Hanmi Financial Corporation Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Derivatives and Hedging Activities

Derivatives and Hedging Activities

3 Months Ended

Mar. 31, 2021

Derivative Instruments And Hedging Activities Disclosure [Abstract]

Note 15 — Derivatives and Hedging Activities

The Company’s derivative financial instruments consist entirely of interest rate swap agreements between the Company and its customers and other third party counterparties. The Company enters into “back-to-back swap” arrangements whereby the Company executes interest rate swap agreements with its customers and acquires an offsetting swap position from a third party counterparty. These derivative financial statements are accounted for at fair value, with changes in fair value recognized in the Company’s Consolidated Statements of Income.

The table below presents the fair value of the Company’s derivative financial instruments as well as their location on the Balance Sheet as of March 31, 2021 and December 31, 2020.

As of March 31, 2021	Derivative Assets					Derivative Liabilities
	Notional Amount		Balance Sheet Location	Fair Value		Notional Amount		Balance Sheet Location	Fair Value
	(in thousands)
Derivatives not designated as hedging instruments
Interest rate products	$	66,759	Other Assets	$	1,354	$	66,759	Other Liabilities	$	1,265
Total derivatives not designated as hedging instruments				$	1,354				$	1,265

As of December 31, 2020	Derivative Assets					Derivative Liabilities
	Notional Amount		Balance Sheet Location	Fair Value		Notional Amount		Balance Sheet Location	Fair Value
	(in thousands)
Derivatives not designated as hedging instruments
Interest rate products	$	66,904	Other Assets	$	1,088	$	66,904	Other Liabilities	$	1,149
Total derivatives not designated as hedging instruments				$	1,088				$	1,149

The table below presents the effect of the Company’s derivative financial instruments that are not designated as hedging instruments on the Income Statement as of March 31, 2021. There were no such instruments outstanding as of March 31, 2020.

Derivatives Not Designated as Hedging Instruments under Subtopic 815-20	Location of Gain or (Loss) Recognized in Income on Derivative	Amount of Gain or (Loss) Recognized in Income on Derivative
		Quarter Ended March 31, 2021
		(in thousands)
Interest rate products	Other income	$	150
Total		$	150

No fee income was recognized from the Company's derivative financial instruments for the three months ended March 31, 2021 or 2020.

The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives as of March 31, 2021 and December 31, 2020. The net amounts of derivative assets or liabilities can be reconciled to the tabular disclosure of fair value. The derivative assets are located within the prepaid and other assets line item on the Consolidated Balance Sheets and the derivative liabilities are located within the accrued expenses and other liabilities line item on the Consolidated Balance Sheets.

Offsetting of Derivative Assets
As of March 31, 2021
							Gross Amounts Not Offset in the Consolidated Balance Sheets
	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Consolidated Balance Sheets		Net Amounts of Assets presented in the Consolidated Balance Sheets		Financial Instruments		Cash Collateral Received		Net Amount
	(in thousands)
Derivatives	$	1,354	$	—	$	1,354	$	1,265	$	89	$	—


Offsetting of Derivative Liabilities
As of March 31, 2021
							Gross Amounts Not Offset in the Consolidated Balance Sheets
	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Consolidated Balance Sheets		Net Amounts of Liabilities presented in the Consolidated Balance Sheets		Financial Instruments		Cash Collateral Provided		Net Amount
	(in thousands)
Derivatives	$	1,265	$	—	$	1,265	$	1,265	$	—	$	—


Offsetting of Derivative Assets
As of December 31, 2020
							Gross Amounts Not Offset in the Consolidated Balance Sheets
	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Consolidated Balance Sheets		Net Amounts of Assets presented in the Consolidated Balance Sheets		Financial Instruments		Cash Collateral Received		Net Amount

Derivatives	$	1,088	$	—	$	1,088	$	1,088	$	—	$	1,088


Offsetting of Derivative Liabilities
As of December 31, 2020
							Gross Amounts Not Offset in the Consolidated Balance Sheets
	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Consolidated Balance Sheets		Net Amounts of Liabilities presented in the Consolidated Balance Sheets		Financial Instruments		Cash Collateral Provided		Net Amount

Derivatives	$	1,149	$	—	$	1,149	$	—	$	1,150	$	(1	)

The Company has agreements with each of its derivative counterparties that contain a provision where if the Company either defaults or is capable of being declared in default on any of its indebtedness, then the Company could also be declared in default on its derivative obligations. In addition, these agreements may also require the Company to post additional collateral should it fail to maintain its status as a well- or adequately- capitalized institution.

As of March 31, 2021 and December 31, 2020, the fair value of derivatives in a net liability position for counterparty transactions, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $0 and $1.1 million, respectively. As of March 31, 2021, the Company had received $1.0 million of collateral from its counterparties related to these agreements and is adequately collateralized since its net asset position was $89,000 ($1.4 million fair value of assets less $1.3 million fair value of liabilities) as of March 31, 2021. As of December 31, 2020, the Company had posted $1.2 million of collateral related to these agreements and was essentially over-collateralized since its net liability position was $61,000 ($1.1 million fair value of assets less $1.1 million fair value of liabilities). If the Company had breached any of the provisions described above at March 31, 2021 or December 31, 2020, it could have been required to settle its obligations under the agreements at their termination value of $0 and $1.1 million, respectively.