KBRA Affirms Ratings for Hanmi Financial Corporation

8 Mar 2024   |   New York


KBRA affirms the senior unsecured debt rating of BBB, the subordinated debt rating of BBB-, and the short-term debt rating of K3 for Los Angeles, CA-based Hanmi Financial Corporation (NASDAQ: HAFC) (“Hanmi” or “the company”). Additionally, KBRA affirms the deposit and senior unsecured debt ratings of BBB+, the subordinated debt rating of BBB, and the short-term deposit and debt ratings of K2 for HAFC’s subsidiary, Hanmi Bank. The Outlook for all long-term ratings is Stable.

Key Credit Considerations

The ratings are supported by Hanmi’s strong market presence in the Korean-American banking space and the company’s long-running ties with Korean communities, in conjunction with its U.S. Subsidiaries of Korean Companies (“USKC”) business vertical, which has produced steady growth, especially in terms of deposit generation (USKC deposits increased by 42% in 2023 and currently represent 13% of total deposits; 41% of USKC deposits are noninterest-bearing). This operational, if not strategic, advantage has not only alleviated some of the NIM pressure but also has supported deposit stability in the current uncertain environment.

The ratings are also buoyed by Hanmi’s disciplined capital management. The consolidated CET1 ratio increased to 11.9% as of YE23, aided by limited RWA growth during the year, placing it above its rated peer group average by around 70 bps. Regulatory capital ratios are anticipated to increase in 2024, due principally to limited growth in RWA.

Beginning in 2023, bottom line earnings performance has been pressured by rapidly increasing deposits costs (including a mix shift to higher cost time deposits), compared to the change in yields on earning assets, resulting in a reduced NIM. The changes in deposit mix were primarily connected to declining noninterest-bearing balances (-25% YoY; currently constituting 30% of total deposits), which were largely replaced by an increase in time deposits. As a result, the cost of total deposits increased to 2.18% for 2023 from 0.44% for the prior year.

The ratings are counterbalanced by the relatively high CRE loan weighting. Investor CRE loans represent 328% of total RBC (or 50% of total loans) and include exposures to large single borrowers as well as meaningful, although reduced, exposures to the cyclical hospitality sector (12% of total loans) and the office sector (9% of total loans). However, KBRA favorably views the diversification efforts in recent years to emphasize C&I lending via the USKC vertical, scale residential mortgage lending operations, and reduce the investor CRE concentration.

On-balance sheet liquidity, including cash and equivalents and unencumbered investment securities, totaled $1.1 billion as of 4Q23. The bank maintains additional available borrowing capacity from FHLB, FRB, and unused Feds Line amounting to $1.2 billion. Total on- and off-balance sheet liquidity covers ~90% of uninsured deposits ($2.5 billion, or 40% of total deposits). KBRA views that the coverage of uninsured deposits could be mitigated by the bank’s less encumbered balance sheet, given that only 3% of the total investment securities and 38% of the total loans are pledged.

Rating Sensitivities

Positive rating momentum would most likely be driven by consistently stable earnings performance, encompassing a more diversified revenue mix, a lower proportion of loans in relation to total deposits and/or improved core deposit funding, as well as a commitment to maintain regulatory capital ratios in line with the KBRA rated peer group. Conversely, rating pressure would most likely develop from deterioration in loan quality, such that bottom line profitability becomes highly variable, including periods of net losses, or if consolidated regulatory capital ratios were to decrease to (and were likely to be maintained at) levels below rated peers.

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A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the Information Disclosure Form(s) located here.

Information on the meaning of each rating category can be located here.

Further disclosures relating to this rating action are available in the Information Disclosure Form(s) referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.

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Kroll Bond Rating Agency, LLC (KBRA) is a full-service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. Kroll Bond Rating Agency Europe Limited is registered as a CRA with the European Securities and Markets Authority. Kroll Bond Rating Agency UK Limited is registered as a CRA with the UK Financial Conduct Authority. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider.

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