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Hanmi Reports Third Quarter 2020 Results

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2020 Third Quarter Highlights:        

  • Net income of $16.3 million, or $0.53 per diluted share, up 78.1% from net income of $9.2 million, or $0.30 per share, for the prior quarter and up 32.1% from net income of $12.4 million, or $0.40 per share, from the same quarter a year ago.
  • Loans receivable were $4.83 billion, relatively unchanged compared with the end of the prior quarter, and included $256.6 million of new loan and lease production. Loans receivable were up 5.8% year-over-year.
  • Deposits of $5.19 billion compared with $5.21 billion from the end of the second quarter; Deposits up 10.7% from a year ago. Cost of interest-bearing deposits fell 24 basis points from the prior quarter.
    • Noninterest-bearing demand deposits of $1.96 billion, up 20.5% from the prior quarter on an annualized basis and up 41.3% year-over-year.
  • Credit loss expense, under the new accounting standard, was $0.04 million, compared with $24.6 million for the prior quarter resulting in an allowance for credit losses of 1.79% of loans at September 30, 2020 – 1.91% excluding Paycheck Protection Program (PPP) loans.
  • Nonperforming assets were 1.07% (1.00% after giving effect to a $3.6 million loan payoff in October) of total assets at quarter-end compared with 0.94% for the prior quarter; the change for the quarter reflects the addition of four loans for $7.9 million, a net increase of $1.4 million in nonperforming leases, and the return to accruing status of four loans for $2.3 million.
  • Net interest income was $45.6 million for the third quarter compared with $44.4 million for the prior quarter; third quarter prepayment penalties were $1.3 million compared with $0.1 million for the prior quarter.
  • Net interest margin for the third quarter was 3.13% (3.18% excluding PPP loans) compared with 3.15% (3.21% excluding PPP loans) for the prior quarter; prepayment penalties contributed approximately 9 basis points and 1 basis point, respectively, to net interest margin.
  • Noninterest income was $7.1 million for the third quarter compared with $20.9 million for the prior quarter; third quarter included $2.3 million of gains from sales of SBA loans while the second quarter included none and second quarter included $15.7 million of gains from sales of securities while the third quarter included none.
  • Noninterest expense was $29.9 million for the third quarter compared with $27.1 million for the prior quarter; the second quarter included the $3.1 million effect of deferred loan origination costs from PPP loan originations. The efficiency ratio for the third quarter was 56.73% compared with 41.51% (60.82% excluding securities gains and deferred PPP loan origination costs) for the prior quarter.
  • Hanmi remained well capitalized with a Total risk-based capital ratio of 15.45% and a Common equity Tier 1 capital ratio of 11.68% at September 30, 2020, and ended the third quarter with tangible common equity to tangible assets ratio of 9.05% (9.52% excluding PPP loans).

For more information about Hanmi's response to the COVID-19 pandemic, including detail regarding participation in the PPP, loan deferrals, including a breakdown by loan type and industry, as well as detail concerning Hanmi's loan exposure to higher impacted industries, please see the Q3 2020 Investor Update (and Supplemental Financial Information), a copy of which is available on the Bank's website at www.hanmi.com and via a current report on Form 8-K on the website of the Securities and Exchange Commission at www.sec.gov.

LOS ANGELES, Oct. 27, 2020 (GLOBE NEWSWIRE) -- Hanmi Financial Corporation (NASDAQ:HAFC, or "Hanmi")), the parent company of Hanmi Bank (the "Bank"), today reported net income for the 2020 third quarter of $16.3 million, or $0.53 per diluted share, compared with $9.2 million, or $0.30 per diluted share for the 2020 second quarter and $12.4 million, or $0.40 per diluted share for the 2019 third quarter.

Bonnie Lee, President and Chief Executive Officer, said, "In light of the significant challenges and uncertainty we faced in the first half of 2020 arising from the COVID-19 pandemic, I am extremely pleased with the financial and operational improvements we achieved in the third quarter. In particular, efforts to protect our portfolio and help borrowers impacted by the pandemic through modifications, deferrals and other services have been extremely successful. We are very encouraged by the positive trend with the modified loan portfolio, declining to approximately 12% of the portfolio as of the end of the third quarter, and down from 29% at the end of the prior quarter. We also saw the benefit of lower deposit costs, moderated credit loss expense, a return to SBA loan sales and careful management of noninterest expense. Together, this greatly expanded our third quarter net income to $16.3 million, or $0.53 per diluted share."

Ms. Lee further added, "While we will continue to proactively monitor the macroeconomic environment and the performance of our loan portfolio, we are concurrently taking steps to provide our customers with additional products and services, further diversify our sources of revenue and safely and soundly drive growth and profitability at the Bank. During the quarter we hired key executives to enhance our residential mortgage origination capabilities, as well as accelerate the digitization of our banking platform to provide a more convenient and seamless customer experience. We are confident these efforts will deepen our relationships with new and existing customers, allow us to scale more efficiently and provide exciting growth opportunities for Hanmi."

Ms. Lee concluded, "As we look ahead to the fourth quarter and beyond, we remain committed to supporting our loyal customers, prioritizing the health and safety of our employees and communities and ultimately emerging from the pandemic well-positioned to drive profitable, sustainable growth and maximize value for our shareholders."

Quarterly Highlights
(Dollars in thousands, except per share data)

                           
  As of or for the Three Months Ended   Amount Change
  September 30,   June 30,   March 31,   December 31,   September 30,   Q3-20   Q3-20
  2020
  2020
  2020
  2019
  2019
  vs. Q2-20   vs. Q3-19
                           
Net income $ 16,344     $ 9,175     $ 2,350     $ 3,084     $ 12,376     $ 7,169     $ 3,968  
Net income per diluted common share $ 0.53     $ 0.30     $ 0.08     $ 0.10     $ 0.40     $ 0.23     $ 0.13  
                           
Assets $ 6,106,782     $ 6,218,163     $ 5,617,690     $ 5,538,184     $ 5,527,982     $ (111,381 )   $ 578,800  
Loans receivable $ 4,834,137     $ 4,825,642     $ 4,543,636     $ 4,610,148     $ 4,569,837     $ 8,495     $ 264,300  
Deposits $ 5,194,292     $ 5,209,781     $ 4,582,068     $ 4,698,962     $ 4,690,141     $ (15,489 )   $ 504,151  
                           
Return on average assets   1.08 %     0.63 %     0.17 %     0.22 %     0.90 %     0.45       0.18  
Return on average stockholders' equity   11.74 %     6.73 %     1.69 %     2.15 %     8.67 %     5.01       3.07  
                           
Net interest margin (1)   3.13 %     3.15 %     3.36 %     3.32 %     3.36 %     -0.02       -0.23  
Efficiency ratio (2)   56.73 %     41.51 %     61.89 %     67.31 %     64.04 %     15.22       -7.31  
                           
Tangible common equity to tangible assets (3)   9.05 %     8.63 %     9.65 %     9.98 %     10.20 %     0.42       -1.15  
Tangible common equity per common share (3) $ 17.95     $ 17.47     $ 17.67     $ 17.90     $ 18.05     $ 0.48     $ (0.10 )
                           
                           
(1)       Amounts calculated on a fully taxable equivalent basis using the federal tax rate in effect for the periods presented.            
(2)       Noninterest expense divided by net interest income plus noninterest income.                    
(3)       Refer to "Non-GAAP Financial Measures" for further details.                      

Results of Operations
Net interest income was $45.6 million for the third quarter of 2020 compared with $44.4 million for the second quarter of 2020, an increase of 2.6%. Interest and fees on loans increased 0.7%, or $0.4 million, from the preceding quarter primarily due to higher average balances, partially offset by a 7 basis point reduction in average yields. Interest on securities decreased 38.8%, or $1.2 million, from the preceding quarter primarily due to the sale of $479.9 million of securities during the previous quarter and the subsequent reinvestment into lower-yielding securities. Third quarter total interest expense decreased 18.2%, or $2.1 million from the preceding quarter driven by a 24 basis point reduction in the average rate paid on interest-bearing deposits. Third quarter loan prepayment penalties were $1.3 million compared with $0.1 million for the second quarter.

                           
  As of or For the Three Months Ended (in thousands)   Percentage Change
  Sep 30,   Jun 30,   Mar 31,   Dec 31,   Sep 30,   Q3-20   Q3-20
Net Interest Income 2020
  2020
  2020
  2019
  2019
  vs. Q2-20   vs. Q3-19
                           
Interest and fees on loans receivable(1) $ 52,586     $ 52,230     $ 54,648     $ 56,267     $ 57,929     0.7 %   -9.2 %
Interest on securities   1,972       3,225       3,655       3,665       3,769     -38.8 %   -47.7 %
Dividends on FHLB stock   204       203       289       289       286     0.3 %   -28.8 %
Interest on deposits in other banks   84       78       333       478       193     7.3 %   -56.6 %
Total interest and dividend income $ 54,846     $ 55,736     $ 58,925     $ 60,699     $ 62,177     -1.6 %   -11.8 %
                           
Interest on deposits   7,032       8,889       12,742       14,699       15,995     -20.9 %   -56.0 %
Interest on borrowings   582       760       496       325       367     -23.4 %   58.6 %
Interest on subordinated debentures   1,627       1,645       1,712       1,739       1,757     -1.1 %   -7.4 %
Total interest expense   9,241       11,294       14,950       16,763       18,119     -18.2 %   -49.0 %
Net interest income $ 45,605     $ 44,442     $ 43,975     $ 43,936     $ 44,058     2.6 %   3.5 %
                           
(1)       Includes loans held for sale.                          

Net interest margin was 3.13% for the third quarter of 2020 compared with 3.15% for the second quarter of 2020, principally reflecting an 18 basis point decline in the yield on earning assets offset by a 24 basis point decline in the cost of interest-bearing deposits. The average earning asset yield was 3.77% for the third quarter of 2020 compared with 3.95% for the second quarter of 2020. The 18 basis point decline was primarily due to the reduction in securities yields reflecting the prior quarter sale of securities and reinvestment into lower-yielding securities, and, to a lesser extent lower average yields on loans receivable. The cost of interest-bearing liabilities was 1.05% for the third quarter of 2020 compared with 1.23% for the second quarter of 2020. The 24 basis point decline in the cost of interest-bearing deposits drove the lower cost of interest-bearing liabilities.

                           
  For the Three Months Ended (in thousands)   Percentage Change
  Sep 30,   Jun 30,   Mar 31,   Dec 31,   Sep 30,   Q3-20   Q3-20
Average Earning Assets and Interest-bearing Liabilities 2020
  2020
  2020
  2019
  2019
  vs. Q2-20   vs. Q3-19
Loans receivable (1) $ 4,734,511     $ 4,680,048     $ 4,518,395     $ 4,487,998     $ 4,519,770     1.2 %   4.8 %
Securities   696,285       589,932       623,711       624,861       630,450     18.0 %   10.4 %
FHLB stock   16,385       16,385       16,385       16,385       16,385     0.0 %   0.0 %
Interest-bearing deposits in other banks   340,486       386,956       104,513       114,462       35,140     -12.0 %   868.9 %
Average interest-earning assets $ 5,787,667     $ 5,673,321     $ 5,263,004     $ 5,243,706     $ 5,201,745     2.0 %   11.3 %
                           
Demand: interest-bearing $ 99,161     $ 92,676     $ 82,934     $ 82,604     $ 82,665     7.0 %   20.0 %
Money market and savings   1,771,615       1,677,081       1,687,013       1,640,162       1,555,639     5.6 %   13.9 %
Time deposits   1,357,167       1,458,351       1,522,745       1,605,276       1,692,419     -6.9 %   -19.8 %
Average interest-bearing deposits   3,227,943       3,228,108       3,292,692       3,328,042       3,330,723     -0.0 %   -3.1 %
Borrowings   163,364       342,437       130,659       75,500       74,239     -52.3 %   120.1 %
Subordinated debentures   118,733       118,583       118,444       118,297       118,145     0.1 %   0.5 %
Average interest-bearing liabilities $ 3,510,040     $ 3,689,128     $ 3,541,795     $ 3,521,839     $ 3,523,107     -4.9 %   -0.4 %
                           
(1)       Includes loans held for sale.                          
                           
  For the Three Months Ended   Amount Change
  Sep 30,   Jun 30,   Mar 31,   Dec 31,   Sep 30,   Q3-20   Q3-20
Average Yields and Rates 2020
  2020
  2020
  2019
  2019
  vs. Q2-20   vs. Q3-19
Loans receivable(1)   4.42 %     4.49 %     4.86 %     4.97 %     5.08 %   -0.07     -0.66  
Securities (2)   1.13 %     2.19 %     2.34 %     2.35 %     2.39 %   -1.06     -1.26  
FHLB stock   4.95 %     5.00 %     7.10 %     7.00 %     6.93 %   -0.05     -1.98  
Interest-bearing deposits in other banks   0.10 %     0.08 %     1.28 %     1.66 %     2.18 %   0.02     -2.08  
Interest-earning assets   3.77 %     3.95 %     4.50 %     4.59 %     4.74 %   -0.18     -0.97  
                           
Interest-bearing deposits   0.87 %     1.11 %     1.56 %     1.75 %     1.91 %   -0.24     -1.04  
Borrowings   1.42 %     0.89 %     1.53 %     1.71 %     1.96 %   0.53     -0.54  
Subordinated debentures   5.48 %     5.55 %     5.78 %     5.88 %     5.92 %   -0.07     -0.44  
Interest-bearing liabilities   1.05 %     1.23 %     1.70 %     1.89 %     2.04 %   -0.18     -0.99  
                           
Net interest margin (taxable equivalent basis)   3.13 %     3.15 %     3.36 %     3.32 %     3.36 %   -0.02     -0.23  
                           
Cost of deposits   0.55 %     0.74 %     1.11 %     1.25 %     1.37 %   -0.19     -0.82  
                           
(1)       Includes loans held for sale.                          
(2)       Amounts calculated on a fully taxable equivalent basis using the federal tax rate in effect for the periods presented.            

For the third quarter of 2020, credit loss expense was $0.04 million, comprised of a $0.70 million provision for loan losses and a $0.66 million negative provision for off-balance sheet items. The provision for credit losses for the second quarter of 2020 was $21.1 million and the provision for loan losses was $1.6 million for the third quarter of 2019. The provision for off-balance sheet items was $3.5 million and $0.2 million for the second quarter of 2020 and third quarter of 2019, respectively.

Third quarter noninterest income decreased to $7.1 million from $20.9 million for the second quarter, primarily due to the $15.7 million in gains on sales of securities realized in the second quarter as a result of repositioning the securities portfolio to capture the high-level of unrealized gains arising from the very low rate environment. This decrease was partially offset by a $2.3 million increase in gain on sale of SBA loans on $29.3 million of loans sold for the third quarter of 2020. Hanmi did not sell any SBA loans during the second quarter due to disruptions in the secondary market resulting from the COVID-19 crisis.

                           
  For the Three Months Ended (in thousands)   Percentage Change
  Sep 30,   Jun 30,   Mar 31,   Dec 31,   Sep 30,   Q3-20   Q3-20
Noninterest Income 2020
  2020
  2020
  2019
  2019
  vs. Q2-20   vs. Q3-19
Service charges on deposit accounts $ 2,002     $ 2,032     $ 2,400     $ 2,589     $ 2,518     -1.5 %   -20.5 %
Trade finance and other service charges and fees   972       961       986       1,267       1,191     1.1 %   -18.4 %
Servicing income   704       855       561       227       614     -17.7 %   14.7 %
Bank-owned life insurance income   289       276       277       281       279     4.6 %   3.4 %
All other operating income   806       1,095       845       846       491     -26.4 %   64.1 %
Service charges, fees & other   4,773       5,219       5,069       5,210       5,093     -8.6 %   -6.3 %
                           
Gain on sale of SBA loans   2,324       -       1,154       1,499       1,767     0.0 %   31.5 %
Net gain on sales of securities   -       15,712       -       -       -     -100.0 %   0.0 %
Gain on sale of bank premises   43       -       -       -       -     0.0 %   0.0 %
Total noninterest income $ 7,140     $ 20,931     $ 6,223     $ 6,709     $ 6,860     -65.9 %   4.1 %

During the third quarter of 2020, noninterest expense increased 10.3% to $29.9 million from $27.1 million for the second quarter primarily due to $3.1 million in deferred loan costs from PPP loans in the second quarter which drove a reduction in 2020 second quarter salaries and benefits expense. Primarily as a result of the decrease in revenues (noninterest income and net interest income), as well as higher noninterest expense, the efficiency ratio increased to 56.73% in the third quarter from 41.51% in the prior quarter. Excluding securities gains and deferred PPP loan origination costs the efficiency ratio for the third quarter was 56.73% compared with 60.82% for the prior quarter.

  For the Three Months Ended (in thousands)   Percentage Change
  Sep 30,   Jun 30,   Mar 31,   Dec 31,   Sep 30,   Q3-20   Q3-20
  2020
  2020
  2020
  2019
  2019
  vs. Q2-20   vs. Q3-19
Noninterest Expense                          
Salaries and employee benefits $ 17,194     $ 14,701     $ 17,749     $ 17,752     $ 17,530     17.0 %   -1.9 %
Occupancy and equipment   4,650       4,508       4,475       4,547       4,528     3.1 %   2.7 %
Data processing   2,761       2,804       2,669       2,122       2,410     -1.5 %   14.6 %
Professional fees   1,794       1,545       1,915       2,601       2,826     16.1 %   -36.5 %
Supplies and communication   698       858       781       717       726     -18.7 %   -3.9 %
Advertising and promotion   594       456       734       1,165       927     30.2 %   -36.0 %
All other operating expenses   2,349       2,457       2,743       3,411       3,500     -4.4 %   -32.9 %
subtotal   30,040       27,329       31,066       32,315       32,447     9.9 %   -7.4 %
                           
Other real estate owned expense (income)   (116 )     (191 )     2       40       160     39.4 %   -172.4 %
Impairment loss on bank premises   -       -       -       1,734       -     0.0 %   0.0 %
Total noninterest expense $ 29,924     $ 27,138     $ 31,068     $ 34,089     $ 32,607     10.3 %   -8.2 %

Hanmi recorded a provision for income taxes of $6.4 million for the third quarter of 2020, representing an effective tax rate of 28.3% compared with $4.5 million, representing an effective tax rate of 32.7%, for the second quarter of 2020. For the first nine months of 2020, the effective tax rate was 30.0%.

Financial Position
Total assets were $6.11 billion at September 30, 2020, a 1.8% decrease from $6.22 billion at June 30, 2020.

Loans receivable, before the allowance for credit losses, were $4.83 billion at September 30, 2020 and June 30, 2020. Loans held for sale, representing the guaranteed portion of SBA 7(a) loans were $12.8 million at the end of the third quarter, compared with $17.9 million at the end of the second quarter.

                           
  As of (in thousands)   Percentage Change
  Sep 30,   Jun 30,   Mar 31,   Dec 31,   Sep 30,   Q3-20   Q3-20
  2020
  2020
  2020
  2019
  2019
  vs. Q2-20   vs. Q3-19
Loan Portfolio                          
Commercial real estate loans $ 3,264,447     $ 3,266,242     $ 3,187,189     $ 3,226,478     $ 3,209,752     -0.1 %   1.7 %
Residential/consumer loans   370,883       366,190       391,206       415,698       451,099     1.3 %   -17.8 %
Commercial and industrial loans   765,484       730,399       472,714       484,093       441,209     4.8 %   73.5 %
Leases   433,323       462,811       492,527       483,879       467,777     -6.4 %   -7.4 %
Loans receivable   4,834,137       4,825,642       4,543,636       4,610,148       4,569,837     0.2 %   5.8 %
Loans held for sale   12,834       17,942       -       6,020       6,598     -28.5 %   94.5 %
Total $ 4,846,971     $ 4,843,584     $ 4,543,636     $ 4,616,168     $ 4,576,435     0.1 %   5.9 %

For the third quarter of 2020, commercial real estate loans as a percentage of loans receivable decreased to 67.5% compared with 70.2% for the same period last year. Commercial and industrial loans, which included $302.9 million of SBA guaranteed PPP loans, reached 15.8% of the portfolio at the end of the 2020-third quarter, up from 9.7% a year ago.

Hanmi generated strong loan production volume through the third quarter. New loan production totaled $256.6 million at an average rate of 4.57%, while the average rate of loans paid off during the same period was 5.13%.

  For the Three Months Ended (in thousands)
  Sep 30,   Jun 30,   Mar 31,   Dec 31,   Sep 30,
  2020
  2020
  2020
  2019
  2019
New Loan Production                  
Commercial real estate loans $ 99,618     $ 129,432     $ 109,433     $ 185,070     $ 78,039  
Commercial and industrial loans   78,594       61,114       18,237       95,349       51,093  
SBA loans   31,335       328,274       23,422       33,649       34,114  
Leases receivable   21,271       15,279       56,849       65,525       52,333  
Residential/consumer loans   25,766       10       714       1,768       1,882  
subtotal   256,584       534,109       208,655       381,361       217,461  
                   
                   
Payoffs   (139,797 )     (67,537 )     (122,686 )     (205,012 )     (103,638 )
Amortization   (66,907 )     (90,678 )     (95,414 )     (77,580 )     (70,407 )
Loan sales   (36,068 )     -       (18,352 )     (26,087 )     (24,286 )
Net line utilization   (2,199 )     (92,230 )     (11,242 )     (31,333 )     (4,012 )
Charge-offs & OREO   (3,118 )     (1,658 )     (27,473 )     (1,038 )     (1,084 )
                   
Loans receivable-beginning balance   4,825,642       4,543,636       4,610,148       4,569,837       4,555,803  
Loans receivable-ending balance $ 4,834,137     $ 4,825,642     $ 4,543,636     $ 4,610,148     $ 4,569,837  

Deposits totaled $5.19 billion at the end of the third quarter, compared with $5.21 billion at the end of the preceding quarter. Growth in noninterest-bearing demand deposits and interest-bearing demand deposits was more than offset by reductions in time deposits. At September 30, 2020 the loan-to-deposit ratio was 93.1% compared with 92.6% at the end of the previous quarter.

  As of (in thousands)   Percentage Change
  Sep 30,   Jun 30,   Mar 31,   Dec 31,   Sep 30,   Q3-20   Q3-20
   2020     2020     2020     2019     2019    vs. Q2-20   vs. Q3-19
Deposit Portfolio                          
Demand: noninterest-bearing $ 1,961,006     $ 1,865,213     $ 1,366,270     $ 1,391,624     $ 1,388,121       5.1 %     41.3 %
Demand: interest-bearing   100,155       96,941       87,313       84,323       84,155       3.3 %     19.0 %
Money market and savings   1,794,627       1,812,612       1,648,022       1,667,096       1,590,037       -1.0 %     12.9 %
Time deposits   1,338,504       1,435,015       1,480,463       1,555,919       1,627,828       -6.7 %     -17.8 %
Total deposits $ 5,194,292     $ 5,209,781     $ 4,582,068     $ 4,698,962     $ 4,690,141       -0.3 %     10.7 %

At September 30, 2020, the Bank had $150.0 million in borrowings from the FHLB with $1.4 billion of remaining unused availability. As of the end of the third quarter of 2020, the Bank had unused secured and unsecured facilities of $1.8 billion and $115.0 million, respectively.

At September 30, 2020, the Company had $16.1 million of cash on deposit with the Bank. Hanmi continues to believe it has ample liquidity to operate in the evolving, uncertain macroeconomic environment resulting from the pandemic, and is continuously evaluating potential liquidity requirements.

At September 30, 2020, stockholders' equity was $563.2 million, compared with $547.4 million at June 30, 2020. Tangible common stockholders' equity was $551.5 million, or 9.05% of tangible assets, at September 30, 2020 compared with $535.7 million, or 8.63% of tangible assets at the end of the second quarter. The ratio of tangible common equity to tangible assets excluding the $302.9 million of PPP loans was 9.52% at the end of the 2020-third quarter. Tangible book value per share increased to $17.95 at September 30, 2020 from $17.47 at the end of the prior quarter.

Hanmi continues to be well capitalized for regulatory purposes, with a preliminary Tier 1 risk-based capital ratio of 12.11% and a Total risk-based capital ratio of 15.45% at September 30, 2020, versus 11.55% and 14.85%, respectively, at the end of the second quarter.

  As of   Amount Change
  Sep 30,   Jun 30,   Mar 31,   Dec 31,   Sep 30,   Q3-20   Q3-20
   2020     2020     2020     2019     2019    vs. Q2-20   vs. Q3-19
Regulatory Capital ratios (1)                          
Hanmi Financial                          
Total risk-based capital   15.45 %     14.85 %     14.77 %     15.11 %     15.07 %     0.60       0.38  
Tier 1 risk-based capital   12.11 %     11.55 %     11.52 %     11.78 %     11.91 %     0.56       0.2  
Common equity tier 1 capital   11.68 %     11.12 %     11.09 %     11.36 %     11.49 %     0.56       0.19  
Tier 1 leverage capital ratio   9.56 %     9.69 %     9.91 %     10.15 %     10.43 %     -0.13       -0.87  
Hanmi Bank                          
Total risk-based capital   15.06 %     14.41 %     14.29 %     14.64 %     14.65 %     0.65       0.41  
Tier 1 risk-based capital   13.81 %     13.15 %     13.12 %     13.39 %     13.55 %     0.66       0.26  
Common equity tier 1 capital   13.81 %     13.15 %     13.12 %     13.39 %     13.55 %     0.66       0.26  
Tier 1 leverage capital ratio   10.91 %     11.04 %     11.35 %     11.56 %     11.86 %     -0.13       -0.95  
                           
(1)       Preliminary ratios for September 30, 2020                          

Asset Quality
Loans and leases 30 to 89 days past due and still accruing were 0.20% of loans and leases at the end of the third quarter of 2020, compared with 0.21% at the end of the second quarter.

Special mention loans were $57.1 million at the end of the third quarter compared with $21.1 million at June 30, 2020. The September 30, 2020 balance of special mention loans included $31.6 million of loans adversely affected by the pandemic.

Classified loans were $106.2 million at September 30, 2020 compared with $93.9 million at the end of the second quarter. The quarter-over-quarter change reflects additions or downgrades of $33.4 million and reductions or upgrades of $21.1 million. At September 30, 2020 classified loans included $21.7 million of loans adversely affected by the COVID-19 pandemic.

Nonperforming loans were $64.3 million at the end of the third quarter of 2020, or 1.33% (1.25% after giving effect to a $3.6 million loan payoff in October) of loans compared with $58.3 million at the end of the second quarter, or 1.21% of the portfolio.

Nonperforming assets were $65.4 million at the end of the third quarter of 2020, or 1.07% (1.00% after giving effect to a $3.6 million loan payoff in October) of total assets, compared with $58.4 million, or 0.94% of assets, at the end of the prior quarter.

Modified loans and leases declined 59% to $578.6 million at September 30, 2020 from $1.4 billion at June 30, 2020. Approximately 70%, or $402.7 million, of modified loans require interest-only payments. In addition, of the modified loan portfolio, 5.2% were special mention, 4.1% were classified and none were on nonaccrual status at September 30, 2020.

Gross charge-offs for the third quarter of 2020 were $2.2 million compared with $1.6 million for the preceding quarter. Recoveries of previously charged-off loans for the third quarter of 2020 were $1.7 million compared with $0.3 million for the preceding quarter. As a result, there were net charge-offs of $0.4 million for the third quarter of 2020, compared with net charge-offs of $1.3 million for the preceding quarter. For the third quarter of 2020, net charge-offs represented an annualized 0.03% of average loans compared with 0.11% of average loans for the second quarter.

The allowance for credit losses was $86.6 million as of September 30, 2020 generating an allowance for credit losses to loans of 1.79% (1.91% excluding the PPP loans) compared with 1.79% (1.91% excluding the PPP loans) at the end of the prior quarter. Although largely unchanged from the second quarter, the allowance reflects the change in macroeconomic assumptions including a lower projected average unemployment rate for the subsequent four quarters and a higher projected annual GDP growth rate. Hanmi recognizes the inherent uncertainties in the estimate of the allowance for credit losses and the effects the COVID-19 pandemic may have on our borrowers. Hanmi expects the estimate of the allowance for credit losses will change in future periods because of changes in economic conditions, economic forecasts, and other factors.

  As of or for the Three Months Ended (in thousands)   Amount Change
  Sep 30,   Jun 30,   Mar 31,   Dec 31,   Sep 30,   Q3-20   Q3-20
  2020
  2020
  2020
  2019
  2019
  vs. Q2-20   vs. Q3-19
Asset Quality Data and Ratios                          
                           
Delinquent loans:                          
Loans, 30 to 89 days past due and still accruing $ 9,428     $ 9,984     $ 10,001     $ 10,251     $ 8,085     $ (556 )   $ 1,343  
Delinquent loans to total loans   0.20 %     0.21 %     0.22 %     0.22 %     0.18 %     -0.01       0.02  
                           
Criticized loans:                          
Special mention $ 57,105     $ 21,134     $ 20,945     $ 26,632     $ 27,400     $ 35,971     $ 29,705  
Classified   106,211       93,922       88,225       94,025       80,734       12,289       25,477  
Total criticized loans $ 163,316     $ 115,056     $ 109,170     $ 120,657     $ 108,134     $ 48,260     $ 55,182  
                           
Nonperforming assets:                          
Nonaccrual loans $ 64,333     $ 58,264     $ 46,383     $ 63,761     $ 64,194     $ 6,069     $ 139  
Loans 90 days or more past due and still accruing   -       -       5,843       -       544       -       (544 )
Nonperforming loans   64,333       58,264       52,226       63,761       64,738       6,069       (405 )
Other real estate owned, net   1,052       148       63       63       330       904       722  
Nonperforming assets $ 65,385     $ 58,412     $ 52,289     $ 63,824     $ 65,068     $ 6,973     $ 317  
                           
Nonperforming loans to total loans   1.33 %     1.21 %     1.15 %     1.38 %     1.43 %        
Nonperforming assets to assets   1.07 %     0.94 %     0.93 %     1.15 %     1.18 %        
                           
Allowance for credit losses:                          
Balance at beginning of period $ 86,330     $ 66,500     $ 61,408     $ 50,712     $ 49,386          
Impact of CECL adoption   -       -       17,433       -       -          
Provision for loan losses   696       21,131       14,916       10,751       1,602          
Net loan (charge-offs) recoveries   (406 )     (1,301 )     (27,257 )     (55 )     (276 )        
Balance at end of period $ 86,620     $ 86,330     $ 66,500     $ 61,408   $ - $ 50,712          
                           
Net loan charge-offs to average loans (1)   0.03 %     0.11 %     2.41 %     0.00 %     0.02 %        
Allowance for credit losses to loans   1.79 %     1.79 %     1.46 %     1.33 %     1.11 %        
                           
Allowance for credit losses related to off-balance sheet items:                        
Balance at beginning of period $ 6,347     $ 2,885     $ 2,397     $ 1,542     $ 1,333          
Impact of CECL adoption   -       -       (335 )     -       -          
Provision for loss on off-balance sheet items   (658 )     3,462       823       855       209          
Balance at end of period $ 5,689     $ 6,347     $ 2,885     $ 2,397     $ 1,542          
                           
Commitments to extend credit $ 444,782     $ 486,852     $ 375,233     $ 371,287     $ 346,182          
                           
(1)       Annualized                          

Corporate Developments
On July 29, 2020 Hanmi's Board of Directors declared a cash dividend on its common stock for the 2020 third quarter of $0.08 per share. The dividend was paid on August 31, 2020 to stockholders of record as of the close of business on August 10, 2020.

Conference Call        
Management will host a conference call today, October 27, 2020 at 2:00 p.m. PT (5:00 p.m. ET) to discuss these results. This call will also be broadcast live via the internet. Investment professionals and all current and prospective stockholders are invited to access the live call by dialing 1-877-407-9039 before 2:00 p.m. PT, using access code HANMI. To listen to the call online, either live or archived, visit the Investor Relations page of Hanmi's website at www.hanmi.com.

About Hanmi Financial Corporation
Headquartered in Los Angeles, California, Hanmi Financial Corporation owns Hanmi Bank, which serves multi-ethnic communities through its network of 35 full-service branches and 9 loan production offices in California, Texas, Illinois, Virginia, New Jersey, New York, Colorado, Washington and Georgia. Hanmi Bank specializes in real estate, commercial, SBA and trade finance lending to small and middle market businesses. Additional information is available at www.hanmi.com.

Forward-Looking Statements
This press release contains forward-looking statements, which are included in accordance with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. All statements 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 and availability, plans and objectives of management for future operations, developments regarding our capital plans, strategic alternatives for a possible business combination, merger or sale transaction, 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 our forward-looking statements to be reasonable, we cannot guarantee future results, levels of activity, performance or achievements.

Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ from those expressed or implied by the forward-looking statements. These factors include the following:

  • a 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;
  • risks of natural disasters;
  • a failure in or breach of our operational or security systems or infrastructure, including cyberattacks;
  • the failure to maintain current technologies;
  • our 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 FDIC insurance premiums;
  • the ability of Hanmi Bank to make distributions to Hanmi Financial Corporation, which is restricted by certain factors, including Hanmi Bank's retained earnings, net income, prior distributions made, and certain other financial tests;
  • our ability to identify a suitable strategic partner or to consummate a strategic transaction;
  • the adequacy of our allowance for credit losses;
  • our credit quality and the effect of credit quality on our provision for loan losses and allowance for credit losses;
  • changes in the financial performance and/or condition of our borrowers and the ability of our borrowers to perform under the terms of their loans and other terms of credit agreements;
  • our ability to control expenses;
  • changes in securities markets; and
  • risks as it relates to cyber security against our information technology and those of our third-party providers and vendors.

Further, given its ongoing and dynamic nature, it is difficult to predict the full impact of the COVID-19 outbreak on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and whether the gradual reopening of businesses will result in a meaningful increase in economic activity. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations:

  • demand for our products and services may decline;
  • if the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase;
  • collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;
  • our allowance for credit losses may have to be increased if borrowers experience financial difficulties;
  • a worsening of business and economic conditions or in the financial markets could result in an impairment of certain intangible assets, such as goodwill or our servicing assets;
  • the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us;
  • as the result of the decline in the Federal Reserve Board's target federal funds rate to near 0%, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities;
  • a material decrease in net income or a net loss over several quarters could result in a decrease in the rate of our quarterly cash dividend;
  • litigation, regulatory enforcement risk and reputation risk regarding our participation in the Paycheck Protection Program and the risk that the Small Business Administration may not fund some or all PPP loan guaranties;
  • our cyber security risks are increased as the result of an increase in the number of employees working remotely;
  • FDIC premiums may increase if the agency experiences additional resolution costs; and
  • the unanticipated loss or unavailability of key employees due to the outbreak, which could harm our ability to operate our business or execute our business strategy, especially as we may not be successful in finding and integrating suitable successors.

In addition, we set forth certain risks in our reports filed with the U.S. Securities and Exchange Commission, including, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019, our Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K that we will file hereafter, which could cause actual results to differ from those projected. We undertake no obligation to update such forward-looking statements except as required by law.

Investor Contacts:
Romolo (Ron) Santarosa
Senior Executive Vice President & Chief Financial Officer
213-427-5636

Lasse Glassen
Investor Relations / Addo Investor Relations
310-829-5400


Hanmi Financial Corporation and Subsidiaries
Consolidated Balance Sheets (Unaudited)
(In thousands)

  September 30,   June 30,   Percentage   September 30,   Percentage
   2020     2020    Change    2019    Change
Assets                  
Cash and due from banks $ 359,755     $ 546,048     -34.1 %   $ 150,678     138.8 %
Securities available for sale, at fair value   723,601       655,971     10.3 %     621,815     16.4 %
Loans held for sale, at the lower of cost or fair value   12,834       17,942     -28.5 %     6,598     94.5 %
Loans receivable, net of allowance for credit losses   4,747,517       4,739,312     0.2 %     4,519,125     5.1 %
Accrued interest receivable   21,417       21,372     0.2 %     11,723     82.7 %
Premises and equipment, net   27,956       26,412     5.8 %     27,271     2.5 %
Customers' liability on acceptances   208       -     -       33     529.5 %
Servicing assets   6,348       6,187     2.6 %     7,436     -14.6 %
Goodwill and other intangible assets, net   11,677       11,742     -0.6 %     11,950     -2.3 %
Federal Home Loan Bank ("FHLB") stock, at cost   16,385       16,385     0.0 %     16,385     0.0 %
Bank-owned life insurance   53,623       53,334     0.5 %     52,500     2.1 %
Prepaid expenses and other assets   125,461       123,458     1.6 %     102,468     22.4 %
Total assets $ 6,106,782     $ 6,218,163     -1.8 %   $ 5,527,982     10.5 %
                   
Liabilities and Stockholders' Equity                  
Liabilities:                  
Deposits:                  
Noninterest-bearing $ 1,961,006     $ 1,865,213     5.1 %   $ 1,388,121     41.3 %
Interest-bearing   3,233,286       3,344,568     -3.3 %     3,302,020     -2.1 %
Total deposits   5,194,292       5,209,781     -0.3 %     4,690,141     10.7 %
Accrued interest payable   5,427       8,655     -37.3 %     10,076     -46.1 %
Bank's liability on acceptances   208       -     -       33     529.5 %
Borrowings   150,000       251,808     -40.4 %     75,000     100.0 %
Subordinated debentures   118,821       118,670     0.1 %     118,232     0.5 %
Accrued expenses and other liabilities   74,831       81,813     -8.5 %     59,973     24.8 %
Total liabilities   5,543,579       5,670,727     -2.2 %     4,953,455     11.9 %
                   
Stockholders' equity:                  
Common stock   33       33     0.0 %     33     0.0 %
Additional paid-in capital   577,727       577,211     0.1 %     574,957     0.5 %
Accumulated other comprehensive income   1,721       335     413.8 %     3,708     -53.6 %
Retained earnings   102,751       88,859     15.6 %     104,927     -2.1 %
Less treasury stock   (119,029 )     (119,002 )   0.0 %     (109,098 )   -9.1 %
Total stockholders' equity   563,203       547,436     2.9 %     574,527     -2.0 %
Total liabilities and stockholders' equity $ 6,106,782     $ 6,218,163     -1.8 %   $ 5,527,982     10.5 %

Hanmi Financial Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
(In thousands, except share and per share data)

  Three Months Ended
  September 30,   June 30,   Percentage   September 30,   Percentage
   2020    2020   Change    2019   Change
Interest and dividend income:                  
Interest and fees on loans receivable $ 52,586   $ 52,230   0.7 %   $ 57,929   -9.2 %
Interest on securities   1,972     3,225   -38.8 %     3,769   -47.7 %
Dividends on FHLB stock   204     203   0.3 %     286   -28.8 %
Interest on deposits in other banks   84     78   7.3 %     193   -56.6 %
Total interest and dividend income   54,846     55,736   -1.6 %     62,177   -11.8 %
Interest expense:                  
Interest on deposits   7,032     8,889   -20.9 %     15,995   -56.0 %
Interest on borrowings   582     760   -23.4 %     367   58.6 %
Interest on subordinated debentures   1,627     1,645   -1.1 %     1,757   -7.4 %
Total interest expense   9,241     11,294   -18.2 %     18,119   -49.0 %
Net interest income before credit loss expense   45,605     44,442   2.6 %     44,058   3.5 %
Credit loss expense   38     24,594   -99.8 %     1,602   -97.6 %
Net interest income after credit loss expense   45,567     19,848   129.6 %     42,456   7.3 %
Noninterest income:                  
Service charges on deposit accounts   2,002     2,032   -1.5 %     2,518   -20.5 %
Trade finance and other service charges and fees   972     961   1.1 %     1,191   -18.4 %
Gain on sale of Small Business Administration ("SBA") loans   2,324     -   -       1,767   31.5 %
Net gain on sales of securities   -     15,712   -100.0 %     -   -  
Other operating income   1,842     2,226   -17.2 %     1,384   33.1 %
Total noninterest income   7,140     20,931   -65.9 %     6,860   4.1 %
Noninterest expense:                  
Salaries and employee benefits   17,194     14,701   17.0 %     17,530   -1.9 %
Occupancy and equipment   4,650     4,508   3.1 %     4,528   2.7 %
Data processing   2,761     2,804   -1.5 %     2,410   14.6 %
Professional fees   1,794     1,545   16.1 %     2,826   -36.5 %
Supplies and communications   698     858   -18.7 %     726   -3.9 %
Advertising and promotion   594     456   30.2 %     927   -36.0 %
Other operating expenses   2,233     2,266   -1.5 %     3,660   -39.0 %
Total noninterest expense   29,924     27,138   10.3 %     32,607   -8.2 %
Income before tax   22,783     13,641   67.0 %     16,709   36.4 %
Income tax expense   6,439     4,466   44.2 %     4,333   48.6 %
Net income $ 16,344   $ 9,175   78.1 %   $ 12,376   32.1 %
                     
Basic earnings per share: $ 0.53   $ 0.30       $ 0.40    
Diluted earnings per share: $ 0.53   $ 0.30       $ 0.40    
                   
Weighted-average shares outstanding:                  
Basic   30,464,263     30,426,967         30,830,445    
Diluted   30,464,263     30,426,967         30,859,119    
Common shares outstanding   30,719,591     30,657,629         31,173,881    

Hanmi Financial Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
(In thousands, except share and per share data)

  Nine Months Ended
  September 30,   September 30,   Percentage
  2020   2019   Change
Interest and dividend income:          
Interest and fees on loans receivable $ 159,464   $ 173,135   -7.9 %
Interest on securities   8,852     10,996   -19.5 %
Dividends on FHLB stock   696     858   -18.8 %
Interest on deposits in other banks   495     1,085   -54.4 %
Total interest and dividend income   169,507     186,074   -8.9 %
Interest expense:          
Interest on deposits   28,663     48,406   -40.8 %
Interest on borrowings   1,838     439   318.8 %
Interest on subordinated debentures   4,984     5,293   -5.8 %
Total interest expense   35,485     54,138   -34.5 %
Net interest income before credit loss expense   134,022     131,936   1.6 %
Credit loss expense   40,371     19,418   107.9 %
Net interest income after credit loss expense   93,651     112,518   -16.8 %
Noninterest income:          
Service charges on deposit accounts   6,434     7,362   -12.6 %
Trade finance and other service charges and fees   2,920     3,519   -17.0 %
Gain on sale of Small Business Administration ("SBA") loans   3,478     3,752   -7.3 %
Net gain on sales of securities   15,712     1,295   1113.3 %
Other operating income   5,751     4,915   17.0 %
Total noninterest income   34,295     20,843   64.5 %
Noninterest expense:          
Salaries and employee benefits   49,645     50,149   -1.0 %
Occupancy and equipment   13,633     12,517   8.9 %
Data processing   8,233     6,633   24.1 %
Professional fees   5,255     6,459   -18.6 %
Supplies and communications   2,337     2,220   5.3 %
Advertising and promotion   1,783     2,632   -32.2 %
Other operating expenses   7,245     11,207   -35.4 %
Total noninterest expense   88,131     91,817   -4.0 %
Income before tax   39,815     41,544   -4.2 %
Income tax expense   11,945     11,840   0.9 %
Net income $ 27,870   $ 29,704   -6.2 %
             
Basic earnings per share: $ 0.91   $ 0.96    
Diluted earnings per share: $ 0.91   $ 0.96    
           
Weighted-average shares outstanding:          
Basic   30,276,462     30,736,456    
Diluted   30,276,462     30,769,160    
Common shares outstanding   30,719,591     31,173,881    

Hanmi Financial Corporation and Subsidiaries
Average Balance, Average Yield Earned, and Average Rate Paid (Unaudited)
(In thousands, except ratios)

  Three Months Ended
  September 30, 2020   June 30, 2020   September 30, 2019
      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                            
Interest-earning assets:                            
Loans receivable (1) $ 4,734,511     $ 52,586 4.42 %   $ 4,680,048     $ 52,230 4.49 %   $ 4,519,770     $ 57,929 5.08 %
Securities (2)   696,285       1,972 1.13 %     589,932       3,225 2.19 %     630,450       3,769 2.39 %
FHLB stock   16,385       204 4.95 %     16,385       203 5.00 %     16,385       286 6.93 %
Interest-bearing deposits in other banks   340,486       84 0.10 %     386,956       78 0.08 %     35,140       193 2.18 %
Total interest-earning assets   5,787,667       54,846 3.77 %     5,673,321       55,736 3.95 %     5,201,745       62,177 4.74 %
                             
Noninterest-earning assets:                            
Cash and due from banks   64,814             69,667             99,492        
Allowance for credit losses   (86,615 )           (66,926 )           (49,762 )      
Other assets   245,589             219,383             210,142        
                             
Total assets $ 6,011,455           $ 5,895,445           $ 5,461,617        
                             
Liabilities and Stockholders' Equity                            
Interest-bearing liabilities:                            
Deposits:                            
Demand: interest-bearing $ 99,161     $ 17 0.07 %   $ 92,676     $ 18 0.08 %   $ 82,665     $ 31 0.15 %
Money market and savings   1,771,615       2,192 0.49 %     1,677,081       2,309 0.55 %     1,555,639       6,180 1.58 %
Time deposits   1,357,167       4,823 1.41 %     1,458,351       6,562 1.81 %     1,692,419       9,784 2.29 %
Total interest-bearing deposits   3,227,943       7,032 0.87 %     3,228,108       8,889 1.11 %     3,330,723       15,995 1.91 %
Borrowings   163,364       582 1.42 %     342,437       760 0.89 %     74,239       367 1.96 %
Subordinated debentures   118,733       1,627 5.48 %     118,583       1,645 5.55 %     118,145       1,757 5.92 %
Total interest-bearing liabilities   3,510,040       9,241 1.05 %     3,689,128       11,294 1.23 %     3,523,107       18,119 2.04 %
                             
Noninterest-bearing liabilities and equity:                            
Demand deposits: noninterest-bearing   1,859,832             1,589,668             1,300,704        
Other liabilities   87,811             68,311             71,631        
Stockholders' equity   553,772             548,338             566,175        
                             
Total liabilities and stockholders' equity $ 6,011,455           $ 5,895,445           $ 5,461,617        
                             
Net interest income (tax equivalent basis)     $ 45,605         $ 44,442         $ 44,058  
                             
Cost of deposits       0.55 %         0.74 %         1.37 %
Net interest spread (taxable equivalent basis)       2.72 %         2.72 %         2.70 %
Net interest margin (taxable equivalent basis)       3.13 %         3.15 %         3.36 %
                             
                             
                             
(1)       Includes average loans held for sale                          
(2)       Amounts calculated on a fully taxable equivalent basis using the federal tax rate in effect for the periods presented.          

Hanmi Financial Corporation and Subsidiaries
Average Balance, Average Yield Earned, and Average Rate Paid (Unaudited)
(In thousands, except ratios)

  Nine Months Ended
  September 30, 2020   September 30, 2019
      Interest Average       Interest Average
  Average   Income / Yield /   Average   Income / Yield /
  Balance   Expense Rate   Balance   Expense Rate
Assets                  
Interest-earning assets:                  
Loans receivable (1) $ 4,644,647     $ 159,464 4.59 %   $ 4,514,707     $ 173,135 5.13 %
Securities (2)   636,860       8,852 1.85 %     616,503       11,141 2.41 %
FHLB stock   16,385       696 5.68 %     16,385       858 7.00 %
Interest-bearing deposits in other banks   277,698       495 0.24 %     60,240       1,085 2.41 %
Total interest-earning assets   5,575,590       169,507 4.06 %     5,207,835       186,219 4.78 %
                   
Noninterest-earning assets:                  
Cash and due from banks   77,263             103,098        
Allowance for credit losses   (71,587 )           (38,885 )      
Other assets   223,675             193,944        
                   
Total assets $ 5,804,941           $ 5,465,992        
                   
Liabilities and Stockholders' Equity                  
Interest-bearing liabilities:                  
Deposits:                  
Demand: interest-bearing $ 91,618     $ 56 0.08 %   $ 83,953     $ 93 0.15 %
Money market and savings   1,712,121       9,281 0.72 %     1,541,548       17,940 1.56 %
Time deposits   1,445,763       19,327 1.79 %     1,802,303       30,373 2.25 %
Total interest-bearing deposits   3,249,502       28,664 1.18 %     3,427,804       48,406 1.89 %
Borrowings   211,976       1,839 1.16 %     28,536       439 2.06 %
Subordinated debentures   118,587       4,984 5.60 %     118,006       5,293 5.97 %
Total interest-bearing liabilities   3,580,065       35,487 1.32 %     3,574,346       54,138 2.03 %
                   
Noninterest-bearing liabilities and equity:                  
Demand deposits: noninterest-bearing   1,595,368             1,270,029        
Other liabilities   75,487             56,607        
Stockholders' equity   554,021             565,010        
                   
Total liabilities and stockholders' equity $ 5,804,941           $ 5,465,992        
                   
Net interest income (tax equivalent basis)     $ 134,020         $ 132,081  
                   
Cost of deposits       0.79 %         1.38 %
Net interest spread (taxable equivalent basis)       2.74 %         2.75 %
Net interest margin (taxable equivalent basis)       3.21 %         3.39 %
                   
                   
(1)       Includes average loans held for sale                
(2)       Amounts calculated on a fully taxable equivalent basis using the federal tax rate in effect for the periods presented.

Non-GAAP Financial Measures

Tangible Common Equity to Tangible Assets Ratio

Tangible common equity to tangible assets ratio is supplemental financial information determined by a method other than in accordance with U.S. generally accepted accounting principles ("GAAP"). This non-GAAP measure is used by management in the analysis of Hanmi's capital strength. Tangible common 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 this financial measure excluding the impact of these items provides useful supplemental information that is essential to a proper understanding of the capital strength of Hanmi. This disclosure should not be viewed as a substitution for results determined in accordance with GAAP, nor is it necessarily comparable to non-GAAP performance measures that may be presented by other companies.

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

Tangible Common Equity to Tangible Assets Ratio (Unaudited)
(In thousands, except share, per share data and ratios)

  September 30,   June 30,   March 31,   December 31,   September 30,
Hanmi Financial Corporation 2020
  2020
  2020
  2019
  2019
Assets $ 6,106,782     $ 6,218,163     $ 5,617,690     $ 5,538,184     $ 5,527,982  
Less goodwill and other intangible assets   (11,677 )     (11,742 )     (11,808 )     (11,873 )     (11,950 )
Tangible assets $ 6,095,105     $ 6,206,421     $ 5,605,882     $ 5,526,311     $ 5,516,032  
                   
Stockholders' equity (1) $ 563,203     $ 547,436     $ 552,958     $ 563,267     $ 574,527  
Less goodwill and other intangible assets   (11,677 )     (11,742 )     (11,808 )     (11,873 )     (11,950 )
Tangible stockholders' equity (1) $ 551,526     $ 535,694     $ 541,150     $ 551,394     $ 562,577  
                   
Stockholders' equity to assets   9.22 %     8.80 %     9.84 %     10.17 %     10.39 %
Tangible common equity to tangible assets (1)   9.05 %     8.63 %     9.65 %     9.98 %     10.20 %
                   
Common shares outstanding   30,719,591       30,657,629       30,622,741       30,799,624       31,173,881  
Tangible common equity per common share $ 17.95     $ 17.47     $ 17.67     $ 17.90     $ 18.05  
                   
                   
(1)       There were no preferred shares outstanding at the periods indicated.                

Paycheck Protection Program

In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") was adopted, which included authorization for the U.S. Small Business Administration (the "SBA") to introduce a new program, entitled the "Paycheck Protection Program," which provides loans for eligible businesses through the SBA's 7(a) loan guaranty program. These loans are fully guaranteed and available for loan forgiveness of up to the full principal amount so long as certain employee and compensation levels of the business are maintained and the proceeds of the loan are used as required under the program. The Paycheck Protection Program ("PPP") and loan forgiveness are intended to provide economic relief to small businesses nationwide adversely impacted under the COVID-19 pandemic.

Hanmi participated in this program and the financial information for the 2020 third quarter reflects this participation. This table below shows financial information excluding the effect of the origination of the PPP loans, including the corresponding interest income earned on such loans, which constitutes a non-GAAP measure. Management believes the presentation of certain financial measures excluding the effect of PPP loans provides useful supplemental information that is essential to a proper understanding of the financial condition and results of operations of Hanmi. This disclosure should not be viewed as a substitution for results determined in accordance with GAAP, nor is it necessarily comparable to non-GAAP financial measures that may be used by other companies.

PPP Non-GAAP Financial Data (Unaudited)
(In thousands, except ratios)

  As of September 30, 2020   As of June 30, 2020
       
Tangible assets   6,095,105     $ 6,206,421  
Less PPP loans   (302,929 )     (301,836 )
Tangible assets adjusted for PPP loans $ 5,792,176     $ 5,904,585  
       
Tangible stockholders' equity   551,526     $ 535,694  
       
Tangible common equity to tangible assets (1)   9.05 %     8.63 %
Tangible common equity to tangible assets adjusted for PPP loans (1)   9.52 %     9.07 %
       
(1) There were no preferred shares outstanding at September 30, 2020      
       
Allowance for credit losses   86,620     $ 86,330  
       
Loans receivable   4,834,137     $ 4,825,642  
Less PPP loans   (302,929 )     (301,836 )
Loans receivable adjusted for PPP loans $ 4,531,208     $ 4,523,806  
       
Allowance for credit losses to loans receivable   1.79 %     1.79 %
Allowance for credit losses to loans receivable adjusted for PPP loans   1.91 %     1.91 %
       
  For the Three Months Ended
September 30, 2020
  For the Three Months Ended
June 30, 2020
Net interest income $ 45,605     $ 44,442  
Less PPP loan interest income   (1,713 )     (1,129 )
Net interest income adjusted for PPP loans $ 43,892     $ 43,313  
       
Average interest-earning assets   5,787,667     $ 5,673,321  
Less average PPP loans   (302,365 )     (251,758 )
Average interest-earning assets adjusted for PPP loans $ 5,485,302     $ 5,421,563  
       
Net interest margin (1)   3.13 %     3.15 %
Net interest margin adjusted for PPP loans (1)   3.18 %     3.21 %
       
(1) net interest income (as applicable) divided by average interest-earning assets (as applicable), annualized    
       
Noninterest expense   29,924     $ 27,138  
Less PPP deferred origination costs   -       3,064  
Noninterest expense adjusted for PPP loans $ 29,924     $ 30,202  
       
Net interest income plus noninterest income $ 52,745     $ 65,373  
Less net gain on sales of securities   -       (15,712 )
Net interest income plus noninterest income adjusted for net securities gains $ 52,745     $ 49,661  
       
Efficiency ratio (1)   56.73 %     41.51 %
Efficiency ratio adjusted for PPP loans and securities gains (1)   56.73 %     60.82 %
       
(1) noninterest expense (as applicable) divided by the sum of net interest income and noninterest income (as applicable)    

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