

 

 

 

 

 

Proceeds from sales of other real estate owned ("OREO")

 

 

716

 

 

 

2,173

 

 

 

5,711

 

Change in loans and leases receivable, excluding purchases

 

 

(1,770

)

 

 

(235,731

)

 

 

(193,557

)

Net cash used in investing activities

 

 

(44,545

)

 

 

(311,567

)

 

 

(520,184

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Change in deposits

 

 

(48,273

)

 

 

398,581

 

 

 

538,917

 

Change in overnight borrowings

 

 

(75,000

)

 

 

(95,000

)

 

 

(165,000

)

Proceeds from borrowings

 

 

110,000

 

 

 

 

 

 

 

Issuance of subordinated debentures

 

 

 

 

 

 

 

 

97,828

 

Proceeds from exercise of stock options

 

 

2,979

 

 

 

570

 

 

 

288

 

Cash paid for surrender of vested shares due to employee tax liability

 

 

(517

)

 

 

(680

)

 

 

(1,103

)

Repurchase of common stock

 

 

(7,362

)

 

 

(36,068

)

 

 

 

Cash dividends paid

 

 

(29,776

)

 

 

(30,921

)

 

 

(25,811

)

Net cash (used in) provided by financing activities

 

 

(47,949

)

 

 

236,482

 

 

 

445,119

 

Net increase (decrease) in cash and due from banks

 

 

(33,698

)

 

 

1,550

 

 

 

6,591

 

Cash and due from banks at beginning of year

 

 

155,376

 

 

 

153,826

 

 

 

147,235

 

Cash and due from banks at end of period

 

$

121,678

 

 

$

155,376

 

 

$

153,826

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense paid

 

$

71,064

 

 

$

47,314

 

 

$

32,519

 

Income taxes paid

 

$

15,570

 

 

$

20,792

 

 

$

28,135

 

Non-cash activities:

 

 

 

 

 

 

 

 

 

 

 

 

Transfer of loans receivable to other real estate owned

 

$

248

 

 

$

938

 

 

$

143

 

Income tax (expense) benefit related to items of other comprehensive income

 

$

(3,827

)

 

$

1,684

 

 

$

(376

)

Change in unrealized (gain) loss in accumulated other comprehensive income

 

$

14,583

 

 

$

5,790

 

 

$

(2,649

)

Right-of-use asset obtained in exchange for lease liability

 

$

43,085

 

 

$

-

 

 

$

-

 

 

See Accompanying Notes to Consolidated Financial Statements

 

67


 

Note 1 — Summary of Significant Accounting Policies

Summary of Operations

Hanmi Financial Corporation (“Hanmi Financial,” the “Company,” “we,” “us” or “our”) was formed as a holding company of Hanmi Bank (the “Bank”) and registered with the Securities and Exchange Commission under the Securities Act on March 17, 2001. 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 California state-chartered financial institution insured by the FDIC. The Bank is a state nonmember bank and the FDIC is its primary federal bank regulator. The California Department of Business Oversight is the Bank's primary state bank regulator.

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, 2019, 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, unless otherwise noted. 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.

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.

Securities

Securities are classified into four categories and accounted for as follows:

 

(i)

Securities that we have the positive intent and ability to hold to maturity are classified as “held to maturity” and reported at amortized cost;

 

(ii)

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;

68


 

 

(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 as a separate component of stockholders’ equity as accumulated other comprehensive income, net of income taxes; and

 

(iv)

Equity Securities, such as mutual funds, which would be classified as “available for sale” and reported at fair value. Unrealized gains and losses are reported as a separate component of income.

We review securities on an ongoing basis for the presence of other-than-temporary impairment (“OTTI”) or permanent impairment, taking into consideration current market conditions, fair value in relationship to cost, extent and nature of the change in fair value, issuer rating changes and trends, whether we intend to sell a security or if it is likely that we will be required to sell the security before recovery of our amortized cost basis of the investment, which may be maturity, and other factors.

Accounting Standards Codification (“ASC”) 320 requires other-than-temporarily impaired securities to be written down when fair value is below amortized cost in circumstances where: (1) an entity has the intent to sell a security; (2) it is more likely than not that an entity will be required to sell the security before recovery of its amortized cost basis; or (3) an entity does not expect to recover the entire amortized cost basis of the security. If we intend to sell a security or if it is more likely than not that we will be required to sell the security before recovery, an OTTI write-down is recognized in earnings equal to the difference between the security’s amortized cost basis and its fair value. If we do not intend to sell the security or it is not more likely than not that we will be required to sell the security before recovery, the OTTI write-down is separated into an amount representing credit loss, which is recognized in earnings, and the amount related to all other factors, which is recognized in other comprehensive income net of tax. A credit loss is the difference between the cost basis of the security and the present value of cash flows expected to be collected, discounted at the security’s effective interest rate at the date of acquisition. The cost basis of an other than temporarily impaired security is written down by the amount of impairment recognized in earnings. The new cost basis is not adjusted for subsequent recoveries in fair value.

Loans and leases receivable

Originated loans and leases: Loans and leases are originated by the Bank with the intent to hold them for investment and are stated at the principal amount outstanding, net of unearned income. Net deferred fees and costs include nonrefundable loan fees, direct loan origination costs and initial indirect 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 leases 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. However, in certain instances, we may place a particular loan on nonaccrual status earlier, depending upon the individual circumstances surrounding the loan’s delinquency. When an asset 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 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.

 

Nonperforming assets consist of loans and leases 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, and other real estate owned (“OREO”). Loans are generally placed on nonaccrual status when they become 90 days past due unless management believes the loan is adequately collateralized and in the process of collection. Additionally, the Bank may place loans that are not 90 days past due on nonaccrual status, if management reasonably believes the borrower will not be able to comply with the contractual loan repayment terms and collection of principal or interest is in question.

69


 

Loans Held for Sale

Loans originated, or transferred from loans and leases 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 Loan and Lease Losses

Management believes the allowance for loan and lease losses is appropriate to provide for probable incurred losses inherent in the loan and lease portfolio. However, the allowance is an estimate that is inherently uncertain and depends on the outcome of future events. Management’s estimates are based on: previous loss experience; volume, growth, size and composition of the loan portfolio; the value of collateral; and current economic conditions. Our lending is concentrated generally in real estate, commercial, SBA and trade finance lending to small and middle market businesses primarily in California, Illinois, and Texas.

The Bank charges or credits the income statement for provisions to the allowance for loan and lease losses and the allowance for off-balance sheet items at least quarterly based upon the allowance need. The allowance for loan and lease losses is maintained at a level considered adequate by management to absorb probable incurred losses in the loan and lease portfolio. The allowance is determined through an analysis involving quantitative calculations based on historic loss rates and qualitative adjustments for general allowances and individual impairment calculations for specific allocations. The Bank charges the allowance for actual losses on loans and leases and credits the allowance for recoveries on loans and leases previously charged-off.

The Bank evaluates the allowance methodology at least annually. For the fourth quarter of 2019, the Bank utilized a 35-quarter look-back period, anchored to the first quarter of 2011, 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 will allow the Bank to better capture the economic cycle while improving the ability to measure losses. For the fourth quarters of 2018 and 2017, the Bank utilized 31- and 27-quarter look-back periods, respectively. In addition, the estimated loss emergence period utilized in the Bank’s loss migration analysis changed to 2.5 years in 2016 and remained unchanged in 2018 and 2019. Moreover, the Bank reevaluated the qualitative adjustments, adjusting to 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, migration analysis allocates historical losses by loan pool and risk grade to determine risk factors for potential losses inherent in the current outstanding loan portfolio. Since the homogeneous loans are bulk graded, the risk grade is not factored into the historical loss analysis. In addition, specific allowances are allocated for loans deemed “impaired.”

When determining the appropriate level for allowance for loan and lease losses, management considers qualitative adjustments for any factors that are likely to cause estimated losses associated with the Bank’s current 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 and lease trends.

To systematically quantify the credit risk impact of trends and changes within the loan and lease portfolio, a credit risk matrix is utilized. The qualitative factors are considered on a loan pool by loan pool basis subsequent to, and in conjunction with, a loss migration analysis. The credit risk matrix provides various scenarios with positive or negative impact on the portfolio along with corresponding basis points for qualitative adjustments.

Loans are measured for impairment when it is probable that not all amounts, including principal and interest, will be collected in accordance with the original contractual terms of the loan agreement. The amount of impairment and any subsequent changes are recorded through the provision for loan losses as an adjustment to the allowance for loan losses.

70


 

The Bank follows the “Interagency Policy Statement on the Allowance for Loan and Lease Losses” and, as an integral part of the quarterly credit review process, the allowance for loan losses and allowance for off-balance sheet items are reviewed for adequacy. The California Department of Business Oversight and/or the Federal Deposit Insurance Corporation may require the Bank to recognize additions to the allowance for loan losses based upon their assessment of the information available to them at the time of their examinations.

In general, the Bank will charge off a loan and declare a loss when its collectability is questionable and when the Bank can no longer justify presenting the loan as an asset on its balance sheet. To determine if a loan should be charged off, possible sources of repayment are 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 do not provide a reasonable probability that principal can be collected in full, the Bank will fully or partially charge off the loan.

For a real estate loan, including commercial term loans secured by collateral, any impaired portion is considered as loss if the loan is more than 90 days past due. In a case where the fair value of collateral is less than the loan balance and the borrower has no other assets or income to support repayment, the amount of the deficiency is considered a loss and charged off.

For a commercial and industrial loan other than those secured by real estate, if the borrower is in the process of a bankruptcy filing in which the Bank is an unsecured creditor or deemed virtually unsecured by lack of collateral equity or lien position and the borrower has no realizable equity in assets and prospects for recovery are negligible, the loan is considered a loss and charged off. Additionally, a commercial and industrial unsecured loan that is more than 120 days past due is considered a loss and charged off.

For an unsecured consumer loan where a borrower files for bankruptcy, the loan is considered a loss within 60 days of receipt of notification of filing from the bankruptcy court. Other consumer loans are considered a loss if they are more than 90 days past due. Other events, such as bankruptcy, fraud, or death result in charge offs being recorded in an earlier period.

Impaired Loans

Loans are identified and classified as impaired when it is probable that not all amounts, including principal and interest, will be collected in accordance with the contractual terms of the loan agreement. The Bank will consider the following loans as impaired: nonaccrual loans or loans where principal or interest payments have been contractually past due for 90 days or more, unless the loan is both well-collateralized and in the process of collection; and loans classified as troubled debt restructuring loans.

The Bank considers whether the borrower is experiencing problems such as operating losses, marginal working capital, inadequate cash flows or business deterioration in realizable value. The Bank also considers the financial condition of a borrower who is in industries or countries experiencing economic or political instability.

When a loan is considered impaired, any future cash receipts on such loans will be treated as either interest income or return of principal depending upon management’s opinion of the ultimate risk of loss on the individual loan. Cash payments are treated as interest income where management believes the remaining principal balance is fully collectible.

We evaluate loan impairment in accordance with GAAP. Impaired loans are 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 is collateral dependent, less costs to sell. If the value of the impaired loan is less than the recorded investment in the loan, the deficiency will be charged off against the allowance for loan losses or, alternatively, a specific allocation will be established. Additionally, impaired loans are specifically excluded from the analysis when determining the amount of the general allowance for loan losses required for the period.

For impaired loans where the impairment amount is measured based on the present value of expected future cash flows discounted at the loan’s original effective interest rate, any impairment that represents the change in present value attributable to the passage of time is recognized as provision for loan losses.

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Troubled Debt Restructuring

A loan is identified as a troubled debt restructuring (“TDR”) when a borrower is experiencing financial difficulties and, for economic or legal reasons related to these difficulties, the Bank grants a concession to the borrower in the restructuring that it would not otherwise consider. The Bank 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.

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

10 to 30 years

Furniture and equipment

3 to 10 years

Leasehold improvements

Term of lease or useful life, whichever is shorter

Software

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 impaired, the impairment 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

Assets acquired through loan foreclosure are recorded at the lower of cost or fair value less estimated costs to sell when acquired. If fair value declines subsequent to foreclosure, valuation impairment is recorded through expense. Operating costs after acquisition are expensed.

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 originators 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, 2019.

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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.

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 $3.9 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 Bank 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 provides 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 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 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. 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.

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, excluding common shares in treasury. 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.

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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, 2019, the Company repurchased 375,000 shares of common stock at a cost of $7.4 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.

 

Accounting Standards Adopted in 2019

FASB ASU 2017-08, Receivables-Nonrefundable Fees and Other Costs (Topic 310): Premium Amortization on Purchased Callable Debt Securities, shortens the period of amortization of the premium on certain callable debt securities to the earliest call date. ASU 2017-08 applies to securities that have explicit, non-contingent call features that are callable at fixed prices and on preset dates. Securities purchased at a discount and mortgage-backed securities in which early repayment is based on prepayment of the underlying assets of the security are outside the scope of ASU 2017-08. For public business entities, the standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period, and applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The adoption of this ASU did not have a material impact on its consolidated financial statements.

 

FASB ASU 2016-02, Leases (Topic 842), introduced the most significant change for lessees including the requirement under the new guidance to recognize right-of-use assets and lease liabilities for all leases not considered short-term leases. By definition, a short-term lease is one in which: (a) the lease term is 12 months or less; and (b) there is not an option to purchase the underlying asset that the lessee is reasonably certain to exercise. For short-term leases, lessees may elect an accounting policy by class of underlying asset under which right-of-use assets and lease liabilities are not recognized and lease payments are generally recognized as expense over the lease term on a straight-line basis. This change resulted in lessees recognizing right-of-use assets and lease liabilities for most leases previously accounted for as operating leases under the legacy lease accounting guidance. Examples of changes in the new guidance affecting both lessees and lessors included: (a) defining initial direct costs to only include those incremental costs that would not have been incurred if the lease had not been entered into, (b) requiring related party leases to be accounted for based on their legally enforceable terms and conditions, (c) eliminating the additional requirements that were previously applied to leases involving real estate and (d) revising the circumstances under which the transfer contract in a sale-leaseback transaction should be accounted for as the sale of an asset by the seller-lessee and the purchase of an asset by the buyer-lessor. In addition, both lessees and lessors are now subject to new disclosure requirements. ASU 2016-02 became effective for public entities for interim and annual periods beginning after December 15, 2018.

Under the new lease guidance to recognize right-of-use assets and lease liabilities for all leases not considered short-term, the Company is required to recognize right-of-use assets and lease liabilities for most leases currently accounted for as operating leases under the legacy lease accounting standards. This impacted the Company’s Consolidated Balance Sheet by grossing up the assets and the liabilities to report the leases as an asset and a liability instead of reporting it as an expense to the income statement. The original opening amount of the right-of-use asset was $40.9 million, which had no impact to equity from the adoption of the standard.

FASB ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, was issued in August 2017 with the objective of improving the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. In addition to that main objective, the amendments in this update make certain targeted improvements to simplify the application of the hedge accounting guidance in current GAAP. The ASU requires certain hedging instrument to be presented in the same line item as the hedged item and also requires expanded disclosures. This ASU’s mandatory effective date for calendar year-end public companies is January 1, 2019, but the amendments may be early adopted in any interim or annual period after issuance. The Company does not currently have hedging transactions that are impacted by this ASU.

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Recently Issued Accounting Standards Not Yet Effective

 

FASB ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, 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 should apply the amendments in this ASU on a prospective basis. An entity is required to disclose the nature of and reason for the change in accounting principle upon transition. That disclosure should be provided in the first annual period and in the interim period within the first annual period when the entity initially adopts the amendments in this standard. Public business entities should adopt the amendments in this ASU for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact of this ASU.

 

FASB ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, introduces new guidance for the accounting for credit losses on instruments within its scope. The new guidance introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. Current expected credit losses (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost; and (2) certain off-balance sheet credit exposures. This includes loans, held-to-maturity debt securities, loan commitments, financial guarantees, and net investments in leases, as well as reinsurance and trade receivables. Upon initial recognition of the exposure, the CECL model requires an entity to estimate the credit losses expected over the life of an exposure (or pool of exposures). The estimate of expected credit losses ECL should consider historical information, current information, and reasonable and supportable forecasts, including estimates of prepayments. Financial instruments with similar risk characteristics should be grouped together when estimating ECL. ASU 2016-13 is effective for public entities for interim and annual periods beginning after December 15, 2019. On July 2, 2019, the FASB voted to delay CECL’s effective date for non-public companies and Smaller Reporting Companies who are public filers. Due to the Company’s categorization as a large accelerated filer, this delay will not have any impact on its adoption of ASU 2016-13. The Company has established a steering committee comprised of senior executives from the Accounting and Credit Risk functions and has engaged third party consultants to support CECL adoption activities.

 

The Company expects to adopt CECL during the three-month period ending March 31, 2020. The Company is currently engaged in CECL implementation activities and has completed development of its methodologies, data/input gathering and validation, and testing of its designed models. The Company plans to leverage three loss rate methodologies across the Bank’s four major loan and lease segments. In addition, the Company has devised risk documentation, policies and procedures associated with CECL to support the ongoing estimation activities and the continuous assessment of risks related to the model, its methodologies, and data governance.

The Company performed parallel runs and assessments of the model outputs during the three-month periods ended June 30, September 30, and December 31, 2019. This assisted the Company in identifying an expected coverage ratio of  allowance for credit losses ranging from 1.63 percent to 1.88 percent of total loans and leases. Given the existing allowance for loan and lease losses of $61.4 million and a coverage ratio of 1.33 percent at December 31, 2019, the expected increase to this ratio of 22.6 percent to 41.4 percent will cause the Company to record a material adjustment to the allowance and a corresponding after-tax charge to retained earnings in the first quarter of 2020.

 

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Note 2 — Securities

The following is a summary of securities available for sale as of December 31, 2019 and 2018:

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

Estimated

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

 

 

Cost

 

 

Gain

 

 

Loss

 

 

Value

 

 

 

(in thousands)

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

34,946

 

 

$

259

 

 

$

 

 

$

35,205

 

U.S. government agency and sponsored agency obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

 

406,813

 

 

 

4,334

 

 

 

(347

)

 

 

410,800

 

Collateralized mortgage obligations

 

 

164,232

 

 

 

792

 

 

 

(432

)

 

 

164,592

 

Debt securities

 

 

23,733

 

 

 

168

 

 

 

(22

)

 

 

23,879

 

Total U.S. government agency and sponsored agency obligations

 

 

594,778

 

 

 

5,294

 

 

 

(801

)

 

 

599,272

 

Total securities available for sale

 

$

629,725

 

 

$

5,553

 

 

$

(801

)

 

$

634,477

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

39,768

 

 

$

69

 

 

$

(7

)

 

$

39,830

 

U.S. government agency and sponsored agency obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

 

300,957

 

 

 

61

 

 

 

(5,984

)

 

 

295,034

 

Collateralized mortgage obligations

 

 

124,550

 

 

 

74

 

 

 

(2,332

)

 

 

122,292

 

Debt securities

 

 

7,499

 

 

 

 

 

 

(97

)

 

 

7,402

 

Total U.S. government agency and sponsored agency obligations

 

 

433,006

 

 

 

135

 

 

 

(8,413

)

 

 

424,728

 

Municipal bonds-tax exempt

 

 

110,670

 

 

 

197

 

 

 

(517

)

 

 

110,350

 

Total securities available for sale

 

$

583,444

 

 

$

401

 

 

$

(8,937

)

 

$

574,908

 

 

The amortized cost and estimated fair value of securities as of December 31, 2019, by contractual or expected maturity, are shown below. Collateralized mortgage obligations are included in the table shown below based on their expected maturities. All other securities are included based on their contractual maturities.

 

 

 

Available for Sale

 

 

 

Amortized

 

 

Estimated

 

 

 

Cost

 

 

Fair Value

 

 

 

(in thousands)

 

Within one year

 

$

38,285

 

 

$

38,381

 

Over one year through five years

 

 

140,066

 

 

 

140,619

 

Over five years through ten years

 

 

209,985

 

 

 

212,473

 

Over ten years

 

 

241,389

 

 

 

243,004

 

Total

 

$

629,725

 

 

$

634,477

 

 

ASC 320, “Investments – Debt and Equity Securities,” requires us to periodically evaluate our investments for other-than-temporary impairment (“OTTI”). There was no OTTI charge during the year ended December 31, 2019.

76


 

Gross unrealized losses on securities available for sale, the estimated fair value of the related securities and the number of securities aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows as of December 31, 2019 and 2018:

 

 

 

Holding Period

 

 

 

Less than 12 Months

 

 

12 Months or More

 

 

Total

 

 

 

Gross

 

 

Estimated

 

 

Number

 

 

Gross

 

 

Estimated

 

 

Number

 

 

Gross

 

 

Estimated

 

 

Number

 

 

 

Unrealized

 

 

Fair

 

 

of

 

 

Unrealized

 

 

Fair

 

 

of

 

 

Unrealized

 

 

Fair

 

 

of

 

 

 

Loss

 

 

Value

 

 

Securities

 

 

Loss

 

 

Value

 

 

Securities

 

 

Loss

 

 

Value

 

 

Securities

 

 

 

(in thousands, except number of securities)

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency and sponsored agency obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

$

(186

)

 

$

51,261

 

 

 

17

 

 

$

(161

)

 

$

18,757

 

 

 

14

 

 

$

(347

)

 

$

70,018

 

 

 

31

 

Collateralized mortgage obligations

 

 

(112

)

 

 

41,419

 

 

 

14

 

 

 

(320

)

 

 

39,936

 

 

 

36

 

 

 

(432

)

 

 

81,355

 

 

 

50

 

Debt securities

 

 

(20

)

 

 

8,235

 

 

 

2

 

 

 

(3

)

 

 

2,997

 

 

 

1

 

 

 

(22

)

 

 

11,233

 

 

 

3

 

Total U.S. government agency and sponsored agency obligations

 

 

(318

)

 

 

100,916

 

 

 

33

 

 

 

(483

)

 

 

61,690

 

 

 

51

 

 

 

(801

)

 

 

162,606

 

 

 

84

 

Total

 

$

(318

)

 

$

100,916

 

 

 

33

 

 

$

(483

)

 

$

61,690

 

 

 

51

 

 

$

(801

)

 

$

162,606

 

 

 

84

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

(7

)

 

$

14,797

 

 

 

2

 

 

$

 

 

$

 

 

 

 

 

$

(7

)

 

$

14,797

 

 

 

2

 

U.S. government agency and sponsored agency obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

 

(226

)

 

 

41,527

 

 

 

10

 

 

 

(5,758

)

 

 

244,550

 

 

 

106

 

 

 

(5,984

)

 

 

286,077

 

 

 

116

 

Collateralized mortgage obligations

 

 

(59

)

 

 

13,732

 

 

 

3

 

 

 

(2,273

)

 

 

92,532

 

 

 

49

 

 

 

(2,332

)

 

 

106,264

 

 

 

52

 

Debt securities

 

 

 

 

 

 

 

 

 

 

 

(97

)

 

 

7,402

 

 

 

3

 

 

 

(97

)

 

 

7,402

 

 

 

3

 

Total U.S. government agency and sponsored agency obligations

 

 

(285

)

 

 

55,259

 

 

 

13

 

 

 

(8,128

)

 

 

344,484

 

 

 

158

 

 

 

(8,413

)

 

 

399,743

 

 

 

171

 

Municipal bonds-tax exempt

 

 

(29

)

 

 

8,196

 

 

 

5

 

 

 

(488

)

 

 

65,644

 

 

 

30

 

 

 

(517

)

 

 

73,840

 

 

 

35

 

Total

 

$

(321

)

 

$

78,252

 

 

 

20

 

 

$

(8,616

)

 

$

410,128

 

 

 

188

 

 

$

(8,937

)

 

$

488,380

 

 

 

208

 

 

All individual securities that have been in a continuous unrealized loss position for 12 months or longer as of December 31, 2019 and December 31, 2018 had investment grade ratings upon purchase. The issuers of these securities have not established any cause for default on these securities and the various rating agencies have reaffirmed these securities’ long-term investment grade status as of December 31, 2019 and December 31, 2018. These securities have fluctuated in value since their purchase dates as market interest rates have fluctuated.

The Company does not intend to sell these securities and it is more likely than not that it will not be required to sell the investments before the recovery of its amortized cost basis. In addition, the unrealized losses on municipal securities are not considered other-than-temporarily impaired, as the bonds are rated investment grade and there are no credit quality concerns with the issuers. Interest payments have been made as scheduled, and management believes this will continue in the future and that the bonds will be repaid in full as scheduled. Therefore, in management’s opinion, all securities that have been in a continuous unrealized loss position for the past 12 months or longer as of December 31, 2019 and December 31, 2018 were not other-than-temporarily impaired, and therefore, no impairment charges as of December 31, 2019 and December 31, 2018 were warranted.

Realized gains and losses on sales of securities and proceeds from sales of securities were as follows for the periods indicated:

 

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

 

(in thousands)

 

Gross realized gains on sales of securities

 

$

1,359

 

 

$

87

 

 

$

1,891

 

Gross realized losses on sales of securities

 

 

(64

)

 

 

(957

)

 

 

(143

)

Net realized gains (losses) on sales of securities

 

$

1,295

 

 

$

(870

)

 

$

1,748

 

Proceeds from sales of securities

 

$

113,306

 

 

 

34,751

 

 

 

97,271

 

 

77


 

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, 2019, the Company recorded $1.3 million in net realized gain from sale of securities that had previously been recognized as net unrealized gains of $586,000 in comprehensive income. This included the sale of all of the Company’s tax-exempt municipal bond securities.

For the year ended December 31, 2018, the Company recorded $870,000 in net realized losses from 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 preceding paragraph. For the year ended December 31, 2017, there was a $1.7 million net gain in earnings resulting from the sale of securities that had previously been recorded as net unrealized gains of $1.3 million in comprehensive income.

Securities available for sale with market values of $30.2 million and $29.9 million as of December 31, 2019 and 2018, respectively, were pledged to secure advances from the Federal Reserve Bank, Discount Window facility, and for other purposes as required or permitted by law.

Note 3 — Loans and Leases

The Board of Directors and management review and approve the Bank’s loan and lease policy and procedures on a regular basis to reflect matters such as regulatory and organizational structure changes, strategic planning revisions, concentrations of credit, loan and lease delinquencies and nonperforming loans and leases, and problem loans and leases.

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, Small Business Administration (“SBA”) and international loans. Leases receivable include equipment finance agreements, which are typically secured by the business assets being financed. Consumer loans consist of auto loans, personal loans, and home equity lines of credit. 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 and lease portfolio consists of commercial real estate loans.

78


 

Loans and leases receivable, net

Loans and leases receivable consisted of the following as of the dates indicated:

 

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

 

(in thousands)

 

Real estate loans:

 

 

 

 

 

 

 

 

Commercial property

 

 

 

 

 

 

 

 

Retail

 

$

869,302

 

 

$

906,260

 

Hospitality

 

 

922,288

 

 

 

830,679

 

Other (1)

 

 

1,358,432

 

 

 

1,449,270

 

Total commercial property loans

 

 

3,150,022

 

 

 

3,186,209

 

Construction

 

 

76,455

 

 

 

71,583

 

Residential property

 

 

402,028

 

 

 

500,563

 

Total real estate loans

 

 

3,628,505

 

 

 

3,758,355

 

Commercial and industrial loans:

 

 

 

 

 

 

 

 

Commercial term

 

 

227,652

 

 

 

206,691

 

Commercial lines of credit

 

 

228,033

 

 

 

194,032

 

International loans

 

 

28,409

 

 

 

29,180

 

Total commercial and industrial loans

 

 

484,093

 

 

 

429,903

 

Leases receivable

 

 

483,879

 

 

 

398,858

 

Consumer loans (2)

 

 

13,670

 

 

 

13,424

 

Loans and leases receivable

 

 

4,610,147

 

 

 

4,600,540

 

Allowance for loan and lease losses

 

 

(61,408

)

 

 

(31,974

)

Loans and leases receivable, net

 

$

4,548,739

 

 

$

4,568,566

 

 

(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 and leases.

(2)

Consumer loans include home equity lines of credit of $8.2 million and $10.3 million as of December 31, 2019 and 2018, respectively.

Accrued interest on loans and leases receivable was $10.0 million and $10.9 million at December 31, 2019 and 2018, respectively. At December 31, 2019 and 2018, $1.35 billion and $1.10 billion of loans and leases receivable, 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, 2019 and 2018:

 

 

 

Real Estate

 

 

Commercial

and Industrial

 

 

Total

 

 

 

(in thousands)

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

5,194

 

 

$

4,196

 

 

$

9,390

 

Originations

 

 

43,001

 

 

 

33,764

 

 

 

76,765

 

Sales

 

 

(45,251

)

 

 

(34,865

)

 

 

(80,116

)

Principal paydowns and amortization

 

 

(1

)

 

 

(18

)

 

 

(19

)

Balance at end of period

 

$

2,943

 

 

$

3,077

 

 

$

6,020

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

3,746

 

 

$

2,648

 

 

$

6,394

 

Originations

 

 

39,243

 

 

 

39,903

 

 

 

79,146

 

Sales

 

 

(37,790

)

 

 

(38,161

)

 

 

(75,951

)

Principal paydowns and amortization

 

 

(5

)

 

 

(194

)

 

 

(199

)

Balance at end of period

 

$

5,194

 

 

$

4,196

 

 

$

9,390

 

 

79


 

Allowance for Loan and Lease Losses

Activity in the allowance for loan and lease losses was as follows for the periods indicated:

 

 

 

As of and for the Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

 

(in thousands)

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

31,974

 

 

$

31,043

 

 

$

32,429

 

Loans and leases charged off

 

 

(4,588

)

 

 

(7,310

)

 

 

(5,899

)

Recoveries on loans and leases previously charged off

 

 

3,852

 

 

 

4,251

 

 

 

3,682

 

Net charge-offs

 

 

(736

)

 

 

(3,059

)

 

 

(2,217

)

Loan and lease loss provision

 

 

30,170

 

 

 

3,990

 

 

 

831

 

Balance at end of period

 

$

61,408

 

 

$

31,974

 

 

$

31,043

 

 

The following table details the information on the allowance for loan and lease losses by portfolio segment for the years ended December 31, 2019 and 2018:

 

 

 

Real

Estate

 

 

Commercial

and

Industrial

 

 

Leases

Receivable

 

 

Consumer

 

 

Unallocated

 

 

Total

 

 

 

(in thousands)

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan and lease losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

18,384

 

 

$

7,162

 

 

$

6,303

 

 

$

98

 

 

$

27

 

 

$

31,974

 

Less loans and leases charged off

 

 

(131

)

 

 

(1,293

)

 

 

(3,162

)

 

 

(1

)

 

 

 

 

 

(4,588

)

Recoveries on loans and leases previously charged off

 

 

2,190

 

 

 

1,241

 

 

 

422

 

 

 

0

 

 

 

 

 

 

3,852

 

Loan and lease loss provision

 

 

15,913

 

 

 

9,097

 

 

 

5,205

 

 

 

(17

)

 

 

(27

)

 

 

30,170

 

Ending balance

 

$

36,355

 

 

$

16,206

 

 

$

8,767

 

 

$

80

 

 

$

 

 

$

61,408

 

Individually evaluated for impairment

 

$

14,028

 

 

$

8,885

 

 

$

2,863

 

 

$

1

 

 

$

 

 

$

25,778

 

Collectively evaluated for impairment

 

$

22,327

 

 

$

7,321

 

 

$

5,904

 

 

$

79

 

 

$

 

 

$

35,631

 

Loans and leases receivable

 

$

3,628,505

 

 

$

484,093

 

 

$

483,879

 

 

$

13,670

 

 

$

 

 

$

4,610,147

 

Individually evaluated for impairment

 

$

43,867

 

 

$

13,700

 

 

$

5,902

 

 

$

1,297

 

 

$

 

 

$

64,766

 

Collectively evaluated for impairment

 

$

3,584,638

 

 

$

470,393

 

 

$

477,977

 

 

$

12,373

 

 

$

 

 

$

4,545,382

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan and lease losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

17,012

 

 

$

7,400

 

 

$

6,279

 

 

$

122

 

 

$

230

 

 

$

31,043

 

Less loans and leases charged off

 

 

(3,897

)

 

 

(815

)

 

 

(2,598

)

 

 

 

 

 

 

 

 

(7,310

)

Recoveries on loans and leases previously charged off

 

 

2,512

 

 

 

1,369

 

 

 

368

 

 

 

2

 

 

 

 

 

 

4,251

 

Loan and lease loss provision

 

 

2,757

 

 

 

(792

)

 

 

2,254

 

 

 

(26

)

 

 

(203

)

 

 

3,990

 

Ending balance

 

$

18,384

 

 

$

7,162

 

 

$

6,303

 

 

$

98

 

 

$

27

 

 

$

31,974

 

Individually evaluated for impairment

 

$

1

 

 

$

428

 

 

$

1,383

 

 

$

 

 

$

 

 

$

1,812

 

Collectively evaluated for impairment

 

$

18,383

 

 

$

6,734

 

 

$

4,920

 

 

$

98

 

 

$

27

 

 

$

30,162

 

Loans and leases receivable

 

$

3,758,355

 

 

$

429,903

 

 

$

398,858

 

 

$

13,424

 

 

$

 

 

$

4,600,540

 

Individually evaluated for impairment

 

$

14,761

 

 

$

4,396

 

 

$

5,129

 

 

$

839

 

 

$

 

 

$

25,125

 

Collectively evaluated for impairment

 

$

3,743,594

 

 

$

425,507

 

 

$

393,729

 

 

$

12,585

 

 

$

 

 

$

4,575,415

 

 

80


 

Loan and Lease Quality Indicators

As part of the on-going monitoring of the quality of our loan and lease portfolio, we utilize an internal loan and lease grading system to identify credit risk and assign an appropriate grade (from 0 to 8) for each and every loan or lease in our loan and lease portfolio. A third-party loan review is required on an annual basis. Additional adjustments are made when determined to be necessary. The loan and lease grade definitions are as follows:

Pass and Pass-Watch: Pass and Pass-Watch loans and leases, 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 and lease grading system. It consists of all performing loans and leases with no identified credit weaknesses. It includes cash and stock/security secured loans or other investment grade loans.

Special Mention: A Special Mention loan or lease, 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 and leases that have significant actual, not potential, weaknesses are considered more severely classified.

Substandard: A Substandard loan or lease, grade (6), has a well-defined weakness that jeopardizes the liquidation of the debt. A loan or lease 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 or lease, there is a distinct possibility that the Bank will sustain some loss if the weaknesses or deficiencies are not corrected.

Doubtful: A Doubtful loan or lease, 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 or lease, and therefore the amount or timing of a possible loss cannot be determined at the current time.

Loss: A loan or lease 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 or lease 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 and leases classified as Loss will be charged off in a timely manner.

81


 

As of December 31, 2019 and 2018, the recorded investment in pass/pass-watch, special mention and classified (substandard, doubtful and loss) loans and leases, disaggregated by loan class, were as follows:

 

 

 

Pass/Pass-

Watch

 

 

Special

Mention

 

 

Classified

 

 

Total

 

 

 

(in thousands)

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial property

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 

$

859,739

 

 

$

2,835

 

 

$

6,728

 

 

$

869,302

 

Hospitality

 

 

915,834

 

 

 

939

 

 

 

5,515

 

 

 

922,288

 

Other

 

 

1,329,817

 

 

 

7,807

 

 

 

20,809

 

 

 

1,358,432

 

Total commercial property loans

 

 

3,105,390

 

 

 

11,580

 

 

 

33,052

 

 

 

3,150,022

 

Construction

 

 

36,956

 

 

 

1,613

 

 

 

37,886

 

 

 

76,455

 

Residential property

 

 

398,737

 

 

 

2,512

 

 

 

779

 

 

 

402,028

 

Total real estate loans

 

 

3,541,082

 

 

 

15,705

 

 

 

71,718

 

 

 

3,628,505

 

Commercial and industrial loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial term

 

 

210,026

 

 

 

2,139

 

 

 

15,487

 

 

 

227,652

 

Commercial lines of credit

 

 

222,348

 

 

 

5,485

 

 

 

200

 

 

 

228,033

 

International loans

 

 

25,810

 

 

 

2,598

 

 

 

 

 

 

28,409

 

Total commercial and industrial loans

 

 

458,184

 

 

 

10,222

 

 

 

15,687

 

 

 

484,093

 

Leases receivable

 

 

477,977

 

 

 

 

 

 

5,902

 

 

 

483,879

 

Consumer loans

 

 

12,247

 

 

 

705

 

 

 

718

 

 

 

13,670

 

Total loans and leases receivable

 

$

4,489,491

 

 

$

26,632

 

 

$

94,025

 

 

$

4,610,147

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial property

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 

$

901,354

 

 

$

16

 

 

$

4,890

 

 

$

906,260

 

Hospitality

 

 

821,542

 

 

 

168

 

 

 

8,969

 

 

 

830,679

 

Other

 

 

1,441,219

 

 

 

2,723

 

 

 

5,328

 

 

 

1,449,270

 

Total commercial property loans

 

 

3,164,115

 

 

 

2,907

 

 

 

19,187

 

 

 

3,186,209

 

Construction

 

 

71,583

 

 

 

 

 

 

 

 

 

71,583

 

Residential property

 

 

500,424

 

 

 

 

 

 

139

 

 

 

500,563

 

Total real estate loans

 

 

3,736,122

 

 

 

2,907

 

 

 

19,326

 

 

 

3,758,355

 

Commercial and industrial loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial term

 

 

197,992

 

 

 

4,977

 

 

 

3,722

 

 

 

206,691

 

Commercial lines of credit

 

 

172,338

 

 

 

21,107

 

 

 

587

 

 

 

194,032

 

International loans

 

 

29,180

 

 

 

 

 

 

 

 

 

29,180

 

Total commercial and industrial loans

 

 

399,510

 

 

 

26,084

 

 

 

4,309

 

 

 

429,903

 

Leases receivable

 

 

393,729

 

 

 

 

 

 

5,129

 

 

 

398,858

 

Consumer loans

 

 

12,454

 

 

 

191

 

 

 

779

 

 

 

13,424

 

Total loans and leases receivable

 

$

4,541,815

 

 

$

29,182

 

 

$

29,543

 

 

$

4,600,540

 

 

82


 

The following is an aging analysis of recorded investment in loans and leases, disaggregated by loan class, as of the dates indicated:

 

 

 

30-59

Days

Past

Due

 

 

60-89

Days

Past

Due

 

 

90 Days

or More

Past Due

 

 

Total

Past

Due

 

 

Current

 

 

Total

 

 

 

(in thousands)

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial property

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 

$

6

 

 

$

132

 

 

$

111

 

 

$

249

 

 

$

869,053

 

 

$

869,302

 

Hospitality

 

 

907

 

 

 

 

 

 

 

 

 

907

 

 

 

921,381

 

 

 

922,288

 

Other

 

 

51

 

 

 

 

 

 

38

 

 

 

89

 

 

 

1,358,344

 

 

 

1,358,432

 

Total commercial property loans

 

 

964

 

 

 

132

 

 

 

149

 

 

 

1,245

 

 

 

3,148,778

 

 

 

3,150,022

 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

76,455

 

 

 

76,455

 

Residential property

 

 

540

 

 

 

1,627

 

 

 

309

 

 

 

2,477

 

 

 

399,551

 

 

 

402,028

 

Total real estate loans

 

 

1,504

 

 

 

1,759

 

 

 

458

 

 

 

3,721

 

 

 

3,624,784

 

 

 

3,628,505

 

Commercial and industrial loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial term

 

 

635

 

 

 

133

 

 

 

143

 

 

 

911

 

 

 

226,742

 

 

 

227,652

 

Commercial lines of credit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

228,033

 

 

 

228,033

 

International loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

28,409

 

 

 

28,409

 

Total commercial and industrial loans

 

 

635

 

 

 

133

 

 

 

143

 

 

 

911

 

 

 

483,183

 

 

 

484,093

 

Leases receivable

 

 

5,358

 

 

 

2,138

 

 

 

3,493

 

 

 

10,990

 

 

 

472,889

 

 

 

483,879

 

Consumer loans

 

 

 

 

 

30

 

 

 

 

 

 

30

 

 

 

13,639

 

 

 

13,670

 

Total loans and leases receivable

 

$

7,497

 

 

$

4,060

 

 

$

4,094

 

 

$

15,652

 

 

$

4,594,496

 

 

$

4,610,147

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial property

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 

$

221

 

 

$

 

 

$

986

 

 

$

1,207

 

 

$

905,053

 

 

$

906,260

 

Hospitality

 

 

65

 

 

 

1,203

 

 

 

1,893

 

 

 

3,161

 

 

 

827,518

 

 

 

830,679

 

Other

 

 

816

 

 

 

206

 

 

 

1,205

 

 

 

2,227

 

 

 

1,447,043

 

 

 

1,449,270

 

Total commercial property loans

 

 

1,102

 

 

 

1,409

 

 

 

4,084

 

 

 

6,595

 

 

 

3,179,614

 

 

 

3,186,209

 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

71,583

 

 

 

71,583

 

Residential property

 

 

3,947

 

 

 

273

 

 

 

44

 

 

 

4,264

 

 

 

496,299

 

 

 

500,563

 

Total real estate loans

 

 

5,049

 

 

 

1,682

 

 

 

4,128

 

 

 

10,859

 

 

 

3,747,496

 

 

 

3,758,355

 

Commercial and industrial loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial term

 

 

334

 

 

 

49

 

 

 

1,117

 

 

 

1,500

 

 

 

205,191

 

 

 

206,691

 

Commercial lines of credit

 

 

 

 

 

 

 

 

587

 

 

 

587

 

 

 

193,445

 

 

 

194,032

 

International loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

29,180

 

 

 

29,180

 

Total commercial and industrial loans

 

 

334

 

 

 

49

 

 

 

1,704

 

 

 

2,087

 

 

 

427,816

 

 

 

429,903

 

Leases receivable

 

 

4,681

 

 

 

845

 

 

 

3,737

 

 

 

9,263

 

 

 

389,595

 

 

 

398,858

 

Consumer loans

 

 

146

 

 

 

 

 

 

 

 

 

146

 

 

 

13,278

 

 

 

13,424

 

Total loans and leases receivable

 

$

10,210

 

 

$

2,576

 

 

$

9,569

 

 

$

22,355

 

 

$

4,578,185

 

 

$

4,600,540

 

 

There were no loans that were 90 days or more past due and accruing interest as of December 31, 2019 and $4,000 of loans that were 90 days or more past due and accruing interest as of December 31, 2018.

83


 

Impaired Loans and Leases

Loans and leases are considered impaired when: they are classified as nonaccrual and principal or interest payments have been contractually past due for 90 days or more, unless the loan is both well-collateralized and in the process of collection; they are classified as TDR loans to offer terms not typically granted by the Bank; current information or events make it unlikely to collect in full according to the contractual terms of the loan or lease agreements; there is a deterioration in the borrower’s financial condition that raises uncertainty as to timely collection of either principal or interest; or full payment of both interest and principal is in doubt according to the original contractual terms.

We evaluate loan and lease impairment in accordance with GAAP. Impaired loans and leases are measured based on the present value of expected future cash flows discounted at the effective interest rate of the loan or lease, or, as a practical expedient, at the observable market price or the fair value of the collateral if the loan or lease is collateral dependent, less costs to sell. If the measure of the impaired loan or lease is less than the recorded investment, the deficiency will be charged off against the allowance for loan and lease receivable losses or, alternatively, a specific allocation will be established. Additionally, loans or leases that are considered impaired are specifically excluded from the analysis when determining the amount of the general allowance for loan and lease losses required for the period.

The allowance for collateral-dependent loans and leases is determined by calculating the difference between the recorded investment and the value of the collateral as determined by recent appraisals. The allowance for collateral-dependent loans and leases varies from loan to loan based on the collateral coverage of the loan or lease at the time of designation as nonperforming. We continue to monitor the collateral coverage, using recent appraisals, on these loans and leases on a quarterly basis and adjust the allowance accordingly.

84


 

The following table provides information on impaired loans and leases, disaggregated by loan class, as of the dates indicated:

 

 

 

Recorded

Investment

 

 

Unpaid

Principal

Balance

 

 

With No

Related

Allowance

Recorded

 

 

With an

Allowance

Recorded

 

 

Related

Allowance

 

 

Average

Recorded

Investment

 

 

Interest

Income

Recognized

 

 

 

(in thousands)

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial property

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 

$

434

 

 

$

459

 

 

$

111

 

 

$

323

 

 

$

19

 

 

$

894

 

 

$

13

 

Hospitality

 

 

244

 

 

 

400

 

 

 

22

 

 

 

223

 

 

 

24

 

 

 

1,683

 

 

 

 

Other

 

 

14,864

 

 

 

15,151

 

 

 

14,696

 

 

 

167

 

 

 

12

 

 

 

10,619

 

 

 

168

 

Total commercial property loans

 

 

15,542

 

 

 

16,010

 

 

 

14,829

 

 

 

713

 

 

 

55

 

 

 

13,196

 

 

 

181

 

Construction

 

 

27,201

 

 

 

28,000

 

 

 

 

 

 

27,201

 

 

 

13,973

 

 

 

18,421

 

 

 

249

 

Residential property

 

 

1,124

 

 

 

1,163

 

 

 

1,089

 

 

 

35

 

 

 

 

 

 

1,356

 

 

 

29

 

Total real estate loans

 

 

43,867

 

 

 

45,173

 

 

 

15,918

 

 

 

27,949

 

 

 

14,028

 

 

 

32,973

 

 

 

459

 

Commercial and industrial loans

 

 

13,700

 

 

 

14,090

 

 

 

143

 

 

 

13,557

 

 

 

8,885

 

 

 

19,361

 

 

 

512

 

Leases receivable

 

 

5,902

 

 

 

5,909

 

 

 

1,112

 

 

 

4,790

 

 

 

2,863

 

 

 

4,854

 

 

 

44

 

Consumer loans

 

 

1,297

 

 

 

1,588

 

 

 

1,220

 

 

 

77

 

 

 

1

 

 

 

1,489

 

 

 

37

 

Total

 

$

64,766

 

 

$

66,760

 

 

$

18,393

 

 

$

46,373

 

 

$

25,778

 

 

$

58,677

 

 

$

1,052

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial property

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 

$

2,166

 

 

$

2,207

 

 

$

1,894

 

 

$

272

 

 

$

 

 

$

2,001

 

 

$

183

 

Hospitality

 

 

4,282

 

 

 

5,773

 

 

 

4,032

 

 

 

250

 

 

 

 

 

 

7,285

 

 

 

482

 

Other

 

 

7,525

 

 

 

8,016

 

 

 

6,253

 

 

 

1,272

 

 

 

1

 

 

 

7,978

 

 

 

601

 

Total commercial property loans

 

 

13,973

 

 

 

15,996

 

 

 

12,179

 

 

 

1,794

 

 

 

1

 

 

 

17,264

 

 

 

1,266

 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential property

 

 

788

 

 

 

929

 

 

 

788

 

 

 

 

 

 

 

 

 

1,932

 

 

 

91

 

Total real estate loans

 

 

14,761

 

 

 

16,925

 

 

 

12,967

 

 

 

1,794

 

 

 

1

 

 

 

19,196

 

 

 

1,357

 

Commercial and industrial loans

 

 

4,396

 

 

 

4,601

 

 

 

1,644

 

 

 

2,752

 

 

 

428

 

 

 

3,568

 

 

 

211

 

Leases receivable

 

 

5,129

 

 

 

5,162

 

 

 

1,256

 

 

 

3,873

 

 

 

1,383

 

 

 

5,229

 

 

 

46

 

Consumer loans

 

 

839

 

 

 

1,073

 

 

 

746

 

 

 

93

 

 

 

 

 

 

1,020

 

 

 

60

 

Total

 

$

25,125

 

 

$

27,761

 

 

$

16,613

 

 

$

8,512

 

 

$

1,812

 

 

$

29,013

 

 

$

1,674

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial property

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 

$

1,403

 

 

$

1,423

 

 

$

1,246

 

 

$

157

 

 

$

1

 

 

$

1,528

 

 

$

106

 

Hospitality

 

 

6,184

 

 

 

7,220

 

 

 

2,144

 

 

 

4,040

 

 

 

1,677

 

 

 

6,080

 

 

 

431

 

Other

 

 

8,513

 

 

 

9,330

 

 

 

7,569

 

 

 

944

 

 

 

394

 

 

 

9,551

 

 

 

842

 

Total commercial property loans

 

 

16,100

 

 

 

17,973

 

 

 

10,959

 

 

 

5,141

 

 

 

2,072

 

 

 

17,159

 

 

 

1,379

 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential property

 

 

2,563

 

 

 

2,728

 

 

 

824

 

 

 

1,739

 

 

 

21

 

 

 

2,771

 

 

 

122

 

Total real estate loans

 

 

18,663

 

 

 

20,701

 

 

 

11,783

 

 

 

6,880

 

 

 

2,093

 

 

 

19,930

 

 

 

1,501

 

Commercial and industrial loans

 

 

3,040

 

 

 

3,081

 

 

 

1,069

 

 

 

1,971

 

 

 

441

 

 

 

4,214

 

 

 

208

 

Leases receivable

 

 

4,452

 

 

 

4,626

 

 

 

455

 

 

 

3,997

 

 

 

3,334

 

 

 

4,464

 

 

 

47

 

Consumer loans

 

 

1,029

 

 

 

1,215

 

 

 

919

 

 

 

110

 

 

 

10

 

 

 

982

 

 

 

33

 

Total

 

$

27,184

 

 

$

29,623

 

 

$

14,226

 

 

$

12,958

 

 

$

5,878

 

 

$

29,590

 

 

$

1,789

 

 

The following is a summary of interest foregone on impaired loans and leases for the periods indicated:

 

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

 

(in thousands)

 

Interest income that would have been recognized had impaired loans and leases performed in accordance with their original terms

 

$

3,439

 

 

$

2,808

 

 

$

2,575

 

Less: Interest income recognized on impaired loans and leases

 

 

(1,279

)

 

 

(1,674

)

 

 

(1,790

)

Interest foregone on impaired loans and leases

 

$

2,160

 

 

$

1,134

 

 

$

785

 

 

85


 

There were no commitments to lend additional funds to borrowers whose loans or leases are included above.

Nonaccrual Loans and Leases

The following table details the recorded investment in nonaccrual loans and leases, disaggregated by loan class, as of the dates indicated:

 

 

 

As of December 31,

 

 

 

2019

 

 

2018

 

 

 

(in thousands)

 

Real estate loans:

 

 

 

 

 

 

 

 

Commercial property

 

 

 

 

 

 

 

 

Retail

 

$

277

 

 

$

865

 

Hospitality

 

 

225

 

 

 

3,625

 

Other

 

 

14,864

 

 

 

1,641

 

Total commercial property loans

 

 

15,366

 

 

 

6,131

 

Construction

 

 

27,201

 

 

 

 

Residential property

 

 

1,124

 

 

 

182

 

Total real estate loans

 

 

43,691

 

 

 

6,313

 

Commercial and industrial loans

 

 

13,479

 

 

 

3,337

 

Leases receivable

 

 

5,902

 

 

 

5,129

 

Consumer loans

 

 

689

 

 

 

746

 

Total nonaccrual loans and leases

 

$

63,761

 

 

$

15,525

 

 

The following table details the recorded investment in nonperforming assets as of the dates indicated:

 

 

 

As of December 31,

 

 

 

2019

 

 

2018

 

 

 

(in thousands)

 

Nonaccrual loans and leases

 

$

63,761

 

 

$

15,525

 

Loans and leases 90 days or more past due and still accruing

 

 

 

 

 

4

 

Total nonperforming loans and leases

 

 

63,761

 

 

 

15,529

 

Other real estate owned ("OREO")

 

 

63

 

 

 

663

 

Total nonperforming assets

 

$

63,824

 

 

$

16,192

 

 

OREO consisted of two properties with a combined carrying value of $63,000 as of December 31, 2019, and seven properties with a combined carrying value of $663,000 as of December 31, 2018.

Troubled Debt Restructuring

The following table details the recorded investment in TDRs, disaggregated by concession type and by loan type, as of December 31, 2019 and 2018:

 

 

 

Nonaccrual TDRs

 

 

Accrual TDRs

 

 

 

Deferral of

Principal

 

 

Deferral of

Principal

and/or

Interest

 

 

Reduction of

Principal

and/or Interest

 

 

Extension

of

Maturity

 

 

Total

 

 

Deferral of

Principal

 

 

Deferral of

Principal

and/or

Interest

 

 

Reduction of

Principal

and/or Interest

 

 

Extension of

Maturity

 

 

Total

 

 

 

(in thousands)

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans

 

$

 

 

$

132

 

 

$

27,740

 

 

$

13,926

 

 

$

41,798

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Commercial and industrial loans

 

 

 

 

 

153

 

 

 

12,527

 

 

 

312

 

 

 

12,991

 

 

 

 

 

 

36

 

 

 

71

 

 

 

114

 

 

 

222

 

Consumer loans

 

 

689

 

 

 

 

 

 

 

 

 

 

 

 

689

 

 

 

531

 

 

 

 

 

 

77

 

 

 

 

 

 

608

 

Total loans

 

$

689

 

 

$

285

 

 

$

40,266

 

 

$

14,238

 

 

$

55,478

 

 

$

531

 

 

$

36

 

 

$

148

 

 

$

114

 

 

$

830

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans

 

$

462

 

 

$

1,423

 

 

$

174

 

 

$

 

 

$

2,059

 

 

$

3,345

 

 

$

 

 

$

1,148

 

 

$

741

 

 

$

5,234

 

Commercial and industrial loans

 

 

265

 

 

 

107

 

 

 

669

 

 

 

430

 

 

 

1,471

 

 

 

 

 

 

166

 

 

 

386

 

 

 

150

 

 

 

702

 

Consumer loans

 

 

746

 

 

 

 

 

 

 

 

 

 

 

 

746

 

 

 

 

 

 

 

 

 

93

 

 

 

 

 

 

93

 

Total loans

 

$

1,473

 

 

$

1,530

 

 

$

843

 

 

$

430

 

 

$

4,276

 

 

$

3,345

 

 

$

166

 

 

$

1,627

 

 

$

891

 

 

$

6,029

 

 

86


 

As of December 31, 2019 and 2018, total TDRs were $56.3 million, and $10.3 million, respectively. A debt restructuring is considered a TDR if we grant a concession that we would not have otherwise considered to the borrower, for economic or legal reasons related to the borrower’s financial difficulties. Loans are considered to be TDRs if they were restructured through payment structure modifications such as reducing the amount of principal and interest due monthly and/or allowing for interest only monthly payments for six months or less. All TDRs are impaired and 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.

The following table presents the number of loans by class modified as troubled debt restructurings that occurred during the year ending December 31, 2019, 2018, and 2017 with their pre- and post-modification recorded amounts.

 

 

 

December 31, 2019

 

 

December 31, 2018

 

 

December 31, 2017

 

 

 

Number

of Loans

 

 

Pre-

Modification

Outstanding

Recorded

Investment

 

 

Post-

Modification

Outstanding

Recorded

Investment

 

 

Number

of Loans

 

 

Pre-

Modification

Outstanding

Recorded

Investment

 

 

Post-

Modification

Outstanding

Recorded

Investment

 

 

Number

of Loans

 

 

Pre-

Modification

Outstanding

Recorded

Investment

 

 

Post-

Modification

Outstanding

Recorded

Investment

 

 

 

(in thousands except for number of loans)

 

Real estate loans

 

 

5

 

 

$

40,743

 

 

$

41,798

 

 

 

-

 

 

$

-

 

 

$

-

 

 

 

2

 

 

$

182

 

 

$

184

 

Commercial and industrial loans

 

 

2

 

 

 

12,779

 

 

 

12,562

 

 

 

2

 

 

 

684

 

 

 

664

 

 

 

1

 

 

 

123

 

 

 

123

 

Consumer loans

 

 

1

 

 

 

549

 

 

 

531

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1

 

 

 

820

 

 

 

811

 

Total loans

 

 

8

 

 

$

54,071

 

 

$

54,892

 

 

 

2

 

 

$

684

 

 

$

664

 

 

 

4

 

 

$

1,125

 

 

$

1,118

 

 

At December 31, 2019 and 2018, TDRs were subjected to specific impairment analysis. We determined impairment allowances of $22.7 million and $300,000, respectively, related to these loans and such allowances were included in the allowance for loan and lease losses.  

A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms. During the years ended December 31, 2019 and 2018, only one loan in the amount of $132,000, defaulted within the twelve-month period following modification in the year 2019.

 

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.

Note 4 — Servicing Assets

The changes in servicing assets for the years ended December 31, 2019 and 2018 were as follows:

 

 

 

As of December 31,

 

 

 

2019

 

 

2018

 

 

 

(in thousands)

 

Balance at beginning of period

 

$

8,520

 

 

$

10,218

 

Addition related to sale of SBA loans

 

 

1,699

 

 

 

1,589

 

Amortization

 

 

(3,263

)

 

 

(3,287

)

Balance at end of period

 

$

6,956

 

 

$

8,520

 

 

At December 31, 2019 and 2018, we serviced the loans sold to unaffiliated parties in the amount of $422.3 million and $448.6 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 $4.4 million for the year ended December 31, 2019, and $4.7 million each of the years ended December 31, 2018 and 2017, respectively. Net amortization expense was $2.8 million, $2.6 million and $2.4 million for the years ended December 31, 2019, 2018 and 2017, respectively. Servicing fee income, net of amortization of servicing assets and liabilities, is included in other operating income in the consolidated statements of income.

87


 

The fair value of servicing rights was $7.0 million at year-end 2019. Fair value at year-end 2019 was determined using the discount rates ranging from 7.7 percent to 21.4 percent, prepayment speeds ranging from 1.8 percent to 15.6 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,

 

 

 

2019

 

 

2018

 

 

 

(in thousands)

 

Land

 

$

7,980

 

 

$

8,470

 

Building and improvements

 

 

14,120

 

 

 

17,252

 

Furniture and equipment

 

 

27,358

 

 

 

24,144

 

Leasehold improvements

 

 

12,715

 

 

 

11,671

 

Leased equipment

 

 

879

 

 

 

879

 

 

 

 

63,052

 

 

 

62,416

 

Accumulated depreciation and amortization

 

 

(36,982

)

 

 

(34,664

)

Total premises and equipment, net

 

$

26,070

 

 

$

27,752

 

 

Depreciation and amortization expense related to premises and equipment was $3.3 million, $2.6 million and $2.9 million for the years ended December 31, 2019, 2018 and 2017, respectively.

 

Note 6 — Leases

 

As described in Note 1 to the consolidated financial statements, the Company adopted ASU 2016-02, Leases (Topic 842), effective January 1, 2019. We had approximately 45 operating leases for real estate and other assets. These included various leases for our branch and office locations. Our leases had initial lease terms of two to twenty-five years. Most leases included one or more options to renew, with renewal terms that can extend the lease term from two to twelve years. We assessed these options using a threshold of reasonably certain. For leases where we were reasonably certain to renew, those option periods were included within the lease term and, therefore, the measurement of the right-of-use asset and lease liability. Certain leases included options to terminate the lease, which allows the contract parties to terminate their obligations under the lease contract, typically in return for an agreed financial consideration. The terms and conditions of the termination options vary by contract. Leases with an initial term of 12 months or less were not recognized on the balance sheet. We recognized lease expense for these leases on a straightline basis over the lease term. Certain lease agreements included payments based on Consumer Price Index (“CPI") on which variable lease payments were determined and included in the right-of-use asset and liability. Variable lease payments that were not based on CPI were excluded from the right-of-use asset and lease liability and recognized in the period in which the obligations for those payments were incurred. Our lease agreements did not contain any material residual value guarantees, restrictions or covenants.

 

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 the outstanding balances were $36.5 million and $37.2 million, respectively, as of December 31, 2019.

 

We had real estate lease agreements with lease and non-lease components, which are generally accounted for separately. However, we elected the practical expedient to not separate non-lease components from lease components for all classes of underlying assets. For certain equipment leases, such as machine equipment, we accounted for the lease and associated non-lease components as a single lease component.

 

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. In order to apply the incremental borrowing rate, a portfolio approach with a collateralized rate was utilized. Assets were grouped based on similar lease terms and economic environments in a manner whereby the Company reasonably expects that the application does not differ materially from a lease-by-lease approach.

 

88


 

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.

 

We lease our premises under non-cancelable operating leases. At December 31, 2019, future minimum annual rental commitments under these non-cancelable operating leases, with initial or remaining terms of one year or more, were as follows:

 

 

 

Amount

 

 

 

(in thousands)

 

2020

 

$

6,374

 

2021

 

 

5,129

 

2022

 

 

4,843

 

2023

 

 

4,735

 

2024

 

 

4,281

 

Thereafter

 

 

17,445

 

Remaining lease commitments

 

 

42,807

 

Interest

 

 

(5,648

)

Present value of lease liability

 

$

37,159

 

 

For the years ended December 31, 2019, 2018 and 2017, net rental expenses recorded under such leases amounted to $7.9 million, $7.4 million, and $7.0 million, respectively.

 

Weighted average remaining lease terms for the Company’s operating leases were 8.57 years as of December 31, 2019. Weighted average discount rates used for the Company’s operating leases were 3.24 percent as of December 31, 2019. Net lease expense recognized for the twelve months ended December 31, 2019 was  $7.9 million. This includes operating lease costs of $8.0 million and sublease income of $132,000 for the twelve months ended December 31, 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, 2019 was  $7.2 million.

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:

 

 

 

 

 

December 31, 2019

 

 

December 31, 2018

 

 

 

Amortization

Period

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

Carrying

Amount

 

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

Carrying

Amount

 

 

 

 

 

(in thousands)

 

Core deposit intangible

 

10 years

 

$

2,213

 

 

$

(1,567

)

 

$

646

 

 

$

2,213

 

 

$

(1,360

)

 

$

853

 

Third-party originators intangible

 

7 years

 

 

483

 

 

 

(287

)

 

 

196

 

 

 

483

 

 

 

(185

)

 

 

298

 

Goodwill

 

N/A

 

 

11,031

 

 

 

 

 

 

11,031

 

 

 

11,031

 

 

 

 

 

 

11,031

 

Total intangible assets

 

 

 

$

13,727

 

 

$

(1,854

)

 

$

11,873

 

 

$

13,727

 

 

$

(1,545

)

 

$

12,182

 

 

89


 

Intangible assets amortization expense for the years ended December 31, 2019, 2018 and 2017 was $309,000, $362,000 and $345,000, 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:

 

 

 

Amount

 

 

 

(in thousands)

 

2020

 

$

261

 

2021

 

 

216

 

2022

 

 

171

 

2023

 

 

126

 

2024

 

 

68

 

Thereafter

 

 

 

 

 

$

842

 

 

The Company performed its annual goodwill impairment analysis in the fourth quarter of 2019 and determined no impairment existed as of December 31, 2019. As of December 31, 2019, 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, 2019.

Note 8 — Deposits

Time deposits at or exceeding the FDIC insurance limit of $250,000 at year-end 2019 and 2018 were $299.9 million and $288.6 million, respectively.

 

At December 31, 2019, the scheduled maturities of time deposits are as follows:

 

Year Ending December 31,

 

Time

Deposits of

$250,000

or More

 

 

Other Time

Deposits

 

 

Total

 

 

 

(in thousands)

 

2020

 

$

291,940

 

 

$

1,098,666

 

 

$

1,390,606

 

2021

 

 

7,186

 

 

 

130,331

 

 

 

137,517

 

2022

 

 

 

 

 

25,155

 

 

 

25,155

 

2023

 

 

789

 

 

 

1,185

 

 

 

1,974

 

2024

 

 

 

 

 

669

 

 

 

669

 

Total

 

$

299,914

 

 

$

1,256,005

 

 

$

1,555,919

 

 

A summary of interest expense on deposits was as follows for the periods indicated:

 

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

 

(in thousands)

 

Demand: interest-bearing

 

$

116

 

 

$

106

 

 

$

74

 

Money market and savings

 

 

23,556

 

 

 

16,182

 

 

 

12,515

 

Time deposits of $100,000 or more

 

 

36,867

 

 

 

24,309

 

 

 

10,471

 

Other time deposits

 

 

2,566

 

 

 

2,483

 

 

 

3,029

 

Total interest expense on deposits

 

$

63,105

 

 

$

43,080

 

 

$

26,089

 

 

Accrued interest payable on deposits was $11.2 million and $11.4 million at December 31, 2019 and 2018, respectively. Total deposits reclassified to loans due to overdrafts at December 31, 2019 and 2018 were $1.5 million, respectively.

90


 

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:

 

 

 

December 31, 2019

 

 

December 31, 2018

 

 

 

Outstanding

Balance

 

 

Weighted

Average

Rate

 

 

Outstanding

Balance

 

 

Weighted

Average

Rate

 

 

 

(in thousands)

 

Overnight advances

 

$

15,000

 

 

 

1.66

%

 

$

55,000

 

 

 

2.56

%

Advances due within 12 months

 

 

25,000

 

 

 

1.75

%

 

 

 

 

 

 

Advances due over 12 months through 24 months

 

 

25,000

 

 

 

1.66

%

 

 

 

 

 

 

Advances due over 24 months through 36 months

 

 

25,000

 

 

 

1.72

%

 

 

 

 

 

 

Outstanding advances

 

$

90,000

 

 

 

1.70

%

 

$

55,000

 

 

 

2.56

%

 

The following is financial data pertaining to FHLB advances:

 

 

 

As of December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

 

(dollars in thousands)

 

Weighted-average interest rate at end of year

 

 

1.70

%

 

 

2.56

%

 

 

1.41

%

Weighted-average interest rate during the year

 

 

1.89

%

 

 

1.94

%

 

 

0.90

%

Average balance of FHLB advances

 

$

40,374

 

 

$

174,452

 

 

$

119,041

 

Maximum amount outstanding at any month-end

 

$

285,000

 

 

$

300,000

 

 

$

330,000

 

 

We have pledged loans receivable with market values of $1.35 billion as collateral with the FHLB for this borrowing facility. The total borrowing capacity available from the collateral that has been pledged is $1.11 billion, of which $878.4 million remained available as of December 31, 2019. At December 31, 2019, we had $29.6 million available for use through the Federal Reserve Bank of San Francisco Discount Window, as we pledged securities with carrying values of $30.2 million, and there were no borrowings.

At December 31, 2019, advances from the FHLB were $90.0 million, an increase of $35.0 million from $55.0 million at December 31, 2018, and $15.0 million of the FHLB advances were overnight borrowings at December 31, 2019. For the years ended December 31, 2019, 2018 and 2017 interest expense on FHLB advances were $763,000, $3.4 million and $1.1 million, respectively, and the weighted-average interest rates were 1.89 percent, 1.94 percent and 0.90 percent, respectively.

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, 2019 and December 31, 2018, the balance of Notes included in the Company’s Consolidated Balance Sheet, net of debt issuance cost, was $98.3 million and $98.1 million. The amortization of debt issuance cost was $193,000, $182,000 and $134,000 for the years ended December 31, 2019, 2018 and 2017, respectively.

The Company assumed Junior Subordinated Deferrable Interest Debentures (“Subordinated Debentures”) as a result of an acquisition in 2014 with an unpaid principal balance of $26.8 million and an estimated fair value of $18.5 million. The $8.3 million discount is being amortized to interest expense through the debentures’ maturity date of March 15, 2036. A trust was formed in 2005 by the acquired entity and $26.0 million of Trust Preferred Securities (“TPS”) was issued 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, 2019 and December 31, 2018, the balance of Subordinated Debentures included in the Company’s Consolidated Balance Sheets, net of discount of $6.8 million and $7.1 million, was $20.0 million and $19.7 million. The amortization of discount was $376,000, $356,000 and $329,000 for the years ended December 31, 2019, 2018 and 2017, respectively.

91


 

 

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:

 

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

 

(in thousands)

 

Unrecognized tax benefits at beginning of year

 

$

202

 

 

$

1,039

 

 

$

1,039

 

Gross decreases for tax positions of prior years

 

 

(202

)

 

 

 

 

 

 

Lapse of statute of limitations

 

 

 

 

 

(837

)

 

 

 

Gross increase for new tax positions

 

 

73

 

 

 

 

 

 

 

Unrecognized tax benefits (expense) at end of year

 

$

73

 

 

$

202

 

 

$

1,039

 

 

The total amount of unrecognized tax benefits that would affect our effective tax rate if recognized was $73,000, $202,000 and $1.0 million as of December 31, 2019, 2018 and 2017, respectively.

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. For the year ended December 31, 2017, unrecognized tax benefits in connection with California Enterprise Zone interest deductions did not change.

In 2019, 2018 and 2017, the Company accrued interest of $0, $10,000 and $34,000 for uncertain tax benefits, respectively. As of December 31, 2019, 2018 and 2017, the total amounts of accrued interest related to uncertain tax positions, were $0, $57,000 and $132,000, respectively. We account for 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.

Unrecognized tax benefit primarily includes state tax exposure. The Company expects the currently open uncertain tax positions to be settled in the next twelve months.

As of December 31, 2019, the Company is subject to examination by federal and various tax authorities for certain years ending December 31, 2015 through 2018.

In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (Topic 220). This ASU eliminates the stranded tax effects in other comprehensive income resulting from the Tax Cuts and Jobs Act (the “Tax Act”). Because the amendments only relate to the reclassification of the income tax effects of the Tax Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations was not affected. ASU 2018-02 allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Act. The Company adopted this standard as of January 1, 2018, and recorded the impact as an adjustment, which increased retained earnings by $399,000 as of the date of adoption.

92


 

A summary of the provision for income taxes was as follows:

 

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

 

(in thousands)

 

Current expense:

 

 

 

 

 

 

 

 

 

 

 

 

Federal

 

$

18,737

 

 

$

13,415

 

 

$

20,924

 

State

 

 

9,377

 

 

 

5,293

 

 

 

6,804

 

Total current expense

 

 

28,114

 

 

 

18,708

 

 

 

27,728

 

Deferred expense (benefit):

 

 

 

 

 

 

 

 

 

 

 

 

Federal

 

 

(10,515

)

 

 

3,428

 

 

 

14,623

 

State

 

 

(3,039

)

 

 

3,966

 

 

 

(1,727

)

Total deferred expense

 

 

(13,554

)

 

 

7,394

 

 

 

12,896

 

Provision for income taxes

 

$

14,560

 

 

$

26,102

 

 

$

40,624

 

 

Deferred tax assets and liabilities were as follows:

 

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

 

(in thousands)

 

Deferred tax assets:

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan and lease losses

 

$

18,401

 

 

$

10,035

 

 

$

9,282

 

Depreciation

 

 

 

 

 

 

 

 

192

 

Purchase accounting

 

 

3,912

 

 

 

2,724

 

 

 

4,685

 

Net operating loss carryforward

 

 

15,453

 

 

 

17,609

 

 

 

18,648

 

Unrealized (gain) loss on securities available for sale

 

 

 

 

 

2,457

 

 

 

919

 

Mark to market

 

 

261

 

 

 

 

 

 

 

Indemnified assets

 

 

1,120

 

 

 

1,151

 

 

 

701

 

Lease liability

 

 

10,716

 

 

 

 

 

 

 

Tax credits

 

 

198

 

 

 

561

 

 

 

1,241

 

State taxes

 

 

1,739

 

 

 

1,138

 

 

 

1,489

 

Other

 

 

2,646

 

 

 

1,804

 

 

 

3,724

 

Total deferred tax assets

 

 

54,446

 

 

 

37,479

 

 

 

40,881

 

Deferred tax liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Mark to market

 

 

 

 

 

(4,719

)

 

 

(4,879

)

Depreciation

 

 

(388

)

 

 

(467

)

 

 

 

Unrealized (gain) loss on securities available for sale

 

 

(1,370

)

 

 

 

 

 

 

Leases - right of use assets

 

 

(10,517

)

 

 

 

 

 

 

Other

 

 

(532

)

 

 

 

 

 

(797

)

Total deferred tax liabilities

 

 

(12,807

)

 

 

(5,186

)

 

 

(5,676

)

Valuation allowance

 

 

(4,852

)

 

 

(4,852

)

 

 

(2,750

)

Net deferred tax assets

 

$

36,787

 

 

$

27,441

 

 

$

32,455

 

 

As of December 31, 2019, the Company’s net deferred tax assets, which primarily consists of net operating loss carryforwards and the allowance for loan and lease losses, increased by $9.3 million from 2018 primarily due to the increase in the allowance for loan and lease losses. As of December 31, 2018, the Company’s net deferred tax assets, which primarily consists of net operating loss carryforwards and the allowance for loan and lease losses, decreased by $5.0 million from 2017 primarily due to the reduction in purchase accounting and an increase in the valuation allowance related to state net operating losses.

93


 

As of each reporting date, management considers the realization 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, 2019, management determined that a valuation allowance of $4.9 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, 2018, management determined a valuation allowance of $4.9 million was appropriate against certain state net operating losses and certain state tax credits. Therefore the valuation allowance did not change in 2019.

As of December 31, 2019, the Company had net operating loss carryforwards of $17.3 million and $216.4 million for federal and state income tax purposes, respectively. The federal net operating loss carryforwards of $17.3M expire at various dates from 2034 to 2035. The material state net operating loss carryforwards include California of $152.3M which expire at various dates from 2026 through 2035, and Illinois of $63.7M which expire at various dates from 2024 to 2025. Management determined a valuation allowance was required against the Illinois net operating loss carryforwards. As of December 31, 2019, the Company had state low income housing tax credit carryforwards of approximately $251,000. The state low income housing tax credits carry forward indefinitely.

Reconciliation between the federal statutory income tax rate and the effective tax rate is shown in the following table:

 

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

Federal statutory income tax rate

 

 

21.00

%

 

 

21.00

%

 

 

35.00

%

State taxes, net of federal tax benefits

 

 

9.39

%

 

 

9.50

%

 

 

6.64

%

Tax-exempt municipal securities

 

 

(0.29

)%

 

 

(0.16

)%

 

 

(0.24

)%

Tax credit - federal

 

 

(3.49

)%

 

 

(2.37

)%

 

 

(2.37

)%

Federal rate adjustment, net of federal benefits of state

 

 

(—

)%

 

 

1.32

%

 

 

4.18

%

Low income housing amortization

 

 

4.17

%

 

 

2.40

%

 

 

2.52

%

Other

 

 

(0.03

)%

 

 

(0.60

)%

 

 

(3.10

)%

Effective tax rate

 

 

30.75

%

 

 

31.09

%

 

 

42.63

%

 

The Tax Act was enacted into U.S. tax law on December 22, 2017. The Tax Act makes numerous changes to the U.S. tax code, including (although not limited to) reducing the U.S. federal corporate tax rate to 21 percent, eliminating the corporate alternative minimum tax (“AMT”), limiting deductible interest expense, increasing limitations on certain executive compensation, and enhancing bonus depreciation to provide for full expensing of qualified property. On that same date, the SEC staff also issued Staff Accounting Bulletin (“SAB”) 118, which provided guidance regarding financial statement accounting of the Tax Act. SAB 118 provides for the completion of the accounting related effects of the Tax Act in accordance with a measurement period of one year from the Tax Act enactment date.

In 2017, the Company reported certain provisional amounts based on reasonable estimates as permitted under SAB 118 for which the accounting under ASC 740 was incomplete. Upon filing the 2017 income tax returns in 2018, the Company recorded a change of $1.1 million to the provisional amount related to the re-measurement of the ending deferred tax assets and liabilities from 35.0 percent to 21.0 percent. During the fourth quarter of 2018, the Company completed the accounting required under ASC 740.

94


 

Note 12 — Accumulated Other Comprehensive Income (Loss)

Activity in accumulated other comprehensive income for the year ended December 31, 2019, 2018 and 2017 was as follows:

 

 

 

Unrealized

Gains and

 

 

 

 

 

 

 

 

 

 

 

Losses on

 

 

 

 

 

 

 

 

 

 

 

Available-

for-Sale

 

 

Tax

Benefit

 

 

 

 

 

 

 

Securities

 

 

(Expense)

 

 

Total

 

 

 

(in thousands)

 

For the year ended December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

(8,536

)

 

$

2,457

 

 

$

(6,079

)

Other comprehensive income (loss) before reclassification

 

 

14,583

 

 

 

(3,827

)

 

 

10,756

 

Reclassification from accumulated other comprehensive income

 

 

(1,295

)

 

 

 

 

 

(1,295

)

Net current period other comprehensive income

 

 

13,288

 

 

 

(3,827

)

 

 

9,461

 

Balance at end of period

 

$

4,752

 

 

$

(1,370

)

 

$

3,382

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the year ended December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

(3,188

)

 

$

1,319

 

 

$

(1,869

)

Other comprehensive income (loss) before reclassification

 

 

(5,790

)

 

 

1,684

 

 

 

(4,106

)

Reclassification from accumulated other comprehensive income

 

 

(87

)

 

 

 

 

 

(87

)

Adjustments to accumulated other comprehensive income

 

 

529

 

 

 

(546

)

 

 

(17

)

Net current period other comprehensive income

 

 

(5,348

)

 

 

1,138

 

 

 

(4,210

)

Balance at end of period

 

$

(8,536

)

 

$

2,457

 

 

$

(6,079

)

 

 

 

 

 

 

 

 

 

 

 

 

 

For the year ended December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

(4,089

)

 

$

1,695

 

 

$

(2,394

)

Other comprehensive income (loss) before reclassification

 

 

2,649

 

 

 

(376

)

 

 

2,273

 

Reclassification from accumulated other comprehensive income

 

 

(1,748

)

 

 

 

 

 

(1,748

)

Net current period other comprehensive income

 

 

901

 

 

 

(376

)

 

 

525

 

Balance at end of period

 

$

(3,188

)

 

$

1,319

 

 

$

(1,869

)

 

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.

For the year ended December 31, 2019, there was a $1.3 million reclassification from accumulated other comprehensive income to gains in earnings resulting from the redemption and sale of available-for-sale securities. The $1.3 million reclassification adjustment from accumulated other comprehensive income was included in net gain on sales of securities in noninterest income. Net unrealized gain 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 gains in earnings resulting from the redemption and sale of available-for-sale securities. The $87,000 reclassification adjustment out of accumulated other comprehensive income was included in 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. For the year ended December 31, 2017, there was a $1.7 million reclassification from accumulated other comprehensive income to gains in earnings resulting from the redemption and sale of available-for-sale securities. The $1.7 million reclassification adjustment out of accumulated other comprehensive income was included in net gain on sales of securities in noninterest income. Net unrealized losses of $1.3 million related to these sold securities had previously been recorded in accumulated other comprehensive income or loss.

95


 

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, 2019, 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 6.64 percent and 6.19 percent and the Company's capital conservation buffer was 5.78 percent and 5.74 percent as of December 31, 2019 and 2018, respectively.

The capital ratios of Hanmi Financial and the Bank as of December 31, 2019 and 2018 were as follows:

 

 

 

 

 

 

 

 

 

 

 

Minimum

 

 

Minimum to Be

 

 

 

 

 

 

 

 

 

 

 

Regulatory

 

 

Categorized as

 

 

 

Actual

 

 

Requirement

 

 

“Well Capitalized”

 

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

 

(in thousands)

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total capital (to risk-weighted assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hanmi Financial

 

$

714,288

 

 

 

15.11

%

 

$

378,059

 

 

 

8.00

%

 

N/A

 

 

N/A

 

Hanmi Bank

 

$

691,024

 

 

 

14.64

%

 

$

377,516

 

 

 

8.00

%

 

$

471,895

 

 

 

10.00

%

Tier 1 capital (to risk-weighted assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hanmi Financial

 

$

556,820

 

 

 

11.78

%

 

$

283,544

 

 

 

6.00

%

 

N/A

 

 

N/A

 

Hanmi Bank

 

$

631,978

 

 

 

13.39

%

 

$

283,137

 

 

 

6.00

%

 

$

377,516

 

 

 

8.00

%

Common equity Tier 1 capital (to risk-weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hanmi Financial

 

$

536,781

 

 

 

11.36

%

 

$

212,658

 

 

 

4.50

%

 

N/A

 

 

N/A

 

Hanmi Bank

 

$

631,978

 

 

 

13.39

%

 

$

212,353

 

 

 

4.50

%

 

$

306,732

 

 

 

6.50

%

Tier 1 capital (to average assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hanmi Financial

 

$

556,820

 

 

 

10.15

%

 

$

219,367

 

 

 

4.00

%

 

N/A

 

 

N/A

 

Hanmi Bank

 

$

631,978

 

 

 

11.56

%

 

$

218,748

 

 

 

4.00

%

 

$

273,435

 

 

 

5.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total capital (to risk-weighted assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hanmi Financial

 

$

682,398

 

 

 

14.54

%

 

$

375,449

 

 

 

8.00

%

 

N/A

 

 

N/A

 

Hanmi Bank

 

$

664,195

 

 

 

14.19

%

 

$

374,538

 

 

 

8.00

%

 

$

468,173

 

 

 

10.00

%

Tier 1 capital (to risk-weighted assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hanmi Financial

 

$

550,839

 

 

 

11.74

%

 

$

281,587

 

 

 

6.00

%

 

N/A

 

 

N/A

 

Hanmi Bank

 

$

630,782

 

 

 

13.47

%

 

$

280,904

 

 

 

6.00

%

 

$

374,538

 

 

 

8.00

%

Common equity Tier 1 capital (to risk-weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hanmi Financial

 

$

531,177

 

 

 

11.32

%

 

$

211,190

 

 

 

4.50

%

 

N/A

 

 

N/A

 

Hanmi Bank

 

$

630,782

 

 

 

13.47

%

 

$

210,678

 

 

 

4.50

%

 

$

304,312

 

 

 

6.50

%

Tier 1 capital (to average assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hanmi Financial

 

$

550,839

 

 

 

10.18

%

 

$

216,526

 

 

 

4.00

%

 

N/A

 

 

N/A

 

Hanmi Bank

 

$

630,782

 

 

 

11.67

%

 

$

216,265

 

 

 

4.00

%

 

$

270,331

 

 

 

5.00

%

 

96


 

Note 14 — Fair Value Measurements

Fair Value Measurements

ASC 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value including a three-level valuation hierarchy, and expands disclosures about fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The three-level fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value are defined as follows:

 

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.

We record securities available for sale at fair value on a recurring basis. Certain other assets, such as loans held for sale, impaired loans, OREO, 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.

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, 2019 and 2018, 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.

Impaired loans and leases – Nonaccrual loans and leases and performing restructured loans and leases are considered impaired for reporting purposes and are measured and recorded at fair value on a non-recurring basis. All impaired loans with a carrying balance over $250,000 are reviewed individually for the amount of impairment, if any. Impaired loans and leases with a carrying balance of $250,000 or less are evaluated for impairment collectively. The Company does not record loans and leases at fair value on a recurring basis. However, from time to time, nonrecurring fair value adjustments to collateral dependent impaired loans and leases are recorded based on either the current appraised value of the collateral, a Level 2

97


 

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.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

As of December 31, 2019 and 2018, assets and liabilities measured at fair value on a recurring basis are as follows: 

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

 

 

 

 

Quoted

 

 

Significant

 

 

 

 

 

 

 

 

 

 

 

Prices in

 

 

Observable

 

 

 

 

 

 

 

 

 

 

 

Active

 

 

Inputs with

 

 

 

 

 

 

 

 

 

 

 

Markets

 

 

No Active

 

 

 

 

 

 

 

 

 

 

 

for

Identical

 

 

Market with

Identical

 

 

Significant

Unobservable

 

 

Total Fair

 

 

 

Assets

 

 

Characteristics

 

 

Inputs

 

 

Value

 

 

 

(in thousands)

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

35,205

 

 

$

 

 

$

 

 

$

35,205

 

U.S. government agency and sponsored agency obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

 

 

 

 

410,800

 

 

 

 

 

 

410,800

 

Collateralized mortgage obligations

 

 

 

 

 

164,592

 

 

 

 

 

 

164,592

 

Debt securities

 

 

 

 

 

23,879

 

 

 

 

 

 

23,879

 

Total U.S. government agency and sponsored agency obligations

 

 

 

 

 

599,272

 

 

 

 

 

 

599,272

 

Total securities available for sale

 

$

35,205

 

 

$

599,272

 

 

$

 

 

$

634,477

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

39,830

 

 

$

 

 

$

 

 

$

39,830

 

U.S. government agency and sponsored agency obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

 

 

 

 

295,034

 

 

 

 

 

 

295,034

 

Collateralized mortgage obligations

 

 

 

 

 

122,292

 

 

 

 

 

 

122,292

 

Debt securities

 

 

 

 

 

7,402

 

 

 

 

 

 

7,402

 

Total U.S. government agency and sponsored agency obligations

 

 

 

 

 

424,728

 

 

 

 

 

 

424,728

 

Municipal bonds-tax exempt

 

 

 

 

 

110,350

 

 

 

 

 

 

110,350

 

Total securities available for sale

 

$

39,830

 

 

$

535,078

 

 

$

 

 

$

574,908

 

 

98


 

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

As of December 31, 2019 and 2018, assets and liabilities measured at fair value on a non-recurring basis are as follows:

 

 

 

 

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

 

 

 

 

Quoted

 

 

Significant

 

 

 

 

 

 

 

 

 

 

 

Prices in

 

 

Observable

 

 

 

 

 

 

 

 

 

 

 

Active

 

 

Inputs With

 

 

 

 

 

 

 

 

 

 

 

Markets

 

 

No Active

 

 

 

 

 

 

 

 

 

 

 

for

Identical

 

 

Market With

Identical

 

 

Significant

Unobservable

 

 

 

Total

 

 

Assets

 

 

Characteristics

 

 

Inputs

 

 

 

(in thousands)

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans and leases (1)

 

$

31,049

 

 

$

 

 

$

 

 

$

31,049

 

Other real estate owned

 

 

63

 

 

 

 

 

 

 

 

 

63

 

Bank-owned premises

 

 

1,900

 

 

 

 

 

 

 

 

 

1,900

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans and leases (2)

 

$

5,210

 

 

$

 

 

$

3,253

 

 

$

1,957

 

Other real estate owned

 

 

663

 

 

 

 

 

 

663

 

 

 

 

 

(1)

Includes real estate loans of $41.4 million and commercial and industrial loans of $12.5 million.

(2)

Includes real estate loans of $3.5 million and commercial and industrial loans of $1.7 million.

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, 2019 and 2018:

 

 

 

Fair Value

 

 

Valuation

Techniques

 

Unobservable

Input(s)

 

Range (Weighted

Average)

 

 

(in thousands)

 

 

 

 

 

 

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

Impaired loans and leases:

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

Commercial property

 

 

 

 

 

 

 

 

 

 

Other

 

$

13,926

 

 

Market approach

 

Market data comparison

 

(1)

Construction

 

 

13,228

 

 

Market approach

 

Market data comparison

 

(3)% to 43% /21% (2)

Total real estate loans

 

 

27,154

 

 

 

 

 

 

 

Commercial and industrial loans:

 

 

 

 

 

 

 

 

 

 

Commercial lines of credit

 

 

3,895

 

 

Market approach

 

Market data comparison

 

(8)% to 42% /18% (2)

Total

 

$

31,049

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bank-owned premises

 

 

1,900

 

 

Market approach

 

Market data comparison

 

(30)% to 55% /(2)% (2)

 

(1)

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, mileage, cosmetics, conversions, originality, condition as well as sale terms and current economic conditions at time of sale.

(2)

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.

 

99


 

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, 2019 and 2018, 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:

 

 

 

December 31, 2019

 

 

 

Carrying

 

 

Fair Value

 

 

 

Amount

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(in thousands)

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

121,678

 

 

$

121,678

 

 

$

 

 

$

 

Securities available for sale

 

 

634,477

 

 

 

35,205

 

 

 

599,272

 

 

 

 

Loans held for sale

 

 

6,020

 

 

 

 

 

 

6,382

 

 

 

 

Loans and leases receivable, net of allowance for loan and lease losses

 

 

4,548,739

 

 

 

 

 

 

 

 

 

4,520,322

 

Accrued interest receivable

 

 

11,742

 

 

 

11,742

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

 

1,391,624

 

 

 

 

 

 

1,391,624

 

 

 

 

Interest-bearing deposits

 

 

3,307,338

 

 

 

 

 

 

 

 

 

3,317,867

 

Borrowings and subordinated debentures

 

 

208,377

 

 

 

 

 

 

89,831

 

 

 

118,807

 

Accrued interest payable

 

 

11,215

 

 

 

11,215

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

 

Carrying

 

 

Fair Value

 

 

 

Amount

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(in thousands)

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

155,376

 

 

$

155,376

 

 

$

 

 

$

 

Securities available for sale

 

 

574,908

 

 

 

39,830

 

 

 

535,078

 

 

 

 

Loans held for sale

 

 

9,390

 

 

 

 

 

 

9,905

 

 

 

 

Loans and leases receivable, net of allowance for loan and lease losses

 

 

4,568,566

 

 

 

 

 

 

 

 

 

4,518,716

 

Accrued interest receivable

 

 

13,331

 

 

 

13,331

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

 

1,284,530

 

 

 

 

 

 

1,284,530

 

 

 

 

Interest-bearing deposits

 

 

3,462,705

 

 

 

 

 

 

 

 

 

3,458,523

 

Borrowings and subordinated debentures

 

 

172,808

 

 

 

 

 

 

98,020

 

 

 

54,939

 

Accrued interest payable

 

 

11,379

 

 

 

11,379

 

 

 

 

 

 

 

 

100


 

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 and leases receivable, net of allowance for loan and lease losses – The fair value of loans and leases receivable is estimated based on the discounted cash flow approach. To estimate the fair value of the loans and leases, certain loan and lease 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 and lease portfolio. Subsequently, the loans and leases were individually valued by sorting and pooling them based on loan and lease 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 and leases receivable is considered to be an exit price notion as of December 31, 2019 (Level 3).

The fair value of impaired 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 impaired loans are recorded based on the current appraised value of the collateral (Level 3).

Accrued interest receivable – The carrying amount of accrued interest receivable approximates its fair value (Level 1).

Noninterest-bearing deposits – The fair value of noninterest-bearing deposits is the amount payable on demand at the reporting date (Level 2).

Interest-bearing deposits – The fair value of interest-bearing deposits, such as savings accounts, money market checking, and certificates of deposit, is estimated based on discounted cash flows. The cash flows for non-maturity deposits, including savings accounts and money market checking, are estimated based on their historical decaying experiences. The discount rate used for fair valuation is based on interest rates currently being offered by the Bank on comparable deposits as to amount and term (Level 3).

Borrowings and subordinated debentures – Borrowings consist of FHLB advances, subordinated debentures and other borrowings. Discounted cash flows based on current market rates for borrowings with similar remaining maturities are used to estimate the fair value of borrowings (Level 2 and 3).

Accrued interest payable – The carrying amount of accrued interest payable approximates its fair value (Level 1).

Note 15 — Share-based Compensation

At December 31, 2019, 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”) which replaced the 2007 Plan.

The Company provides 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 under the earlier plans, 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, 2019, 348,922 shares were still available for issuance under the 2013 Plan.

101


 

The table below provides the share-based compensation expense and related tax benefits for the periods indicated:

 

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

Share-based compensation expense

 

$

3,125

 

 

$

3,515

 

 

$

2,893

 

Related tax benefits

 

$

941

 

 

$

984

 

 

$

1,179

 

 

As of December 31, 2019, unrecognized share-based compensation expense was $4.5 million with an average expected recognition period of 2.0 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 10 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, 2019.

The following information under the Plans is presented for the periods indicated:

 

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

Fair value of options vested

 

$

 

 

$

184

 

 

$

820

 

Total intrinsic value of options exercised (1)

 

$

842

 

 

$

 

 

$

432

 

Cash received from options exercised

 

$

2,979

 

 

$

 

 

$

288

 

 

(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.

The following is a summary of stock option transactions under the Plans for the periods indicated:

 

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

 

Number of

Shares

 

 

Weighted-

Average

Exercise

Price Per

Share

 

 

Number of

Shares

 

 

Weighted-

Average

Exercise

Price Per

Share

 

 

Number of

Shares

 

 

Weighted-

Average

Exercise

Price Per

Share

 

Options outstanding at beginning of period

 

 

338,338

 

 

$

17.52

 

 

 

364,088

 

 

$

17.86

 

 

 

387,901

 

 

$

17.49

 

Options granted

 

 

 

 

$

 

 

 

 

 

$

 

 

 

 

 

$

 

Options exercised

 

 

(181,900

)

 

$

16.38

 

 

 

(25,750

)

 

$

22.06

 

 

 

(23,813

)

 

$

12.21

 

Options forfeited

 

 

 

 

$

 

 

 

 

 

$

 

 

 

 

 

$

 

Options expired

 

 

 

 

$

 

 

 

 

 

$

 

 

 

 

 

$

 

Options outstanding at end of period

 

 

156,438

 

 

$

18.84

 

 

 

338,338

 

 

$

17.52

 

 

 

364,088

 

 

$

17.86

 

Options exercisable at end of period

 

 

156,438

 

 

$

18.84

 

 

 

338,338

 

 

$

17.52

 

 

 

354,753

 

 

$

17.71

 

 

102


 

As of December 31, 2019 there was no unrecognized compensation cost related to nonvested stock options granted under the plan.

 

The following is a summary of transactions for non-vested stock options under the Plans for the periods indicated:

 

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

 

Number of

Shares

 

 

Weighted-

Average

Exercise

Price Per

Share

 

 

Number of

Shares

 

 

Weighted-

Average

Exercise

Price Per

Share

 

 

Number of

Shares

 

 

Weighted-

Average

Exercise

Price Per

Share

 

Non-vested options outstanding at beginning of period

 

 

 

 

$

 

 

 

9,335

 

 

$

23.47

 

 

 

46,340

 

 

$

22.42

 

Options granted

 

 

 

 

$

 

 

 

 

 

$

 

 

 

 

 

$

 

Options vested

 

 

 

 

$

 

 

 

(9,335

)

 

$

23.47

 

 

 

(37,005

)

 

$

22.16

 

Options forfeited

 

 

 

 

$

 

 

 

 

 

$

 

 

 

 

 

$

 

Non-vested options outstanding at end of period

 

 

 

 

$

 

 

 

 

 

$

 

 

 

9,335

 

 

$

23.47

 

 

As of December 31, 2019, stock options outstanding under the Plans were as follows:

 

 

 

Options Outstanding

 

Options Exercisable

 

 

Number of

Shares

 

 

Intrinsic

Value

(1)

 

 

Weighted-

Average

Average

Exercise

Price Per

Share

 

 

Weighted-

Average

Remaining

Contractual

Life

 

Number of

Shares

 

 

Intrinsic

Value

(1)

 

 

Weighted-

Average

Exercise

Price Per

Share

 

 

Weighted-

Average

Remaining

Contractual

Life

$10.80 to $14.99

 

 

10,438

 

 

$

78

 

 

$

12.54

 

 

2.9 years

 

 

10,438

 

 

$

78

 

 

$

12.54

 

 

2.9 years

$15.00 to $19.99

 

 

85,000

 

 

 

270

 

 

 

16.82

 

 

3.8 years

 

 

85,000

 

 

 

270

 

 

 

16.82

 

 

3.8 years

$20.00 to $24.83

 

 

61,000

 

 

 

 

 

 

22.73

 

 

4.8 years

 

 

61,000

 

 

 

 

 

 

22.73

 

 

4.8 years

 

 

 

156,438

 

 

$

348

 

 

$

18.84

 

 

 

 

 

156,438

 

 

$

924

 

 

$

18.84

 

 

 

 

(1)

Intrinsic value represents the difference between the closing stock price on the last trading day of the period, which was $20.00 as of December 31, 2019, 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.

103


 

The table below provides information for restricted stock awards under the 2013 Plan for the periods indicated:

 

 

 

2019

 

 

2018

 

 

2017

 

 

 

Number of

Shares

 

 

Weighted-

Average

Grant Date

Fair Value

Per Share

 

 

Number of

Shares

 

 

Weighted-

Average

Grant Date

Per Share

 

 

Number of

Shares

 

 

Weighted-

Average

Grant Date

Fair Value

Per Share

 

Restricted stock at beginning of period

 

 

304,595

 

 

$

21.98

 

 

 

317,783

 

 

$

21.09

 

 

 

343,958

 

 

$

16.60

 

Restricted stock granted

 

 

181,204

 

 

$

22.05

 

 

 

156,771

 

 

$

25.02

 

 

 

127,239

 

 

$

31.06

 

Restricted stock vested

 

 

(99,527

)

 

$

27.56

 

 

 

(106,674

)

 

$

27.11

 

 

 

(139,298

)

 

$

18.73

 

Restricted stock forfeited

 

 

(90,071

)

 

$

13.78

 

 

 

(63,285

)

 

$

15.38

 

 

 

(14,116

)

 

$

24.73

 

Restricted stock at end of period

 

 

296,201

 

 

$

22.91

 

 

 

304,595

 

 

$

21.98

 

 

 

317,783

 

 

$

21.09

 

 

As of December 31, 2019, there was $4.5 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 2.0 years. The total fair value of shares vested during the years ended December 31, 2019, 2018, and 2017 was $2.1 million, $3.0 million, and $4.2 million, respectively.

 

104


 

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:

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

Net

 

 

Average

 

 

Per

 

 

 

Income

 

 

Shares

 

 

Share

 

 

 

(Numerator)

 

 

(Denominator)

 

 

Amount (1)

 

Year Ended December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

Basic EPS

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

32,788

 

 

 

30,725,376

 

 

$

1.07

 

Less: income allocated to unvested restricted stock

 

 

230

 

 

 

30,725,376

 

 

 

0.01

 

Basic EPS

 

$

32,558

 

 

 

30,725,376

 

 

$

1.06

 

Effect of dilutive securities - options and unvested restricted stock

 

 

 

 

 

35,046

 

 

 

 

Diluted EPS

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

32,788

 

 

 

30,760,422

 

 

$

1.07

 

Less: income allocated to unvested restricted stock

 

 

230

 

 

 

30,760,422

 

 

 

0.01

 

Diluted EPS

 

$

32,558

 

 

 

30,760,422

 

 

$

1.06

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Basic EPS

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

57,868

 

 

 

31,924,863

 

 

$

1.81

 

Less: income allocated to unvested restricted stock

 

 

359

 

 

 

31,924,863

 

 

 

0.01

 

Basic EPS

 

$

57,509

 

 

 

31,924,863

 

 

$

1.80

 

Effect of dilutive securities - options and unvested restricted stock

 

 

 

 

 

126,470

 

 

 

 

Diluted EPS

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

57,868

 

 

 

32,051,333

 

 

$

1.80

 

Less: income allocated to unvested restricted stock

 

 

359

 

 

 

32,051,333

 

 

 

0.01

 

Diluted EPS

 

$

57,509

 

 

 

32,051,333

 

 

$

1.79

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Basic EPS

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

54,660

 

 

 

32,071,585

 

 

$

1.71

 

Less: income allocated to unvested restricted stock

 

 

339

 

 

 

32,071,585

 

 

 

0.01

 

Basic EPS

 

$

54,321

 

 

 

32,071,585

 

 

$

1.70

 

Effect of dilutive securities - options and unvested restricted stock

 

 

 

 

 

178,333

 

 

 

 

Diluted EPS

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

54,660

 

 

 

32,249,918

 

 

$

1.70

 

Less: income allocated to unvested restricted stock

 

 

339

 

 

 

32,249,918

 

 

 

0.01

 

Diluted EPS

 

$

54,321

 

 

 

32,249,918

 

 

$

1.69

 

 

(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 and shares of unvested restricted stock outstanding for the years ended December 31, 2019, 2018 and 2017.

105


 

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, $2.4 million and $2.0 million for the years ended December 31, 2019, 2018 and 2017, 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, 2019, the accrued expense liability for personal paid time off was $2.5 million.  

Bank-Owned Life Insurance

As of December 31, 2019, cash surrender value of bank-owned life insurance was $52.8 million. 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:

 

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

 

(in thousands)

 

Commitments to extend credit

 

$

371,287

 

 

$

325,100

 

Standby letters of credit

 

 

31,372

 

 

 

32,500

 

Commercial letters of credit

 

 

11,133

 

 

 

13,848

 

Total undisbursed loan commitments

 

$

413,792

 

 

$

371,448

 

 

106


 

The allowance for 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 off-balance sheet items are included in other operating expenses. Activity in the allowance for off-balance sheet items was as follows for the periods indicated:

 

 

 

As of and for the Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

 

(in thousands)

 

Allowance for off-balance sheet items:

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

1,439

 

 

$

1,296

 

 

$

1,184

 

Provision charged to operating expense

 

 

958

 

 

 

143

 

 

 

112

 

Balance at end of period

 

$

2,397

 

 

$

1,439

 

 

$

1,296

 

 

Note 20 — Qualified Affordable Housing Project Investments

The Company invests in qualified affordable housing projects. At December 31, 2019, the balance of the investment for qualified affordable housing project was $9.6 million. This balance is reflected in accrued interest receivable and other assets on the consolidated balance sheets. Total unfunded commitments related to the investments in qualified affordable housing projects aggregated $112,000 at December 31, 2019. The Company expects to fulfill these commitments during the year ending 2023.

During the years ended December 31, 2019, the Company recognized amortization expense of $2.0 million, which was included within income tax expense on the consolidated statements of income.  

 

Note 21 — Liquidity

Hanmi Financial

Hanmi Financial had $17.1 million 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, 2019 and 2018, the Bank had $90.0 million and $55.0 million of FHLB advances and $264.2 million and $351.3 million, respectively, of brokered deposits.

We monitor the sources and uses of funds on a regular basis to maintain an acceptable liquidity position. The Bank’s primary source of borrowings is the FHLB, from which the Bank is eligible to borrow up to 30 percent of its assets. As of December 31, 2019, the total borrowing capacity available based on pledged collateral and the remaining available borrowing capacity were $1.11 billion and $878.4 million, respectively, compared to $924.4 million and $729.4 million, respectively, as of December 31, 2018.

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.

107


 

As a means of augmenting its liquidity, the Bank had an available borrowing source of $29.6 million from the Federal Reserve Discount Window, to which the Bank pledged securities with a carrying value of $30.2 million, and had no borrowings as of December 31, 2019. 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, 2019.

Note 22 — Condensed Financial Information of Parent Company

Balance Sheets

 

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

 

(in thousands)

 

Assets

 

 

 

 

 

 

 

 

Cash

 

$

17,105

 

 

$

7,450

 

Investments in consolidated subsidiaries

 

 

658,464

 

 

 

652,174

 

Other assets

 

 

7,511

 

 

 

12,196

 

Total assets

 

$

683,080

 

 

$

671,820

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Subordinated debentures

 

$

118,377

 

 

$

117,808

 

Other liabilities

 

 

1,436

 

 

 

1,444

 

Total liabilities

 

 

119,813

 

 

 

119,252

 

Stockholders' equity

 

 

563,267

 

 

 

552,568

 

Total liabilities and stockholders' equity

 

$

683,080

 

 

$

671,820

 

 

Statements of Income

 

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

 

(in thousands)

 

Dividends from bank subsidiaries

 

$

44,500

 

 

$

76,669

 

 

$

22,619

 

Interest expense

 

 

(7,032

)

 

 

(6,925

)

 

 

(5,353

)

Other expense

 

 

(5,333

)

 

 

(5,988

)

 

 

(5,291

)

Income before taxes and undistributed income of subsidiary

 

 

32,135

 

 

 

63,756

 

 

 

11,975

 

Income tax benefit

 

 

3,823

 

 

 

4,116

 

 

 

7,513

 

Income before undistributed income of subsidiary

 

 

35,958

 

 

 

67,872

 

 

 

19,488

 

Equity in undistributed income of subsidiary

 

 

(3,170

)

 

 

(10,004

)

 

 

35,172

 

Net income

 

$

32,788

 

 

$

57,868

 

 

$

54,660

 

 

108


 

Statements of Cash Flows

 

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

 

(in thousands)

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

32,788

 

 

$

57,868

 

 

$

54,660

 

Adjustments to reconcile net income to net cash used in operating activities

 

 

 

 

 

 

 

 

 

 

 

 

Undistributed income of subsidiary

 

 

3,170

 

 

 

10,004

 

 

 

(35,172

)

Amortization of subordinated debentures

 

 

569

 

 

 

538

 

 

 

463

 

Share-based compensation expense

 

 

3,125

 

 

 

3,515

 

 

 

2,893

 

Change in other assets and liabilities

 

 

4,679

 

 

 

(10,463

)

 

 

5,156

 

Net cash provided by operating activities

 

 

44,331

 

 

 

61,462

 

 

 

28,000

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

 

 

 

 

 

Equity contribution to Hanmi Bank

 

 

 

 

 

 

 

 

(90,000

)

Net cash provided by (used in) investing activities

 

 

 

 

 

 

 

 

(90,000

)

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from exercise of stock options

 

 

2,979

 

 

 

570

 

 

 

288

 

Proceeds from insurance of long-term debt

 

 

 

 

 

 

 

 

97,828

 

Cash paid for repurchase of vested shares due to employee tax liability

 

 

(517

)

 

 

(680

)

 

 

(1,103

)

Repurchase of common stock

 

 

(7,362

)

 

 

(36,068

)

 

 

 

Cash dividends paid

 

 

(29,776

)

 

 

(30,921

)

 

 

(25,811

)

Net cash provided by (used in) investing activities

 

 

(34,676

)

 

 

(67,099

)

 

 

71,202

 

Net increase (decrease) in cash

 

 

9,655

 

 

 

(5,637

)

 

 

9,202

 

Cash at beginning of year

 

 

7,450

 

 

 

13,087

 

 

 

3,885

 

Cash at end of year

 

$

17,105

 

 

$

7,450

 

 

$

13,087

 

 

Note 23 — Quarterly Financial Data (Unaudited)

Summarized quarterly financial data is shown in the following tables:

 

 

 

Quarter Ended

 

 

 

March 31

 

 

June 30

 

 

September 30

 

 

December 31

 

2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and dividend income

 

$

62,414

 

 

$

61,482

 

 

$

62,177

 

 

$

60,699

 

Interest expense

 

 

17,526

 

 

 

18,492

 

 

 

18,119

 

 

 

16,763

 

Net interest income before provision for loan and lease losses

 

 

44,888

 

 

 

42,990

 

 

 

44,058

 

 

 

43,936

 

Loan and lease loss provision

 

 

1,117

 

 

 

16,699

 

 

 

1,602

 

 

 

10,752

 

Noninterest income

 

 

6,254

 

 

 

7,729

 

 

 

6,860

 

 

 

6,709

 

Noninterest expense

 

 

29,065

 

 

 

30,144

 

 

 

32,607

 

 

 

34,089

 

Income before provision for income taxes

 

 

20,960

 

 

 

3,876

 

 

 

16,709

 

 

 

5,804

 

Provision for income taxes

 

 

6,288

 

 

 

1,220

 

 

 

4,333

 

 

 

2,720

 

Net income

 

$

14,672

 

 

$

2,656

 

 

$

12,377

 

 

$

3,084

 

Basic earnings per share

 

$

0.48

 

 

$

0.09

 

 

$

0.40

 

 

$

0.10

 

Diluted earnings per share

 

$

0.48

 

 

$

0.09

 

 

$

0.40

 

 

$

0.10

 

109


 

 

 

 

Quarter Ended

 

 

 

March 31

 

 

June 30

 

 

September 30

 

 

December 31

 

2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and dividend income

 

$

55,082

 

 

$

57,322

 

 

$

60,036

 

 

$

61,957

 

Interest expense

 

 

10,158

 

 

 

12,208

 

 

 

14,707

 

 

 

16,311

 

Net interest income before provision for loan and lease losses

 

 

44,924

 

 

 

45,114

 

 

 

45,329

 

 

 

45,646

 

Loan and lease loss provision

 

 

649

 

 

 

100

 

 

 

200

 

 

 

3,041

 

Noninterest income

 

 

6,061

 

 

 

5,945

 

 

 

6,215

 

 

 

6,299

 

Noninterest expense

 

 

29,757

 

 

 

29,510

 

 

 

29,008

 

 

 

29,298

 

Income before provision for income taxes

 

 

20,579

 

 

 

21,449

 

 

 

22,336

 

 

 

19,606

 

Provision for income taxes

 

 

5,724

 

 

 

5,901

 

 

 

6,255

 

 

 

8,222

 

Net income

 

$

14,855

 

 

$

15,548

 

 

$

16,081

 

 

$

11,384

 

Basic earnings per share

 

$

0.46

 

 

$

0.48

 

 

$

0.50

 

 

$

0.37

 

Diluted earnings per share

 

$

0.46

 

 

$

0.48

 

 

$

0.50

 

 

$

0.37

 

 

Note 24 — 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, 2019.

 

Note 25 — Revenue Recognition

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.

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, 2019 and 2018. 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.

 

110


 

Hanmi Financial Corporation and Subsidiary

Exhibit Index

 

Exhibit

Number

 

Document

 

 

    3.1

 

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).

 

 

    3.2

 

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).

 

 

    3.3

 

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).

 

 

    3.4

 

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).

 

 

 

    4.1

 

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).

 

 

    4.2

 

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).

 

 

    4.3

 

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).

 

 

    4.4

 

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).

 

 

    4.5

 

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).

 

 

 

    4.6

 

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).

 

 

 

    4.7

 

Description of Registrant’s Capital Stock.

 

 

 

  10.1

 

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).

 

 

 

  10.2

 

Hanmi Financial Corporation 2007 Equity Compensation Plan (Previously filed and incorporated by reference herein from Hanmi Financial’s Current Report on Form 8-K, filed with the SEC on June 26, 2007). †

 

 

 

  10.3

 

Form of Notice of Stock Option Grant and Agreement Pursuant to 2007 Equity Compensation Plan(Previously filed and 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). †

 

 

 

  10.4

 

Form of Notice of Grant and Restricted Stock Agreement Pursuant to 2007 Equity Compensation Plan(Previously filed and 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). †

 

 

 

111


 

  10.5

 

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).†

 

 

 

  10.6

 

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).†

 

 

 

  10.7

 

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).†

 

 

 

  10.8

 

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).†

 

 

 

  10.9

 

Amended and Restated Employment Agreement by and among Hanmi Financial Corporation, Hanmi Bank and Bonita I. Lee dated February 26, 2020.†

 

 

 

  10.10

 

Amended and Restated Employment Agreement by and among Hanmi Financial Corporation, Hanmi Bank and Romolo C. Santarosa dated February 26, 2020.†

 

 

 

  21.1

 

List of Subsidiaries

 

 

 

  23.1

 

Consent of Independent Registered Public Accounting Firm - Consent of Crowe LLP.

 

 

 

  23.2

 

Consent of Independent Registered Public Accounting Firm - Consent of KPMG LLP.

 

 

 

  31.1

 

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.

 

 

 

  31.2

 

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.

 

 

 

  32.1

 

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

  32.2

 

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

101.INS

 

Inline XBRL Instance Document *

 

 

 

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document *

 

 

 

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document *

 

 

 

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document *

 

 

 

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document *

 

 

 

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document *

 

 

 

104

 

The cover page from the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, 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).

112


 

Signatures

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 undersigned, thereunto duly authorized.

 

Date: March 2, 2020

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 2, 2020.

 

/s/ Bonita I. Lee

 

/s/ Romolo C. Santarosa

Bonnie Lee

 

Romolo C. Santanrosa

Chief Executive Officer; Director

 

Senior Executive Vice President and Chief Financial Officer

(Principal Executive Officer)

 

(Principal Financial and Accounting Officer)

 

 

 

/s/ John J. Ahn

 

/s/ Kiho Choi

John J. Ahn

 

Kiho Choi

Chairman of the Board

 

Director

 

 

 

/s/ Christie K. Chu

 

/s/ Harry H. Chung

Christie K. Chu

 

Harry H. Chung

Director

 

Director

 

 

 

/s/ David L. Rosenblum

 

/s/ Thomas J. Williams

David L. Rosenblum

 

Thomas J. Williams

Director

 

Director

 

 

 

/s/ Michael M. Yang

 

/s/ Scott R. Diehl

Michael M. Yang

 

Scott R. Diehl

Director

 

Director

 

 

 

 

 

 

113