Hanmi Financial Corporation Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Derivative Financial Instruments

Derivative Financial Instruments

12 Months Ended

Dec. 31, 2021

Derivative Instruments And Hedging Activities Disclosure [Abstract]

Note 20 — Derivative Financial Instruments

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 classification on the Balance Sheet as of December 31, 2021 and 2020.

As of December 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	$	61,968	Other Assets	$	1,379	$	61,968	Other Liabilities	$	1,360
Total derivatives not designated as hedging instruments				$	1,379				$	1,360

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 December 31, 2021 and 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
		For the Year Ended December 31,
		2021		2020
		(in thousands)
Interest rate products	Other income	$	80	$	(61	)
Total		$	80	$	(61	)

Fee income recognized from the Company's derivative financial instruments for the twelve months ended December 31, 2021 and 2020 was $0 and $1.1 million, respectively.

The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives as of December 31, 2021 and 2020. The net amounts of derivative assets or liabilities can be reconciled to the tabular disclosure of fair value. The tabular disclosure of fair value provides the location that derivative assets and liabilities are presented on the Balance Sheet.

Offsetting of Derivative Assets
As of December 31, 2021
							Gross Amounts Not Offset in the Consolidated Balance Sheets
	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Statement of Financial Position		Net Amounts of Assets presented in the Statement of Financial Position		Financial Instruments		Cash Collateral Received		Net Amount
	(in thousands)
Derivatives	$	1,379	$	—	$	1,379	$	1,360	$	19	$	—


Offsetting of Derivative Liabilities
As of December 31, 2021
							Gross Amounts Not Offset in the Consolidated Balance Sheets
	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Statement of Financial Position		Net Amounts of Liabilities presented in the Statement of Financial Position		Financial Instruments		Cash Collateral Provided		Net Amount
	(in thousands)
Derivatives	$	1,360	$	—	$	1,360	$	1,360	$	—	$	—


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 Statement of Financial Position		Net Amounts of Assets presented in the Statement of Financial Position		Financial Instruments		Cash Collateral Received		Net Amount
	(in thousands)
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 Statement of Financial Position		Net Amounts of Liabilities presented in the Statement of Financial Position		Financial Instruments		Cash Collateral Provided		Net Amount
	(in thousands)
Derivatives	$	1,149	$	—	$	1,149	$	—	$	1,150	$	(1	)

The Company has agreements with each of its derivative counterparties that contain a provision stating 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 December 31, 2021, the fair value of derivatives in a net asset position for counterparty transactions, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $1.4 million. As of December 31, 2021, the Company had posted no collateral related to these agreements since its net asset position is $19,000 ($1.4 million fair value of assets less $1.4 million fair value of liabilities) as of the end of the period. If the Company had breached any of the provisions described above at December 31, 2021, it could have been required to settle its obligations under the agreements at their termination value of $1.4 million.

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