HANMI FINANCIAL CORP (HAFC)

Results of Operations

Net Interest Income

Our primary source of revenue is net interest income, which is the difference between interest derived from assets, and interest paid on liabilities obtained to fund those assets. Our net interest income is affected by changes in the level and mix of interest-earning assets and interest-bearing liabilities, referred to as volume changes. Net interest income is also affected by changes in the yields earned on assets and rates paid on liabilities, referred to as rate changes. Interest rates charged on loans are affected principally by changes to market interest rates, the demand for loans, the supply of money available for lending purposes, and other competitive factors. Those factors are, in turn, affected by general economic conditions and other factors beyond our control, such as federal economic policies, the general supply of money in the economy, legislative tax policies, governmental budgetary matters, and the actions of the Federal Reserve.

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The following table shows the average balance of assets, liabilities and stockholders’ equity; the amount of interest income, and interest expense; the average yield or rate for each category of interest-earning assets and interest-bearing liabilities; and the net interest spread and the net interest margin on a taxable-equivalent basis for the periods indicated. All average balances are daily average balances.

(1)
Loans include loans held for sale and exclude the allowance for credit losses. Nonaccrual loans are included in the average loans balance.

(2)
Securities average yield is calculated on a fully taxable equivalent basis using the current statutory federal tax rate of 21%.

(3)
Represents interest expense on deposits as a percentage of all interest-bearing and noninterest-bearing deposits.

(4)
Represents the average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities.

(5)
Represents net interest income as a percentage of average interest-earning assets.

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The average balance of interest-earning assets increased $162.0 million, or 2.2%, to $7.63 billion for the three months ended June 30, 2026, from $7.47 billion for the three months ended June 30, 2025, primarily due to growth in the average balance of commercial and industrial loans. The average balance of interest-bearing liabilities increased $114.1 million, or 2.4%, to $4.93 billion for the three months ended June 30, 2026, compared with $4.82 billion for the three months ended June 30, 2025, primarily due to a higher average balance of time deposits.

Net interest margin, on a taxable equivalent basis, increased 29 basis points to 3.36% for the three months ended June 30, 2026, from 3.07% for the same period in 2025. This increase was primarily due to a decline in the cost of interest-bearing liabilities of 47 basis points to 3.21% for the three months ended June 30, 2026, from 3.68% for the same period in 2025, due to the decline in interest rates.

The table below shows changes in interest income and interest expense and the amounts attributable to variations in interest rates and volumes for the periods indicated. Simultaneous volume and rate effects have been allocated proportionally to the respective volume and rate variances based on their absolute dollar amounts.

(1)
Loans include loans held for sale and exclude the allowance for credit losses. Nonaccrual loans are included in the average loans balance.

(2)
Securities average yield is calculated on a fully taxable equivalent basis using the current statutory federal tax rate of 21%.

Net interest income for the three months ended June 30, 2026 and 2025 was $63.9 million and $57.1 million, respectively, reflecting an increase of $6.8 million, or 11.8%. This increase was primarily due to a $5.9 million effect from a decrease in interest rates on liabilities and a $2.4 million effect from an increase in the average balance of loans, partially offset by a $1.2 million effect from an increase in the average balance of interest-bearing liabilities.

The $5.9 million impact from the decrease in interest rates on liabilities was primarily driven by money market and savings accounts and time deposits, which increased net interest income by $3.4 million and $2.5 million, respectively, for the three months ended June 30, 2026, compared with the same period in 2025. The $2.4 million volume-driven increase in interest income on loans was primarily due to a higher average balance of commercial and industrial loans, partially offset by a decline in the average balance of equipment financing agreements. The $1.2 million offsetting increase in interest expense was primarily due to the $2.1 million impact of a higher average balance of time deposits, partially offset by a lower average balance of money market and savings accounts and borrowings.

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The following table shows the average balance of assets, liabilities and stockholders’ equity; the amount of interest income and interest expense; the average yield or rate for each category of interest-earning assets and interest-bearing liabilities; and the net interest spread and the net interest margin on a taxable-equivalent basis for the periods indicated. All average balances are daily average balances.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This discussion presents management’s analysis of the financial condition and results of operations as of and for the years ended December 31, 2025, 2024 and 2023. This discussion should be read in conjunction with our Consolidated Financial Statements and the Notes related thereto presented elsewhere in this Report. See also “Cautionary Note Regarding Forward-Looking Statements.”

Critical Accounting Policies

We have established various accounting policies that govern the application of GAAP in the preparation of our Consolidated Financial Statements. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions to arrive at the carrying value of assets and liabilities and amounts reported as revenues and expenses. Our financial position and results of operations can be materially affected by these estimates and assumptions. Critical accounting policies are those policies that are most important to the determination of our financial condition and results of operations and that require management to make assumptions and estimates that are subjective or complex. Our significant accounting policies are discussed in the “Notes to Consolidated Financial Statements, Note 1 — Summary of Significant Accounting Policies.” Management believes that the following policy is critical.

Allowance for credit losses and Allowance for credit losses related to off-balance sheet items

Effective January 1, 2025, we changed our methodology for estimating expected credit losses on our loan portfolio in accordance with Accounting Standards Update (“ASU”) 2016-23, Financial Instruments – Credit Losses. Previously, we primarily used a Probability of Default/Loss Given Default (“PD/LGD") model to determine the allowance for credit losses. Following a periodic review of the credit loss estimation process, we concluded that a historical loss rate approach, adjusted for current conditions and reasonable and supportable economic forecasts, more appropriately reflects the expected credit losses for our loan portfolio. This change is considered a change in accounting estimate resulting from a change in methodology and assumptions, and is accounted for prospectively in accordance with ASC 250-10-45-17 through 45-18.

Our allowance for credit losses methodologies incorporate a variety of risk considerations, both quantitative and qualitative, that management believes is appropriate at each reporting date. Quantitative factors are driven by aggregated industry loss rate history and the weighting of various macroeconomic forecast models, which are made up of a number of specific economic factors, including unemployment rates, gross domestic product growth rates, U.S. Treasury rates, BBB spreads, and Commercial Real Estate Price Index growth rates. Further, the Bank's own loan portfolio characteristics are incorporated as quantitative considerations, including risk ratings, collateral values, delinquencies, and non-performing loans. Quantitative factors are incorporated through the use of Moody's economic scenarios. We use qualitative factors to adjust the allowance calculation for risks not considered by the quantitative calculations. Qualitative factors considered in our methodologies include the Bank's historical loan loss trends, concentrations of credit, loan policy exception rate trends, changes in lending management and staff, quality of the loan review system, and changes in prepayment rates.

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 necessary 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.

See “Results of Operations — Credit Loss Expense,” “Financial Condition — Allowance for credit losses and Allowance for Credit Losses related to off-balance sheet items,” and “Notes to Consolidated Financial Statements, Note 1 — Summary of Significant Accounting Policies” for additional information on methodologies used to determine the allowance for credit losses and the allowance for credit losses related to off-balance sheet items.

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Allowance Attribution Analysis

The following macroeconomic variables, which are used in our allowance for credit losses calculation, are among those with the highest correlation to the historical loan loss data leveraged by Moody's in their allowance for credit losses models. Shown below are projections of those variables from Moody's, employed in the determination of the allowance for credit losses at December 31, 2025 and 2024:

Economic Factors

(1)
The economic factors shown in this table are a single projection of a future point in time, and are provided to illustrate model assumptions. The remaining projections of these variables subsequent to March 31, 2026, which are not shown here, further impact the results of the allowance for credit losses as of December 31, 2025. Unlike the allowance for credit losses model used at December 31, 2024, there are not separate reversion periods in addition to the forecast periods.

(1)
The Moody's baseline scenario was used for the unemployment rate forecast for the period ended December 31, 2024. The unemployment rate forecast remained unfavorable within the baseline scenario due to job market volatility and deterioration below expectations, with less impact to the lending environment compared to GDP growth and consumer sentiment forecasts.

(2)
The Moody's alternative scenarios 2 and 3 (equally weighted) were used for the GDP growth rate and consumer sentiment forecast for the period ended December 31, 2024. Effective Q1 2024, the Company elected to use equally weighted alternative scenario 2 and 3 (mid-level downside/pessimistic scenario) for the GDP growth rate and consumer sentiment forecasts, given the current market condition.

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Sensitivity Analysis

The potential effect from changes in key assumptions could affect the estimated allowance for credit losses at December 31, 2025. Adverse changes in management's assessment of the assumptions and key inputs used to determine the allowance for credit losses could lead to increases in the allowance for credit losses through additional provisions for credit losses. If actual losses and conditions differ materiality from the assumptions used to determine the allowance for credit losses, our actual credit losses could differ materially from management's estimates.

A sensitivity analysis of our allowance for credit losses was performed by allocating ten additional percentage points (a 33% relative increase) to the weighting on Moody's S2 scenario, which projects that the economy could fall into a mild recession starting the first quarter of 2026. This resulted in additional allowance for credit losses of approximately $2.5 million compared with the results using the midpoint approach of Moody's baseline, upside, and downside scenarios as of December 31, 2025.

Conversely, management performed a sensitivity analysis by allocating ten additional percentage points (a 33% relative increase) to the weighting on Moody's S1 scenario, which has a more positive outlook on the economy, compared with Moody's baseline and S2 scenarios. The S1 scenario assumes the impacts of tariffs and deportations on the economy are much lower than expected. This resulted in a reduction of allowance for credit losses of approximately $1.1 million compared with the results using the midpoint approach of Moody's baseline, upside, and downside scenarios as of December 31, 2025.

Management reviews and considers the results of each sensitivity analysis when evaluating the qualitative factor adjustments. While management believes that it has established adequate allowance for lifetime credit losses on loans, actual results may prove different, and the difference could be material.

The following table provides Moody's first-quarter 2026 forecast estimates, by scenario, for key economic variables that are inputs to the allowance for credit losses calculation:

Executive Overview

For the years ended December 31, 2025, 2024 and 2023, net income was $76.1 million, $62.2 million and $80.0 million, respectively. The increase of $13.9 million, or 22.3%, in net income for the year ended December 31, 2025 as compared with the year ended December 31, 2024, reflects a $33.4 million increase in net interest income and a $2.4 million increase in noninterest income, offset

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