HANMI FINANCIAL CORP

Loans 30 to 89 days past due and still accruing were $17.3 million at March 31, 2025, compared with $18.5 million at December 31, 2024.

Activity in criticized loans was as follows for the periods indicated:

Special mention loans were $118.4 million and $139.6 million at March 31, 2025 and December 31, 2024, respectively. The $21.2 million decrease in the first quarter of 2025 included loan upgrades of $20.5 million and amortization/paydowns of $0.9 million, offset by additions of $0.2 million. The increase in loan upgrades was primarily attributable to a $18.9 million loan upgrade of a commercial and industrial loan. The $3.0 million decrease in the first quarter of 2024 included upgrades to pass loans of $1.5 million, downgrades to classified loans of $0.8 million, and paydowns and payoffs of $1.4 million, offset by downgrades from pass loans of $0.7 million. The upgrades to pass loans were primarily attributable to a $1.5 million retail loan and downgrades to classified consisted of two SBA commercial real estate retail loans for $0.8 million.

Classified loans were $46.5 million and $25.7 million at March 31, 2025 and December 31, 2024, respectively. The $20.8 million increase in classified loans for the three months ended March 31, 2025 resulted from $22.8 million of loan downgrades and $3.4 million of equipment financing downgrades. The increase in loan downgrades was primarily the result of a $20.0 million commercial real estate office loan designated as nonaccrual. Additions were offset by $2.7 million of equipment financing charge-offs, $1.1 million of payoffs, $1.0 million of amortization and paydowns, $0.3 million of loan charge-offs and $0.3 million of loan upgrades. The $7.7 million decrease in the first quarter of 2024 was primarily driven by paydowns and payoffs of $9.4 million, and charge-offs of $1.9 million, offset by new downgrades to classified loans of $3.6 million. The paydowns and payoffs during the three months ended March 31, 2024 were mainly attributed to payoffs of a $4.7 million commercial real estate industrial loan and a $1.2 million commercial real estate office loan, and a $0.9 million paydown on a previously mentioned nonperforming commercial and industrial loan in the health-care industry.

Nonperforming Assets

Nonperforming loans consist of nonaccrual loans and loans 90 days or more past due and still accruing interest. Nonperforming assets consist of nonperforming loans and OREO. Loans are placed on nonaccrual status when, in the opinion of management, the full timely collection of principal or interest is in doubt. Generally, the accrual of interest is discontinued when principal or interest payments become more than 90 days past due, unless we believe the loan is adequately collateralized and in the process of collection. However, in certain instances, we may place a particular loan on nonaccrual status earlier, depending upon the individual circumstances surrounding the loan’s delinquency. When a loan 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 loans not meeting the criteria for nonaccrual. OREO consists of properties acquired by foreclosure or similar means.

Except for nonaccrual loans, management is not aware of any other loans as of March 31, 2025 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 repayment terms, or any known events that would result in a loan being designated as nonperforming at some future date.

Nonaccrual loans were $35.5 million and $14.3 million as of March 31, 2025 and December 31, 2024, respectively, representing an increase of $21.3 million, or 149.1%. The increase was due to the previously mentioned $20.0 million commercial real estate office loan designated as nonaccrual during the first quarter of 2025. As of March 31, 2025 and December 31, 2024, 1.72% and 1.81% of equipment financing agreements were on nonaccrual status, respectively. At March 31, 2025 there were $112,000 of loans 90 days or more past due and still accruing interest. At December 31, 2024, all loans 90 days or more past due were classified as nonaccrual.

The $35.5 million of nonperforming loans as of March 31, 2025 had individually evaluated allowances of $11.8 million, compared to $14.3 million of nonperforming loans with individually evaluated allowances of $6.2 million as of December 31, 2024.

Nonperforming assets were $35.7 million at March 31, 2025, or 0.46% of total assets, compared to $14.4 million, or 0.19%, at December 31, 2024. Additionally, not included in nonperforming assets were repossessed personal property assets associated with equipment finance agreements of $0.7 million and $0.6 million at March 31, 2025 and December 31, 2024, respectively.

Individually Evaluated Loans

The Company reviews loans on an individual basis when the loan does not share similar risk characteristics with loan pools. Individually evaluated loans are measured for expected credit losses based on the present value of expected cash flows discounted at the effective interest rate, the observable market price, or the fair value of collateral.

Individually evaluated loans were $33.1 million and $14.3 million as of March 31, 2025 and December 31, 2024, respectively, representing a increase of $18.8 million, or 131.5%. Specific allowances associated with individually evaluated loans increased $5.6 million to $11.8 million as of March 31, 2025 compared with $6.2 million as of December 31, 2024.

A borrower is experiencing financial difficulties when there is a probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. The Company may modify loans to borrowers experiencing financial difficulties by providing principal forgiveness, a term extension, an other-than-insignificant payment delay, or an interest rate reduction.

The following table presents loan modifications made to borrowers experiencing financial difficulty by type of modification, with related amortized cost balances, respective percentage shares of the total class of loans, and the related financial effect, as of the periods indicated:

The modified loans above were current at March 31, 2025.

The table above includes two retail commercial loans with an amortized cost of $13.5 million that were modified during the three months ended March 31, 2025.

No loans were modified to borrowers experiencing financial difficulty during the three months ended March 31, 2024.

During the three months ended March 31, 2025, there were no payment defaults on loans modified within the preceding 12 months.

Allowance for Credit Losses and Allowance for Credit Losses Related to Off-Balance Sheet Items

As previously mentioned, effective January 1, 2025, the Company changed its methodology for estimating expected credit losses on its loan portfolio. The Company’s estimate of the allowance for credit losses at March 31, 2025 and December 31, 2024 reflected losses expected over the remaining contractual life of assets based on historical, current, and forward-looking information. The contractual term does not consider extensions, renewals or modifications.

Our allowance for credit losses incorporate a variety of risk considerations, both quantitative and qualitative, that management believes is appropriate to absorb lifetime credit losses at each reporting date. Quantitative factors include the general economic forecast in our markets, risk ratings, delinquency trends, collateral values, changes in nonperforming loans, and other factors.

We use qualitative factors to adjust the allowance calculation for risks not considered by the quantitative calculations. Qualitative factors considered in our methodologies include concentrations of credit, changes in lending management and staff, and quality of the loan review system.

The Company reviews baseline and alternative economic scenarios from Moody’s (previously known as Moody’s Analytics, a subsidiary of Moody’s Corporation) for consideration in the quantitative portion of our analysis of the allowance for credit losses. Moody’s publishes a baseline forecast that represents the estimate of the most likely path for the United States economy through the current business cycle (50% probability that economic conditions will be worse and 50% probability that economic conditions will be better) as well as alternative scenarios to examine how different types of shocks will affect the future performance of the United States economy.

The Company utilizes a midpoint approach of multiple forward-looking scenarios to incorporate losses from a baseline, upside (stronger near-term growth) and downside (slower near-term growth) economy. As a result, the upside and downside scenarios each receive a weight of 30%, and the baseline receives a weight of 40%.

Certain quantitative and qualitative factors used to estimate credit losses and establish an allowance for credit losses are subject to uncertainty. The adequacy of our allowance for credit losses is sensitive to changes in current and forecasted economic conditions that may affect the ability of borrowers to make contractual payments as well as the value of the collateral securing such payments.

Although management believes it uses the best information available to establish the allowance for credit losses, future adjustments to the allowance for credit losses may be necessary and the Company’s results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations.

In addition, because future events affecting borrowers and collateral cannot be predicted without uncertainty, the existing allowance for credit losses may not be adequate or increases may be necessary should the quality of any loans deteriorate as a result of the factors discussed. Any material increase in the allowance for credit losses would adversely impact the Company's financial condition and results of operations.

The following table reflects our allocation of the allowance for credit losses by loan category as well as the amount of loans in each loan category, including related percentages:

The following table sets forth certain ratios related to our allowance for credit losses at the dates presented:

The allowance for credit losses was $70.6 million and $70.1 million at March 31, 2025 and December 31, 2024, respectively. The allowance attributed to individually evaluated loans was $11.8 million and $6.2 million as of March 31, 2025 and December 31, 2024, respectively. The allowance attributed to collectively evaluated loans was $58.8 million and $64.0 million as of March 31, 2025 and December 31, 2024, respectively. The decrease in the allowance attributed to collectively evaluated loans was primarily due to the change in ACL methodology.

As of March 31, 2025 and December 31, 2024, the allowance for credit losses related to off-balance sheet items, primarily unfunded loan commitments, was $2.4 million and $2.1 million, respectively. 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, prevailing economic conditions and economic forecasts, we believe these allowances were adequate for current expected lifetime losses in the loan portfolio and off-balance sheet exposure as of March 31, 2025.

The following table presents a summary of gross charge-offs and recoveries for the loan portfolio:

For the three months ended March 31, 2025, gross charge-offs increased $1.1 million from the same period in 2024. Gross recoveries for the three months ended March 31, 2025 increased $0.7 million from the same period in 2024. Gross charge-offs for the three months ended March 31, 2025 and 2024 primarily consisted of $2.8 million and $2.0 million of equipment financing agreements charge-offs, respectively. Gross recoveries for the three months ended March 31, 2025 primarily consisted of $0.8 million of recoveries on equipment financing agreements.

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

(1)

Annualized

Net loan charge-offs were $1.9 million, or 0.13% of average loans and $1.6 million, or 0.10% of average loans for the three months ended March 31, 2025 and 2024, respectively.

Deposits

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

Total deposits were $6.62 billion and $6.44 billion as of March 31, 2025 and December 31, 2024, respectively, representing an increase of $183.7 million, or 2.9%. The increase in deposits was primarily driven by a $140.4 million increase in money market and savings deposits and a $72.8 million increase in time deposits, partially offset by a $30.0 million decrease in noninterest-bearing demand deposits. At March 31, 2025, the loan-to-deposit ratio was 94.9% compared to 97.1% at December 31, 2024.

As of March 31, 2025, the aggregate amount of uninsured deposits (deposits in amounts greater than $250,000, which is the maximum amount for federal deposit insurance) was $2.67 billion. The aggregate amount of uninsured time deposits was $651.4 million. Other uninsured deposits, such as demand and money market and savings deposits were $2.02 billion. At March 31, 2025, $1.17 billion of total uninsured deposits were in accounts with balances of $5.0 million or more. As of December 31, 2024, the aggregate amount of uninsured deposits was $2.72 billion. The aggregate amount of uninsured time deposits was $647.3 million. Other uninsured deposits, such as demand, money market and savings deposits were $2.07 billion. At December 31, 2024, $1.21 billion of total uninsured deposits were in accounts with balances of $5.0 million or more.

The Bank’s wholesale funds historically consisted of FHLB advances, brokered deposits as well as State of California time deposits. As of March 31, 2025 and December 31, 2024, the Bank had $117.5 million and $262.5 million of FHLB advances, and $76.0 million and $60.7 million of brokered deposits, respectively. The Bank had $150.0 million and $120.0 million of State of California time deposits, as of March 31, 2025 and December 31, 2024, respectively.