HANMI FINANCIAL CORP - Quarter Report: 2023 September (Form 10-Q)

Hanmi Financial Corporation

November 8, 2023

/s/ Bonita I. Lee

Bonita I. Lee

President and Chief Executive Officer (Principal Executive Officer)

10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2023


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From To

Commission File Number: 000-30421

HANMI FINANCIAL CORPORATION

(Exact Name of Registrant as Specified in its Charter)


Delaware		95-4788120
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)


900 Wilshire Boulevard, Suite 1250
Los Angeles, California		90017
(Address of Principal Executive Offices)		(Zip Code)

(213) 382-2200

(Registrant’s Telephone Number, Including Area Code)

Not Applicable

(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)

Securities Registered Pursuant to Section 12(b) of the Act:

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock, $0.001 par value

HAFC

Nasdaq Global Select Market

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging Growth Company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

As of November 1, 2023, there were 30,394,397 outstanding shares of the Registrant’s Common Stock.

Hanmi Financial Corporation and Subsidiaries Quarterly Report on Form 10-Q

Three Months Ended September 30, 2023

Table of Contents


	Part I – Financial Information

Item 1.	Financial Statements	3

	Consolidated Balance Sheets at September 30, 2023 (unaudited) and December 31, 2022	3

	Consolidated Statements of Income for the three and nine months ended September 30, 2023 and 2022 (unaudited)	4

	Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2023 and 2022 (unaudited)	5

	Consolidated Statements of Changes in Stockholders’ Equity for the three and nine months ended September 30, 2023 and 2022 (unaudited)	6

	Consolidated Statements of Cash Flows for the nine months ended September 30, 2023 and 2022 (unaudited)	8

	Notes to Consolidated Financial Statements (unaudited)	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	41

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	60

Item 4.	Controls and Procedures	60

	Part II – Other Information

Item 1.	Legal Proceedings	61

Item 1A.	Risk Factors	61

Item 2.	Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities	61

Item 3.	Defaults Upon Senior Securities	61

Item 4.	Mine Safety Disclosures	61

Item 5.	Other Information	61

Item 6.	Exhibits	62

Signatures		63

Part I — Financial Information

Item 1. Financial Statements

Hanmi Financial Corporation and Subsidiaries

Consolidated Balance Sheets

(in thousands, except share data)


	September 30,			December 31,
	2023			2022
	(Unaudited)
Assets
Cash and due from banks	$	289,006		$	352,421
Securities available for sale, at fair value (amortized cost of $957,272 and $978,796 as of September 30, 2023 and December 31, 2022, respectively)		817,242			853,838
Loans held for sale, at the lower of cost or fair value		11,767			8,043
Loans receivable, net of allowance for credit losses of $67,313 and $71,523 as of September 30, 2023 and December 31, 2022, respectively		5,953,472			5,895,610
Accrued interest receivable		20,715			18,537
Premises and equipment, net		20,707			22,850
Customers' liability on acceptances		1,386			328
Servicing assets		7,156			7,176
Goodwill and other intangible assets, net		11,131			11,225
Federal Home Loan Bank ("FHLB") stock, at cost		16,385			16,385
Income tax assets		48,039			51,924
Bank-owned life insurance		56,364			55,544
Prepaid expenses and other assets		96,770			84,381
Total assets	$	7,350,140		$	7,378,262

Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Noninterest-bearing	$	2,161,238		$	2,539,602
Interest-bearing		4,098,834			3,628,470
Total deposits		6,260,072			6,168,072
Accrued interest payable		50,286			7,792
Bank's liability on acceptances		1,386			328
Borrowings		162,500			350,000
Subordinated debentures ($136,800 and $136,800 face amount less unamortized discount and debt issuance costs of $6,940 and $7,391 as of September 30, 2023 and December 31, 2022, respectively)		129,860			129,409
Accrued expenses and other liabilities		82,677			85,146
Total liabilities		6,686,781			6,740,747
Stockholders’ equity:
Preferred stock, $0.001 par value; authorized 10,000,000 shares; no shares issued as of September 30, 2023 and December 31, 2022		—			—
Common stock, $0.001 par value; authorized 62,500,000 shares; issued 33,909,457 shares (30,410,582 shares outstanding) and 33,708,234 shares (30,485,621 shares outstanding) as of September 30, 2023 and December 31, 2022, respectively		34			33
Additional paid-in capital		586,169			583,410
Accumulated other comprehensive loss, net of tax benefit of $40,608 and $35,973 as of September 30, 2023 and December 31, 2022, respectively		(99,422	)		(88,985	)
Retained earnings		308,007			269,542
Less treasury stock; 3,498,875 shares and 3,222,613 shares as of September 30, 2023 and December 31, 2022, respectively		(131,429	)		(126,485	)
Total stockholders’ equity		663,359			637,515
Total liabilities and stockholders’ equity	$	7,350,140		$	7,378,262

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

Hanmi Financial Corporation and Subsidiaries

Consolidated Statements of Income (Unaudited)

(in thousands, except share and per share data)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2023		2022		2023		2022
Interest and dividend income:
Interest and fees on loans receivable	$	85,398	$	66,976	$	249,888	$	180,755
Interest on securities		4,204		3,271		12,356		8,718
Dividends on FHLB stock		317		245		888		735
Interest on deposits in other banks		4,153		958		9,012		1,366
Total interest and dividend income		94,072		71,450		272,144		191,574
Interest expense:
Interest on deposits		36,818		6,567		94,431		11,038
Interest on borrowings		753		349		4,755		1,056
Interest on subordinated debentures		1,646		1,448		4,828		6,394
Total interest expense		39,217		8,364		104,014		18,488
Net interest income before credit loss expense		54,855		63,086		168,130		173,086
Credit loss expense		5,154		563		7,210		783
Net interest income after credit loss expense		49,701		62,523		160,920		172,303
Noninterest income:
Service charges on deposit accounts		2,605		2,996		7,756		8,745
Trade finance and other service charges and fees		1,155		1,132		3,586		3,690
Gain on sale of Small Business Administration ("SBA") loans		1,172		2,250		4,253		7,545
Other operating income		6,296		2,536		11,904		6,763
Total noninterest income		11,228		8,914		27,499		26,743
Noninterest expense:
Salaries and employee benefits		20,361		19,365		61,336		55,861
Occupancy and equipment		4,825		4,736		13,737		13,979
Data processing		3,490		3,352		10,208		9,702
Professional fees		1,568		1,249		4,278		3,909
Supplies and communications		552		710		1,866		1,956
Advertising and promotion		534		1,186		2,114		2,664
Other operating expenses		2,915		2,677		7,777		8,370
Total noninterest expense		34,245		33,275		101,316		96,441
Income before tax		26,684		38,162		87,103		102,605
Income tax expense		7,888		10,993		25,695		29,690
Net income	$	18,796	$	27,169	$	61,408	$	72,915
Basic earnings per share	$	0.62	$	0.89	$	2.01	$	2.39
Diluted earnings per share	$	0.62	$	0.89	$	2.01	$	2.39
Weighted-average shares outstanding:
Basic		30,251,961		30,314,439		30,296,991		30,289,068
Diluted		30,292,872		30,396,762		30,338,678		30,369,538

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

Hanmi Financial Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

(in thousands)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2023			2022			2023			2022
Net income	$	18,796		$	27,169		$	61,408		$	72,915
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on securities:
Unrealized holding gain (loss) arising during period		(20,820	)		(42,135	)		(16,943	)		(125,368	)
Unrealized gain (loss) on securities		(20,820	)		(42,135	)		(16,943	)		(125,368	)
Income tax benefit (expense) related to items of other comprehensive income		6,037			12,641			5,187			37,749
Other comprehensive income (loss), net of tax		(14,783	)		(29,494	)		(11,756	)		(87,619	)

Reclassification adjustment for (gains) losses included in net earnings		—			—			1,871			—
Income tax (benefit) expense related to reclassification adjustment		—			—			(552	)		—
Reclassification adjustment for (gains) losses included in net earnings, net of tax		—			—			1,319			—
Other comprehensive income (loss), net of tax		(14,783	)		(29,494	)		(10,437	)		(87,619	)
Total comprehensive income (loss)	$	4,013		$	(2,325	)	$	50,971		$	(14,704	)

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

Hanmi Financial Corporation and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

For the Three Months Ended September 30, 2023 and 2022

(in thousands, except share data)


	Common Stock - Number of Shares								Stockholders' Equity
													Accumulated
											Additional		Other						Treasury			Total
	Shares		Treasury			Shares			Common		Paid-in		Comprehensive			Retained			Stock,			Stockholders'
	Issued		Shares			Outstanding			Stock		Capital		Loss			Earnings			at Cost			Equity
Balance at July 1, 2022		33,701,784		(3,218,794	)		30,482,990		$	33	$	582,018	$	(66,568	)	$	229,135		$	(126,322	)	$	618,296
Stock options exercised		—		1,050			1,050			—		13		—			—			—			13
Issuance of awards pursuant to equity incentive plans		4,189		—			4,189			—		—		—			—			—			—
Share-based compensation expense		—		—			—			—		664		—			—			—			664
Shares surrendered to satisfy tax liability upon vesting of equity awards		—		(4,225	)		(4,225	)		—		—		—			—			(135	)		(135	)
Cash dividends paid (common stock, $0.25/share)		—		—			—			—		—		—			(7,620	)		—			(7,620	)
Net income		—		—			—			—		—		—			27,169			—			27,169
Change in unrealized gain (loss) on securities available for sale, net of income taxes		—		—			—			—		—		(29,494	)		—			—			(29,494	)
Balance at September 30, 2022		33,705,973		(3,221,969	)		30,484,004		$	33	$	582,695	$	(96,062	)	$	248,684		$	(126,457	)	$	608,893

Balance at July 1, 2023		33,863,421		(3,377,633	)		30,485,788		$	33	$	585,391	$	(84,639	)	$	296,901		$	(129,126	)	$	668,560
Issuance of awards pursuant to equity incentive plans		46,036		—			46,036			1		—		—			—			—			1
Share-based compensation expense		—		—			—			—		778		—			—			—			778
Shares surrendered to satisfy tax liability upon vesting of equity awards		—		(21,242	)		(21,242	)		—		—		—			—			(401	)		(401	)
Repurchase of common stock		—		(100,000	)		(100,000	)		—		—		—			—			(1,902	)		(1,902	)
Cash dividends paid (common stock, $0.25/share)		—		—			—			—		—		—			(7,690	)		—			(7,690	)
Net income		—		—			—			—		—		—			18,796			—			18,796
Change in unrealized gain (loss) on securities available for sale, net of income taxes		—		—			—			—		—		(14,783	)		—			—			(14,783	)
Balance at September 30, 2023		33,909,457		(3,498,875	)		30,410,582		$	34	$	586,169	$	(99,422	)	$	308,007		$	(131,429	)	$	663,359

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

Hanmi Financial Corporation and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

For the Nine Months Ended September 30, 2023 and 2022

(in thousands, except share data)


	Common Stock - Number of Shares								Stockholders' Equity
													Accumulated
											Additional		Other						Treasury			Total
	Shares		Treasury			Shares			Common		Paid-in		Comprehensive			Retained			Stock,			Stockholders'
	Issued		Shares			Outstanding			Stock		Capital		Loss			Earnings			at Cost			Equity
Balance at January 1, 2022		33,603,839		(3,196,578	)		30,407,261		$	33	$	580,796	$	(8,443	)	$	196,784		$	(125,753	)	$	643,417
Stock options exercised		—		1,050			1,050			—		13		—			—			—			13
Issuance of awards pursuant to equity incentive plans		102,134		—			102,134			—		—		—			—			—			—
Share-based compensation expense		—		—			—			—		1,886		—			—			—			1,886
Shares surrendered to satisfy tax liability upon vesting of equity awards		—		(26,441	)		(26,441	)		—		—		—			—			(704	)		(704	)
Cash dividends paid (common stock, $0.69/share)		—		—			—			—		—		—			(21,015	)		—			(21,015	)
Net income		—		—			—			—		—		—			72,915			—			72,915
Change in unrealized gain (loss) on securities available for sale, net of income taxes		—		—			—			—		—		(87,619	)		—			—			(87,619	)
Balance at September 30, 2022		33,705,973		(3,221,969	)		30,484,004		$	33	$	582,695	$	(96,062	)	$	248,684		$	(126,457	)	$	608,893

Balance at January 1, 2023		33,708,234		(3,222,613	)		30,485,621		$	33	$	583,410	$	(88,985	)	$	269,542		$	(126,485	)	$	637,515
Stock options exercised		50,000		—			50,000			—		821		—			—			—			821
Issuance of awards pursuant to equity incentive plans		151,223		—			151,223			1		—		—			—			—			1
Share-based compensation expense		—		—			—			—		1,938		—			—			—			1,938
Shares surrendered to satisfy tax liability upon vesting of equity awards		—		(76,262	)		(76,262	)		—		—		—			—			(1,599	)		(1,599	)
Repurchase of common stock		—		(200,000	)		(200,000	)		—		—		—			—			(3,345	)		(3,345	)
Cash dividends paid (common stock, $0.75/share)		—		—			—			—		—		—			(22,943	)		—			(22,943	)
Net income		—		—			—			—		—		—			61,408			—			61,408
Change in unrealized gain (loss) on securities available for sale, net of income taxes		—		—			—			—		—		(10,437	)		—			—			(10,437	)
Balance at September 30, 2023		33,909,457		(3,498,875	)		30,410,582		$	34	$	586,169	$	(99,422	)	$	308,007		$	(131,429	)	$	663,359

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

Hanmi Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

(in thousands)


	Nine Months Ended September 30,
	2023			2022
Cash flows from operating activities:
Net income	$	61,408		$	72,915
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		5,152			10,430
Amortization of servicing assets - net		1,815			2,033
Share-based compensation expense		1,938			1,886
Credit loss expense		7,210			783
Loss on sales of securities		1,871			—
Gain on sales of SBA loans		(4,253	)		(7,545	)
Origination of SBA loans held for sale		(74,888	)		(111,915	)
Proceeds from sales of SBA loans		73,496			122,744
Change in bank-owned life insurance		(820	)		(736	)
Change in prepaid expenses and other assets		(22,644	)		(21,443	)
Change in income tax assets		8,520			15,592
Valuation adjustment on servicing assets		(385	)		—
Change in accrued interest payable and other liabilities		41,187			15,646
Net cash provided by (used in) operating activities		99,607			100,390
Cash flows from investing activities:
Purchases of securities available for sale		(64,767	)		(132,966	)
Proceeds from matured, called and repayment of securities		74,046			84,669
Proceeds from sales of securities available for sale		8,149			—
Purchases of loans receivable		—			(11,130	)
Purchases of premises and equipment		(330	)		(1,750	)
Proceeds from disposition of premises and equipment		7,020			—
Change in loans receivable, excluding purchases		(64,574	)		(641,619	)
Net cash provided by (used in) investing activities		(40,456	)		(702,796	)
Cash flows from financing activities:
Change in deposits		92,000			415,107
Change in borrowings		(187,500	)		(37,501	)
Redemption of subordinated debentures, net of treasury debentures		—			(87,300	)
Proceeds from exercise of stock options		—			13
Cash paid for employee vested shares surrendered due to employee tax liability		(778	)		(704	)
Repurchase of common stock		(3,345	)		—
Cash dividends paid		(22,943	)		(21,015	)
Net cash provided by (used in) financing activities		(122,566	)		268,600
Net increase (decrease) in cash and due from banks		(63,415	)		(333,806	)
Cash and due from banks at beginning of year		352,421			608,965
Cash and due from banks at end of period	$	289,006		$	275,159
Supplemental disclosures of cash flow information:
Interest paid	$	61,520		$	17,469
Income taxes paid	$	16,144		$	12,725
Non-cash activities:
Transfer of loans receivable to other real estate owned	$	—		$	117
Income tax benefit (expense) related to items of other comprehensive income	$	4,635		$	37,749
Change in right-of-use asset obtained in exchange for lease liability	$	8,936		$	108
Cashless exercise of stock options	$	821		$	—

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

Hanmi Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 1 — Organization and Basis of Presentation

Hanmi Financial Corporation (“Hanmi Financial,” the “Company,” “we,” “us” or “our”) is a bank holding company whose primary subsidiary is Hanmi Bank (the “Bank”). Our primary operations are related to traditional banking activities, including the acceptance of deposits and the lending and investing of money by the Bank.

In management’s opinion, the accompanying unaudited consolidated financial statements of Hanmi Financial and its subsidiaries reflect all adjustments of a normal and recurring nature that are necessary for a fair presentation of the results for the interim periods ended September 30, 2023, but are not necessarily indicative of the results that will be reported for the entire year or any other interim period. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted. The unaudited consolidated financial statements are prepared in conformity with GAAP and in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission. Operating results for the three-month or nine-month period ended September 30, 2023 are not necessarily indicative of the results that may be expected for the year ended December 31, 2023 or for any other period. The interim information should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Annual Report on Form 10-K”).

The preparation of interim unaudited consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions affect the amounts reported in the unaudited financial statements and disclosures provided, and actual results could differ.

Recently Issued Accounting Standards

FASB ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting: On March 12, 2020, the FASB issued ASU 2020-04 to ease the potential burden in accounting for reference rate reform. The amendments in ASU 2020-04 are elective and apply to all entities that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform.

The new guidance provided several optional expedients that reduce costs and complexity of accounting for reference rate reform, including measures to simplify or modify accounting issues resulting from reference rate reform for contract modifications, hedges, and debt securities.

FASB ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848: In March 2021, it was announced LIBOR would cease on June 30, 2023. Because the current relief in Topic 848 may not cover a period of time during which a significant number of modifications may take place, the amendments in this ASU were deferred to December 31, 2024.

The adoption of this standard is not expected to have a material effect on the Company’s operating results or financial condition.

Accounting Standards Adopted in 2023

FASB ASU 2022-02, Troubled Debt Restructurings ("TDRs") and Vintage Disclosures (Topic 326): The FASB amended the accounting and disclosure requirements for expected credit losses by removing the recognition and measurement guidance on TDRs and enhancing disclosures pertaining to certain loan refinancings and restructurings by creditors made to borrowers experiencing financial difficulty. Additionally, this standard requires disclosure of current-period gross write-offs by year of origination for financing receivables.

The adoption of this standard did not have a material effect on the Company’s operating results or financial condition. See "Note 3 - Loans" to the consolidated financial statements for more details.

Descriptions of our significant accounting policies are included in Note 1 - Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements in the 2022 Annual Report on Form 10-K.

Note 2 — Securities

The following is a summary of securities available for sale as of the dates indicated:


			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gain		Loss			Value
	(in thousands)
September 30, 2023
U.S. Treasury securities	$	72,561	$	—	$	(1,639	)	$	70,922
U.S. government agency and sponsored agency obligations:
Mortgage-backed securities - residential		507,922		—		(85,196	)		422,726
Mortgage-backed securities - commercial		60,407		—		(14,441	)		45,966
Collateralized mortgage obligations		98,595		—		(12,337	)		86,258
Debt securities		140,409		—		(10,490	)		129,919
Total U.S. government agency and sponsored agency obligations		807,333		—		(122,464	)		684,869
Municipal bonds-tax exempt		77,378		—		(15,927	)		61,451
Total securities available for sale	$	957,272	$	—	$	(140,030	)	$	817,242

December 31, 2022
U.S. Treasury securities	$	49,690	$	—	$	(1,664	)	$	48,026
U.S. government agency and sponsored agency obligations:
Mortgage-backed securities - residential		540,590		63		(75,501	)		465,152
Mortgage-backed securities - commercial		61,799		—		(10,507	)		51,292
Collateralized mortgage obligations		98,236		—		(12,751	)		85,485
Debt securities		150,338		—		(11,839	)		138,499
Total U.S. government agency and sponsored agency obligations		850,963		63		(110,598	)		740,428
Municipal bonds-tax exempt		78,143		—		(12,759	)		65,384
Total securities available for sale	$	978,796	$	63	$	(125,021	)	$	853,838

The amortized cost and estimated fair value of securities as of September 30, 2023 and December 31, 2022, by contractual or expected maturity, are shown below. Collateralized mortgage obligations are included in the table shown below based on their expected maturities. All other securities are included based on their contractual maturities.


	September 30, 2023				December 31, 2022
	Available for Sale				Available for Sale
	Amortized		Estimated		Amortized		Estimated
	Cost		Fair Value		Cost		Fair Value
	(in thousands)
Within one year	$	51,042	$	50,491	$	28,665	$	28,043
Over one year through five years		171,668		159,474		180,322		167,000
Over five years through ten years		75,866		67,227		39,213		35,318
Over ten years		658,696		540,050		730,596		623,477
Total	$	957,272	$	817,242	$	978,796	$	853,838

The following table summarizes debt securities available-for-sale in an unrealized loss position for which an allowance for credit losses has not been recorded at September 30, 2023 and December 31, 2022, aggregated by major security type and length of time in a continuous unrealized loss position:


	Holding Period
	Less than 12 Months							12 Months or More							Total
	Gross			Estimated		Number		Gross			Estimated		Number		Gross			Estimated		Number
	Unrealized			Fair		of		Unrealized			Fair		of		Unrealized			Fair		of
	Loss			Value		Securities		Loss			Value		Securities		Loss			Value		Securities
	(in thousands, except number of securities)
September 30, 2023
U.S. Treasury securities	$	(212	)	$	42,415		15	$	(1,427	)	$	28,507		10	$	(1,639	)	$	70,922		25
U.S. government agency and sponsored agency obligations:
Mortgage-backed securities - residential		(533	)		19,097		9		(84,663	)		403,629		118		(85,196	)		422,726		127
Mortgage-backed securities - commercial		—			—		—		(14,441	)		45,966		15		(14,441	)		45,966		15
Collateralized mortgage obligations		(405	)		22,488		6		(11,933	)		63,770		24		(12,337	)		86,258		30
Debt securities		(58	)		10,381		3		(10,432	)		119,538		25		(10,490	)		129,919		28
Total U.S. government agency and sponsored agency obligations		(996	)		51,966		18		(121,469	)		632,903		182		(122,464	)		684,869		200
Municipal bonds-tax exempt		—			—		—		(15,927	)		61,451		19		(15,927	)		61,451		19
Total	$	(1,208	)	$	94,381		33	$	(138,823	)	$	722,861		211	$	(140,030	)	$	817,242		244

December 31, 2022
U.S. Treasury securities	$	(414	)	$	33,812		14	$	(1,250	)	$	14,215		4	$	(1,664	)	$	48,027		18
U.S. government agency and sponsored agency obligations:
Mortgage-backed securities - residential		(1,712	)		36,009		18		(73,789	)		424,302		105		(75,501	)		460,311		123
Mortgage-backed securities - commercial		(84	)		4,069		1		(10,423	)		47,221		14		(10,507	)		51,290		15
Collateralized mortgage obligations		(1,011	)		23,606		8		(11,740	)		61,879		20		(12,751	)		85,485		28
Debt securities		(1,103	)		31,714		8		(10,736	)		106,785		22		(11,839	)		138,499		30
Total U.S. government agency and sponsored agency obligations		(3,910	)		95,398		35		(106,688	)		640,187		161		(110,598	)		735,585		196
Municipal bonds-tax exempt		—			—		—		(12,759	)		65,385		19		(12,759	)		65,385		19
Total	$	(4,324	)	$	129,210		49	$	(120,697	)	$	719,787		184	$	(125,021	)	$	848,997		233

The Company evaluates its available-for-sale securities portfolio for impairment on a quarterly basis. The Company did not recognize unrealized losses in income because it has the ability and the intent to hold and does not expect to be required to sell these securities until the recovery of their cost basis. The quarterly impairment assessment takes into account the changes in the credit quality of these debt securities since acquisition and the likelihood of a credit loss occurring over the life of the securities. In the event that a credit loss is expected to occur in the future, an allowance is established and a corresponding credit loss is recognized. Based on this analysis, as of September 30, 2023, the Company determined that no credit losses were expected to be realized on the tax-exempt municipal bond portfolio. The remainder of the portfolio consists of U.S. Treasury obligations, U.S. government agency securities, and U.S. government sponsored agency securities, all of which have the backing of the U.S. government, and are therefore not expected to incur credit losses.

Realized gains and losses on sales of securities and proceeds from sales of securities were as follows for the periods indicated:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2023		2022		2023			2022
	(in thousands)
Gross realized gains on sales of securities	$	—	$	—	$	—		$	—
Gross realized losses on sales of securities		—		—		(1,871	)		—
Net realized gains (losses) on sales of securities	$	—	$	—	$	(1,871	)	$	—
Proceeds from sales of securities	$	—	$	—	$	8,149		$	—

During the nine months ended September 30, 2023, there were $1.9 million in net losses in earnings resulting from the sale of $8.1 million of securities previously recorded with $1.7 million unrealized losses in accumulated other comprehensive income.

There were no sales of securities during the three and nine months ended September 30, 2022.

Securities available for sale with market values of $24.7 million and $23.4 million as of September 30, 2023 and December 31, 2022, respectively, were pledged to secure borrowings from the Federal Reserve Bank (“FRB”) Discount Window and the Bank Term Funding Program (“BTFP”).

At September 30, 2023, there were no holdings of securities of any one issuer, other than the U.S. government and its agencies in an amount greater than 10% of shareholders’ equity.

Note 3 — Loans

Loans Receivable

Loans consisted of the following as of the dates indicated:


	September 30, 2023			December 31, 2022
	(in thousands)
Real estate loans:
Commercial property
Retail	$	1,097,650		$	1,023,608
Hospitality		705,735			646,893
Office		575,319			499,946
Other (1)		1,309,507			1,553,729
Total commercial property loans		3,688,211			3,724,176
Construction		84,804			109,205
Residential (2)		926,326			734,472
Total real estate loans		4,699,341			4,567,853
Commercial and industrial loans (3)		728,792			804,492
Equipment financing agreements		592,652			594,788
Loans receivable		6,020,785			5,967,133
Allowance for credit losses		(67,313	)		(71,523	)
Loans receivable, net	$	5,953,472		$	5,895,610

(1)

Includes mixed-use, multifamily, industrial, gas stations, faith-based facilities, and medical; all other property types represent less than one percent of total loans receivable.

(2)

Includes $2.0 million and $2.4 million of home equity loans and lines, and $4.2 million and $4.6 million of personal loans at September 30, 2023 and December 31, 2022, respectively.

(3)

At September 30, 2023 and December 31, 2022, Paycheck Protection Program loans were $0.2 million and $0.9 million, respectively.

Accrued interest on loans was $17.7 million and $16.0 million at September 30, 2023 and December 31, 2022, respectively.

At September 30, 2023 and December 31, 2022, loans of $2.41 billion and $1.99 billion, respectively, were pledged to secure advances from the FHLB.

Loans Held for Sale

The following is the activity for loans held for sale for the three months ended September 30, 2023 and 2022:


	Real Estate			Commercial and Industrial			Total
	(in thousands)
September 30, 2023
Balance at beginning of period	$	5,544		$	1,749		$	7,293
Originations and transfers		12,588			13,398			25,986
Sales		(11,520	)		(9,490	)		(21,010	)
Principal paydowns and amortization		(75	)		(427	)		(502	)
Balance at end of period	$	6,537		$	5,230		$	11,767

September 30, 2022
Balance at beginning of period	$	10,976		$	7,552		$	18,528
Originations and transfers		23,013			12,198			35,211
Sales		(27,493	)		(16,192	)		(43,685	)
Principal paydowns and amortization		(6	)		(4	)		(10	)
Balance at end of period	$	6,490		$	3,554		$	10,044

Loans held for sale was comprised of $11.8 million and $8.0 million of the guaranteed portion of SBA 7(a) loans at September 30, 2023 and December 31, 2022, respectively.

The following is the activity for loans held for sale for the nine months ended September 30, 2023 and 2022:


	Real Estate			Commercial and Industrial			Total
	(in thousands)
September 30, 2023
Balance at beginning of period	$	3,775		$	4,268		$	8,043
Originations and transfers		43,468			31,420			74,888
Sales		(40,630	)		(30,022	)		(70,652	)
Principal payoffs and amortization		(76	)		(436	)		(512	)
Balance at end of period	$	6,537		$	5,230		$	11,767

September 30, 2022
Balance at beginning of period	$	6,954		$	6,388		$	13,342
Originations and transfers		72,708			39,207			111,915
Sales		(73,166	)		(42,033	)		(115,199	)
Principal payoffs and amortization		(6	)		(8	)		(14	)
Balance at end of period	$	6,490		$	3,554		$	10,044

Allowance for Credit Losses

The following table details the information on the allowance for credit losses by portfolio segment as of and for the three months ended September 30, 2023 and 2022:


	Real Estate			Commercial and Industrial			Equipment Financing Agreements			Total
	(in thousands)
September 30, 2023
Balance at beginning of period	$	43,054		$	16,028		$	11,942			71,024
Charge-offs		(216	)		(6,323	)		(2,831	)		(9,370	)
Recoveries		50			141			301			492
Provision (recovery) for credit losses		948			1,396			2,823			5,167
Ending balance	$	43,836		$	11,242		$	12,235		$	67,313

September 30, 2022
Balance at beginning of period	$	46,112		$	14,275		$	12,680		$	73,067
Charge-offs		(1,356	)		(8	)		(716	)		(2,080	)
Recoveries		373			228			369			970
Provision (recovery) for credit losses		395			381			(1,149	)		(373	)
Ending balance	$	45,524		$	14,876		$	11,184		$	71,584

The following table details the information on the allowance for credit losses by portfolio segment as of and for the nine months ended September 30, 2023 and 2022:


	Real Estate			Commercial and Industrial			Equipment Financing Agreements			Total
	(in thousands)
September 30, 2023
Balance at beginning of period	$	44,026		$	15,267		$	12,230			71,523
Charge-offs		(627	)		(6,635	)		(7,052	)		(14,314	)
Recoveries		180			931			1,131			2,242
Provision (recovery) for credit losses		257			1,679			5,926			7,862
Ending balance	$	43,836		$	11,242		$	12,235		$	67,313

September 30, 2022
Balance at beginning of period	$	48,890		$	12,418		$	11,249		$	72,557
Charge-offs		(1,886	)		(87	)		(1,548	)		(3,521	)
Recoveries		632			679			1,117			2,428
Provision (recovery) for credit losses		(2,112	)		1,866			366			120
Ending balance	$	45,524		$	14,876		$	11,184		$	71,584

The table below illustrates the allowance for credit losses by loan portfolio segment and each loan portfolio segment as a percentage of total loans.


	September 30, 2023										December 31, 2022
	Allowance Amount		Percentage of Total Allowance			Total Loans		Percentage of Total Loans			Allowance Amount		Percentage of Total Allowance			Total Loans		Percentage of Total Loans
	(dollars in thousands)
Real estate loans:
Commercial property
Retail	$	10,083		15.0	%	$	1,097,650		18.3	%	$	7,872		11.0	%	$	1,023,608		17.2	%
Hospitality		15,083		22.4			705,735		11.7			13,407		18.7			646,893		10.8
Office		2,884		4.3			575,319		9.6			2,293		3.2			499,946		8.4
Other		8,321		12.3			1,309,507		21.7			13,056		18.3			1,553,729		26.0
Total commercial property loans		36,371		54.0			3,688,211		61.3			36,628		51.2			3,724,176		62.4
Construction		2,594		3.9			84,804		1.4			4,022		5.7			109,205		1.8
Residential		4,871		7.2			926,326		15.4			3,376		4.7			734,472		12.4
Total real estate loans		43,836		65.1			4,699,341		78.1			44,026		61.6			4,567,853		76.6
Commercial and industrial loans		11,242		16.7			728,792		12.1			15,267		21.3			804,492		13.4
Equipment financing agreements		12,235		18.2			592,652		9.8			12,230		17.1			594,788		10.0
Total	$	67,313		100.0	%	$	6,020,785		100.0	%	$	71,523		100.0	%	$	5,967,133		100.0	%

The following table represents the amortized cost basis of collateral-dependent loans by class of loans as of September 30, 2023 and December 31, 2022, for which repayment is expected to be obtained through the sale of the underlying collateral.


	September 30, 2023		December 31, 2022
	Amortized Cost		Amortized Cost
	(in thousands)
Real estate loans:
Commercial property
Retail	$	1,637	$	1,930
Hospitality		333		—
Office		—		—
Other		22		256
Total commercial property loans		1,992		2,186
Residential		3		508
Total real estate loans		1,995		2,694
Commercial and industrial loans		4,847		—
Total	$	6,842	$	2,694

Loan Quality Indicators

As part of the on-going monitoring of the quality of our loans portfolio, we utilize an internal loan grading system to identify credit risk and assign an appropriate grade (from 1 to 8) for each loan in our portfolio. A third-party loan review is performed at least on an annual basis. Additional adjustments are made when determined to be necessary. The loan grade definitions are as follows:

Pass and Pass-Watch: Pass and Pass-Watch loans, grades (1-4), are in compliance with the Bank’s credit policy and regulatory requirements, and do not exhibit any potential or defined weaknesses as defined under “Special Mention,” “Substandard” or “Doubtful.” This category is the strongest level of the Bank’s loan grading system. It consists of all performing loans with no identified credit weaknesses. It includes cash and stock/security secured loans or other investment grade loans.

Special Mention: A Special Mention loan, grade (5), has potential weaknesses that deserve management’s close attention. If not corrected, these potential weaknesses may result in deterioration of the repayment of the debt and result in a Substandard classification. Loans that have significant actual, not potential, weaknesses are considered more severely classified.

Substandard: A Substandard loan, grade (6), has a well-defined weakness that jeopardizes the liquidation of the debt. A loan graded Substandard is not protected by the sound worth and paying capacity of the borrower, or of the value and type of collateral pledged. With a Substandard loan, there is a distinct possibility that the Bank will sustain some loss if the weaknesses or deficiencies are not corrected.

Doubtful: A Doubtful loan, grade (7), is one that has critical weaknesses that would make the collection or liquidation of the full amount due improbable. However, there may be pending events which may work to strengthen the loan, and therefore the amount or timing of a possible loss cannot be determined at the current time.

Loss: A loan classified as Loss, grade (8), is considered uncollectible and of such little value that their continuance as active bank assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this asset even though partial recovery may be possible in the future. Loans classified as Loss will be charged off in a timely manner.

Under regulatory guidance, loans graded special mention or worse are considered criticized loans, and loans graded substandard or worse are considered classified loans.

Loans by Vintage Year and Risk Rating


	Term Loans
	Amortized Cost Basis by Origination Year (1)
	2023		2022		2021			2020		2019		Prior			Revolving Loans Amortized Cost Basis		Total
	(in thousands)
September 30, 2023
Real estate loans:
Commercial property
Risk Rating								`
Pass / Pass-Watch	$	511,148	$	1,013,414	$	863,200		$	578,433	$	384,562	$	264,284		$	26,171	$	3,641,212
Special Mention		5,194		4,032		10,141			4,328		715		1,556			1,700		27,666
Classified		4,430		977		4,936					5,606		3,384					19,333
Total commercial property		520,772		1,018,423		878,277			582,761		390,883		269,224			27,871		3,688,211
YTD gross charge-offs		—		—		—			411		—		216			—		627
YTD net charge-offs		—		—		—			407		—		46			—		453

Construction
Risk Rating
Pass / Pass-Watch		38,129		—		18,375			—		—		—			—		56,504
Special Mention		—		—		28,300			—		—		—			—		28,300
Classified		—		—		—			—		—		—			—		—
Total construction		38,129		—		46,675			—		—		—			—		84,804
YTD gross charge-offs		—		—		—			—		—		—			—		—
YTD net charge-offs		—		—		—			—		—		—			—		—

Residential
Risk Rating
Pass / Pass-Watch		241,830		381,167		160,856			12,791		221		124,047			4,911		925,823
Special Mention		—		—		—			—		—		—			500		500
Classified		—		—		—			—		—		3			—		3
Total residential		241,830		381,167		160,856			12,791		221		124,050			5,411		926,326
YTD gross charge-offs		—		—		—			—		—		—			—		—
YTD net charge-offs		—		—		—			—		—		(6	)		—		(6	)

Total real estate loans
Risk Rating
Pass / Pass-Watch		791,107		1,394,581		1,042,431			591,224		384,783		388,331			31,082		4,623,539
Special Mention		5,194		4,032		38,441			4,328		715		1,556			2,200		56,466
Classified		4,430		977		4,936			—		5,606		3,387			—		19,336
Total real estate loans		800,731		1,399,590		1,085,808			595,552		391,104		393,274			33,282		4,699,341
YTD gross charge-offs		—		—		—			411		—		216			—		627
YTD net charge-offs		—		—		—			407		—		40			—		447

Commercial and industrial loans:
Risk Rating
Pass / Pass-Watch		142,240		176,815		88,316			33,403		11,156		10,047			240,951		702,928
Special Mention		—		16,128		—			104		—		3,775			—		20,007
Classified		378		—		—			84		46		210			5,139		5,857
Total commercial and industrial loans		142,618		192,943		88,316			33,591		11,202		14,032			246,090		728,792
YTD gross charge-offs		—		17		—			—		110		388			6,120		6,635
YTD net charge-offs		—		5		(5	)		—		107		(522	)		6,119		5,704

Equipment financing agreements:
Risk Rating
Pass / Pass-Watch		174,377		234,753		115,310			29,380		25,457		5,434			—		584,711
Special Mention		—		—		—			—		—		—			—		—
Classified		329		3,630		2,719			167		830		266			—		7,941
Total equipment financing agreements		174,706		238,383		118,029			29,547		26,287		5,700			—		592,652
YTD gross charge-offs		56		3,030		2,732			294		725		215			—		7,052
YTD net charge-offs		56		2,961		2,455			217		335		(103	)		—		5,921

Total loans receivable:
Risk Rating
Pass / Pass-Watch		1,107,724		1,806,149		1,246,057			654,007		421,396		403,812			272,033		5,911,178
Special Mention		5,194		20,160		38,441			4,432		715		5,331			2,200		76,473
Classified		5,137		4,607		7,655			251		6,482		3,863			5,139		33,134
Total loans receivable	$	1,118,055	$	1,830,916	$	1,292,153		$	658,690	$	428,593	$	413,006		$	279,372	$	6,020,785
YTD gross charge-offs		56		3,047		2,732			705		835		819			6,120		14,314
YTD net charge-offs		56		2,966		2,450			624		442		(585	)		6,119		12,072

(1)

Includes extensions, renewals, or modifications of credit contracts, which consist of a new credit decision.


	Term Loans
	Amortized Cost Basis by Origination Year (1)
	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Total

December 31, 2022
Real estate loans:
Commercial property
Risk Rating
Pass / Pass-Watch	$	1,184,361	$	901,029	$	600,740	$	404,786	$	301,950	$	207,861	$	50,877	$	3,651,604
Special Mention		847		13,384		5,857		7,115		—		6,080		1,701		34,984
Classified		—		—		412		4,312		12,304		20,560		—		37,588
Total commercial property		1,185,208		914,413		607,009		416,213		314,254		234,501		52,578		3,724,176

Construction
Risk Rating
Pass / Pass-Watch		41,662		67,543		—		—		—		—		—		109,205
Special Mention		—		—		—		—		—		—		—		—
Classified		—		—		—		—		—		—		—		—
Total construction		41,662		67,543		—		—		—		—		—		109,205

Residential
Risk Rating
Pass / Pass-Watch		405,975		173,236		13,102		232		731		134,766		5,422		733,464
Special Mention		—		—		—		—		—		—		500		500
Classified		12		—		—		—		—		496		—		508
Total residential		405,987		173,236		13,102		232		731		135,262		5,922		734,472

Total real estate loans
Risk Rating
Pass / Pass-Watch		1,631,998		1,141,808		613,842		405,018		302,681		342,627		56,299		4,494,273
Special Mention		847		13,384		5,857		7,115		—		6,080		2,201		35,484
Classified		12		—		412		4,312		12,304		21,056		—		38,096
Total real estate loans		1,632,857		1,155,192		620,111		416,445		314,985		369,763		58,500		4,567,853

Commercial and industrial loans:
Risk Rating
Pass / Pass-Watch		368,778		100,537		39,577		24,117		7,342		12,282		205,951		758,584
Special Mention		—		9,285		—		—		29		102		34,113		43,529
Classified		—		—		171		1,097		81		391		639		2,379
Total commercial and industrial loans		368,778		109,822		39,748		25,214		7,452		12,775		240,703		804,492

Equipment financing agreements:
Risk Rating
Pass / Pass-Watch		305,249		165,313		46,970		52,133		17,608		1,798		—		589,071
Special Mention		—		—		—		—		—		—		—		—
Classified		630		2,542		311		1,581		565		88		—		5,717
Total equipment financing agreements		305,879		167,855		47,281		53,714		18,173		1,886		—		594,788

Total loans receivable:
Risk Rating
Pass / Pass-Watch		2,306,025		1,407,658		700,389		481,268		327,631		356,707		262,250		5,841,928
Special Mention		847		22,669		5,857		7,115		29		6,182		36,314		79,013
Classified		642		2,542		894		6,990		12,950		21,535		639		46,192
Total loans receivable	$	2,307,514	$	1,432,869	$	707,140	$	495,373	$	340,610	$	384,424	$	299,203	$	5,967,133

(1)

Includes extensions, renewals, or modifications of credit contracts, which consist of a new credit decision.

Loans by Vintage Year and Payment Performance


	Term Loans
	Amortized Cost Basis by Origination Year (1)
	2023		2022		2021			2020		2019		Prior			Revolving Loans Amortized Cost Basis		Total
	(in thousands)
September 30, 2023
Real estate loans:
Commercial property
Payment performance
Performing	$	519,135	$	1,018,423	$	878,124		$	582,761	$	390,800	$	268,305		$	27,871	$	3,685,419
Nonperforming		1,637		—		153			—		83		919			—		2,792
Total commercial property		520,772		1,018,423		878,277			582,761		390,883		269,224			27,871		3,688,211
YTD gross charge-offs		—		—		—			411		—		216			—		627
YTD net charge-offs		—		—		—			407		—		46			—		453

Construction
Payment performance
Performing		38,129		—		46,675			—		—		—			—		84,804
Nonperforming		—		—		—			—		—		—			—		—
Total construction		38,129		—		46,675			—		—		—			—		84,804
YTD gross charge-offs		—		—		—			—		—		—			—		—
YTD net charge-offs		—		—		—			—		—		—			—		—

Residential
Payment performance
Performing		241,830		381,167		160,856			12,791		221		124,047			5,411		926,323
Nonperforming		—		—		—			—		—		3			—		3
Total residential		241,830		381,167		160,856			12,791		221		124,050			5,411		926,326
YTD gross charge-offs		—		—		—			—		—		—			—		—
YTD net charge-offs		—		—		—			—		—		(6	)		—		(6	)

Total real estate loans
Payment performance
Performing		799,094		1,399,590		1,085,655			595,552		391,021		392,352			33,282		4,696,546
Nonperforming		1,637		—		153			—		83		922			—		2,795
Total real estate loans		800,731		1,399,590		1,085,808			595,552		391,104		393,274			33,282		4,699,341
YTD gross charge-offs		—		—		—			411		—		216			—		627
YTD net charge-offs		—		—		—			407		—		40			—		447

Commercial and industrial loans:
Payment performance
Performing		142,618		192,943		88,316			33,507		11,202		13,919			241,241		723,746
Nonperforming		—		—		—			84		—		113			4,849		5,046
Total commercial and industrial loans		142,618		192,943		88,316			33,591		11,202		14,032			246,090		728,792
YTD gross charge-offs		—		17		—			—		110		388			6,120		6,635
YTD net charge-offs		—		5		(5	)		—		107		(522	)		6,119		5,704

Equipment financing agreements:
Payment performance
Performing		174,377		234,753		115,310			29,380		25,456		5,434			—		584,710
Nonperforming		329		3,630		2,719			167		831		266			—		7,942
Total equipment financing agreements		174,706		238,383		118,029			29,547		26,287		5,700			—		592,652
YTD gross charge-offs		56		3,030		2,732			294		725		215			—		7,052
YTD net charge-offs		56		2,961		2,455			217		335		(103	)		—		5,921

Total loans receivable:
Payment performance
Performing		1,116,089		1,827,286		1,289,281			658,439		427,679		411,705			274,523		6,005,002
Nonperforming		1,966		3,630		2,872			251		914		1,301			4,849		15,783
Total loans receivable	$	1,118,055	$	1,830,916	$	1,292,153		$	658,690	$	428,593	$	413,006		$	279,372	$	6,020,785
YTD gross charge-offs		56		3,047		2,732			705		835		819			6,120		14,314
YTD net charge-offs		56		2,966		2,450			624		442		(585	)		6,119		12,072

(1)

Includes extensions, renewals, or modifications of credit contracts, which consist of a new credit decision.


	Term Loans
	Amortized Cost Basis by Origination Year (1)
	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Total

December 31, 2022
Real estate loans:
Commercial property
Payment performance
Performing	$	1,185,208	$	914,413	$	606,597	$	416,213	$	312,324	$	233,643	$	52,578	$	3,720,976
Nonperforming		—		—		412		—		1,930		858		—		3,200
Total commercial property		1,185,208		914,413		607,009		416,213		314,254		234,501		52,578		3,724,176

Construction
Payment performance
Performing		41,662		67,543		—		—		—		—		—		109,205
Nonperforming		—		—		—		—		—		—		—		—
Total construction		41,662		67,543		—		—		—		—		—		109,205

Residential
Payment performance
Performing		405,975		173,236		13,102		232		731		134,766		5,922		733,964
Nonperforming		12		—		—		—		—		496		—		508
Total residential		405,987		173,236		13,102		232		731		135,262		5,922		734,472

Total real estate loans
Payment performance
Performing		1,632,845		1,155,192		619,699		416,445		313,055		368,409		58,500		4,564,145
Nonperforming		12		—		412		—		1,930		1,354		—		3,708
Total real estate loans		1,632,857		1,155,192		620,111		416,445		314,985		369,763		58,500		4,567,853

Commercial and industrial loans:
Payment performance
Performing		368,778		109,822		39,577		25,199		7,452		12,539		240,703		804,070
Nonperforming		—		—		171		15		—		236		—		422
Total commercial and industrial loans		368,778		109,822		39,748		25,214		7,452		12,775		240,703		804,492

Equipment financing agreements:
Payment performance
Performing		305,249		165,313		46,970		52,133		17,608		1,798		—		589,071
Nonperforming		630		2,542		311		1,581		565		88		—		5,717
Total equipment financing agreements		305,879		167,855		47,281		53,714		18,173		1,886		—		594,788

Total loans receivable:
Payment performance
Performing		2,306,872		1,430,327		706,246		493,777		338,115		382,746		299,203		5,957,286
Nonperforming		642		2,542		894		1,596		2,495		1,678		—		9,847
Total loans receivable	$	2,307,514	$	1,432,869	$	707,140	$	495,373	$	340,610	$	384,424	$	299,203	$	5,967,133

(1)

Includes extensions, renewals, or modifications of credit contracts, which consist of a new credit decision.

The following is an aging analysis of loans, including loans on nonaccrual status, disaggregated by loan class, as of the dates indicated:


	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total
	(in thousands)
September 30, 2023
Real estate loans:
Commercial property
Retail	$	260	$	—	$	—	$	260	$	1,097,390	$	1,097,650
Hospitality		153		33		—		186		705,549		705,735
Office		—		—		—		—		575,319		575,319
Other		704		—		22		726		1,308,781		1,309,507
Total commercial property loans		1,117		33		22		1,172		3,687,039		3,688,211
Construction		—		—		—		—		84,804		84,804
Residential		935		364		3		1,302		925,024		926,326
Total real estate loans		2,052		397		25		2,474		4,696,867		4,699,341
Commercial and industrial loans		384		151		4,849		5,384		723,408		728,792
Equipment financing agreements		6,527		2,195		3,382		12,104		580,548		592,652
Total loans receivable	$	8,963	$	2,743	$	8,256	$	19,962	$	6,000,823	$	6,020,785

December 31, 2022
Real estate loans:
Commercial property
Retail	$	—	$	—	$	—	$	—	$	1,023,608	$	1,023,608
Hospitality		—		—		—		—		646,893		646,893
Office		—		—		—		—		499,946		499,946
Other		—		494		—		494		1,553,235		1,553,729
Total commercial property loans		—		494		—		494		3,723,682		3,724,176
Construction		—		—		—		—		109,205		109,205
Residential		313		804		7		1,124		733,348		734,472
Total real estate loans		313		1,298		7		1,618		4,566,235		4,567,853
Commercial and industrial loans		77		79		—		156		804,336		804,492
Equipment financing agreements		5,825		1,271		2,949		10,045		584,743		594,788
Total loans receivable	$	6,215	$	2,648	$	2,956	$	11,819	$	5,955,314	$	5,967,133

Nonaccrual Loans and Nonperforming Assets

The following table represents the amortized cost basis of loans on nonaccrual status and loans past due 90 days and still accruing as of September 30, 2023 and December 31, 2022.


	September 30, 2023
	Nonaccrual Loans With No Allowance for Credit Losses		Nonaccrual Loans With Allowance for Credit Losses		Loans Past Due 90 Days Still Accruing		Total Nonperforming Loans
	(in thousands)
Real estate loans:
Commercial property
Retail	$	1,849	$	402	$	—	$	2,251
Hospitality		333		186		—		519
Office		—		—		—		—
Other		22		—		—		22
Total commercial property loans		2,204		588		—		2,792
Construction		—		—		—		—
Residential		3		—		—		3
Total real estate loans		2,207		588		—		2,795
Commercial and industrial loans		—		5,046		—		5,046
Equipment financing agreements		848		7,094		—		7,942
Total	$	3,055	$	12,728	$	—	$	15,783

	December 31, 2022
	Nonaccrual Loans With No Allowance for Credit Losses		Nonaccrual Loans With Allowance for Credit Losses		Loans Past Due 90 Days Still Accruing		Total Nonperforming Loans
	(in thousands)
Real estate loans:
Commercial property
Retail	$	1,929	$	—	$	—	$	1,929
Hospitality		—		—		—		—
Office		—		—		—		—
Other		540		731		—		1,271
Total commercial property loans		2,469		731		—		3,200
Construction		—		—		—		—
Residential		508		—		—		508
Total real estate loans		2,977		731		—		3,708
Commercial and industrial loans		—		422		—		422
Equipment financing agreements		215		5,502		—		5,717
Total	$	3,192	$	6,655	$	—	$	9,847

The Company recognized $26,000 and $5,000 of interest income on nonaccrual loans for the three months ended September 30, 2023 and 2022, respectively. Interest income recognized on nonaccrual loans for the nine months ended September 30, 2023 and 2022 was $160,000 and $40,000, respectively.

The following table details nonperforming assets as of the dates indicated:


	September 30, 2023		December 31, 2022
	(in thousands)
Nonaccrual loans	$	15,783	$	9,847
Loans receivable 90 days or more past due and still accruing		—		—
Total nonperforming loans receivable		15,783		9,847
Other real estate owned ("OREO")		117		117
Total nonperforming assets	$	15,900	$	9,964

OREO of $0.1 million is included in prepaid expenses and other assets in the accompanying Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022.

Loan Modifications

No loans were modified during the three and nine months ended September 30, 2023 or 2022.

Note 4 — Servicing Assets

The changes in servicing assets for the three and nine months ended September 30, 2023 and 2022, were as follows:


	Three Months Ended September 30,
	2023			2022
	(in thousands)

Balance at beginning of period	$	7,352		$	7,354
Addition related to sale of SBA loans		396			828
Amortization		(592	)		(758	)
Balance at end of period	$	7,156		$	7,424


	Nine Months Ended September 30,
	2023			2022
	(in thousands)

Balance at beginning of period	$	7,176		$	7,080
Addition related to sale of SBA loans		1,410			2,377
Amortization		(1,815	)		(2,033	)
Change in valuation allowance		385			—
Balance at end of period	$	7,156		$	7,424

At September 30, 2023 and December 31, 2022, we serviced loans sold to unaffiliated parties of $531.6 million and $523.6 million, respectively. These represented loans that were sold for which the Bank continues to provide servicing. These loans are maintained off-balance sheet and are not included in the loans receivable balance. All of the loans serviced were SBA loans.

The Company recorded servicing fee income of $1.3 million for the three months ended September 30, 2023 and 2022, and $3.9 million and $3.7 million for the nine months ended September 30, 2023 and 2022, respectively. Servicing fee income, net of the amortization of servicing assets, is included in other operating income in the consolidated statements of income. Amortization expense was $0.6 million and $0.8 million for the three months ended September 30, 2023 and 2022, respectively, and $1.8 million and $2.0 million for the nine months ended September 30, 2023 and 2022, respectively.

The fair value of servicing rights was $7.6 million at September 30, 2023 and was determined using discount rates ranging from 15.4% to 26.8% and prepayment speeds ranging from 11.9% to 18.8%, depending on the stratification of the specific right. The fair value of servicing rights was $7.1 million at December 31, 2022 and was determined using discount rates ranging from 21.9% to 25.3% and prepayment speeds ranging from 10.8% to 16.7%, depending on the stratification of the specific right.

Note 5 — Income Taxes

The Company’s income tax expense was $7.9 million and $11.0 million, representing an effective income tax rate of 29.6% and 28.8% for the three months ended September 30, 2023 and 2022, respectively. The Company’s income tax expense was $25.7 million and $29.7 million, representing an effective income tax rate of 29.5% and 28.9% for the nine months ended September 30, 2023 and 2022, respectively.

Management concluded that as of September 30, 2023 and December 31, 2022, a valuation allowance of $1.3 million was appropriate against certain state net operating loss carry forwards and certain tax credits. For all other deferred tax assets, management believes it was more likely than not these deferred tax assets will be realized principally through future taxable income and reversal

of existing taxable temporary differences. Net income tax assets were $48.0 million and $51.9 million as of September 30, 2023 and December 31, 2022, respectively.

As of September 30, 2023, the Company was subject to examination by various taxing authorities for its federal tax returns for the periods ended after December 31, 2018 and state tax returns for the periods ended after December 31, 2017. During the quarter ended September 30, 2023, there was no material change to the Company’s uncertain tax positions. The Company does not expect its unrecognized tax positions to change significantly over the next twelve months.

Note 6 — Goodwill and other Intangibles

The third-party originator's intangible of $0.5 million and goodwill of $11.0 million were recorded as a result of the acquisition of an equipment financing agreements portfolio in 2016. The core deposit intangible of $2.2 million was recognized for the core deposits acquired in a 2014 acquisition. The Company’s intangible assets were as follows for the periods indicated:


		September 30, 2023							December 31, 2022
	Amortization Period	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
		(in thousands)
Core deposit intangible	10 years	$	2,213	$	(2,116	)	$	97	$	2,213	$	(2,031	)	$	182
Third-party originator's intangible	7 years		483		(480	)		3		483		(471	)		12
Goodwill	N/A		11,031		—			11,031		11,031		—			11,031
Total intangible assets		$	13,727	$	(2,596	)	$	11,131	$	13,727	$	(2,502	)	$	11,225

The Company performed an impairment analysis on its goodwill and other intangible assets as of September 30, 2023 and determined there was no impairment. No triggering event occurred as of, or subsequent to September 30, 2023, that would require a reassessment of goodwill and other intangible assets.

Note 7 — Deposits

The scheduled maturities of time deposits are as follows for the periods indicated:


At September 30, 2023	Time Deposits Greater Than $250,000		Other Time Deposits		Total
	(in thousands)
2023	$	432,361	$	540,642	$	973,003
2024		597,364		855,244		1,452,608
2025		266		4,803		5,069
2026		263		2,870		3,133
2027 and thereafter		—		882		882
Total	$	1,030,254	$	1,404,441	$	2,434,695

At December 31, 2022
2023	$	696,470	$	1,185,020	$	1,881,490
2024		—		68,037		68,037
2025		266		3,151		3,417
2026		263		2,430		2,693
2027 and thereafter		—		570		570
Total	$	696,999	$	1,259,208	$	1,956,207

Accrued interest payable on deposits was $50.3 million and $7.8 million at September 30, 2023 and December 31, 2022, respectively. Total deposits reclassified to loans due to overdrafts at September 30, 2023 and December 31, 2022 were $1.3 million and $1.2 million, respectively.

Note 8 — Borrowings and Subordinated Debentures

At September 30, 2023, the Bank had $50.0 million of overnight advances and $112.5 million of term advances at the FHLB with a weighted average interest rate of 5.77% and 2.77%, respectively. At December 31, 2022, the Bank had $250.0 million of overnight advances and $100.0 million of term advances at the FHLB with a weighted average rate of 4.65% and 0.87%, respectively. Interest expense on borrowings for the three months ended September 30, 2023 and 2022 was $0.8 million and $0.3 million, respectively. Interest expense on borrowings for the nine months ended September 30, 2023 and 2022 was $4.8 million and $1.1 million, respectively.


	September 30, 2023					December 31, 2022
	Outstanding Balance		Weighted Average Rate			Outstanding Balance		Weighted Average Rate
	(dollars in thousands)
Overnight advances	$	50,000		5.77	%	$	250,000		4.65	%
Advances due within 12 months		37,500		0.40			50,000		0.97
Advances due over 12 months through 24 months		12,500		1.90			37,500		0.40
Advances due over 24 months through 36 months		62,500		4.37			12,500		1.90
Outstanding advances	$	162,500		3.69	%	$	350,000		3.57	%

The following is financial data pertaining to FHLB advances:


	September 30, 2023			December 31, 2022
	(dollars in thousands)
Weighted-average interest rate at end of period		3.69	%		3.57	%
Weighted-average interest rate during the period		3.27	%		1.52	%
Average balance of FHLB advances	$	194,505		$	148,027
Maximum amount outstanding at any month-end	$	450,000		$	350,000

The Bank maintains a secured credit facility with the FHLB, allowing the Bank to borrow on an overnight and term basis. The Bank had $2.41 billion and $1.99 billion of loans pledged as collateral with the FHLB as of September 30, 2023 and December 31, 2022, respectively. The remaining available borrowing capacity was $1.32 billion and $1.07 billion at September 30, 2023 and December 31, 2022, respectively.

The Bank also had securities with market values of $24.7 million and $23.4 million at September 30, 2023 and December 31, 2022, respectively, pledged with the FRB, which provided $23.9 million and $22.0 million in available borrowing capacity through the Fed Discount Window and the BTFP of September 30, 2023 and December 31, 2022, respectively.

On August 20, 2021, the Company issued $110.0 million of Fixed-to-Floating Subordinated Notes (“2031 Notes”) with a maturity date of September 1, 2031. The 2031 Notes have an initial fixed interest rate of 3.75% per annum, payable semiannually in arrears on March 1 and September 1 of each year, up to but excluding September 1, 2026. From and including September 1, 2026 and thereafter, the 2031 Notes will bear interest at a floating rate per annum equal to the Benchmark rate (which is expected to be the Three-Month Term SOFR) plus 310 basis points, payable quarterly in arrears on March 1, June 1, September 1 and December 1 of each year. If the then current three-month term SOFR rate is less than zero, the three-month SOFR will be deemed to be zero. Debt issuance cost was $2.1 million, which is being amortized through the 2031 Notes’ maturity date. At September 30, 2023 and December 31, 2022, the balance of the 2031 Notes included in the Company’s Consolidated Balance Sheet, net of issuance cost, was $108.3 million and $108.2 million, respectively.

The Company issued $100.0 million of Fixed-to-Floating Subordinated Notes (“2027 Notes”) on March 21, 2017, with a maturity on March 30, 2027. The 2027 Notes had an initial fixed interest rate of 5.45% per annum. From and including March 30, 2022 and thereafter, the 2027 Notes would have interest at a floating rate equal to the then current three-month LIBOR, as calculated on each applicable date of determination, plus 3.315% payable quarterly.

On March 30, 2022, the Company redeemed its 2027 Notes. A portion of the redemption was funded with the proceeds from the Company’s 2021 subordinated debt offering. The redemption price for each of the 2027 Notes equaled 100% of the outstanding principal amount redeemed, plus any accrued and unpaid interest thereon. All interest accrued on the 2027 Notes ceased to accrue on and after March 30, 2022. Upon the redemption, the Company recognized a pre-tax charge of $1.1 million for the remaining unamortized debt issuance costs associated with the 2027 Notes.

The Company assumed Junior Subordinated Deferrable Interest Debentures (“Subordinated Debentures”) as a result of an acquisition in 2014 with an unpaid principal balance of $26.8 million and an estimated fair value of $18.5 million. The $8.3 million discount is being amortized to interest expense through the debentures’ maturity date of March 15, 2036. A trust was formed in 2005 which issued $26.0 million of Trust Preferred Securities (“TPS”) at a 6.26% fixed rate for the first five years and a variable rate of three-month LIBOR plus 140 basis points thereafter and invested the proceeds in the Subordinated Debentures. The rate on the TPS at September 30, 2023 was 7.07%. Beginning September 15, 2023, the variable rate on the TPS changed to three-month SOFR plus approximately 166 basis points, representing the credit spread of 140 basis points and an approximate 26 basis point adjustment to convert three-month LIBOR to three-month SOFR. The TPS will be subject to mandatory redemption if the Subordinated Debentures are repaid by the Company. Interest is payable quarterly, and the Company has the option to defer interest payments on the Subordinated Debentures from time to time for a period not to exceed five consecutive years. At September 30, 2023 and December 31, 2022, the balance of Subordinated Debentures included in the Company’s Consolidated Balance Sheets, net of discount of $5.2 million and $5.6 million, was $21.6 million and $21.2 million, respectively. The amortization of discount was $106,000 and $104,000 for the three months ended September 30, 2023 and 2022, respectively and $314,000 and $308,000 for the nine months ended September 30, 2023 and 2022, respectively.

Note 9 — Earnings Per Share

Earnings per share (“EPS”) is calculated on both a basic and a diluted basis. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted from the issuance of common stock that then shared in earnings, excluding common shares in treasury. For diluted EPS, the weighted-average number of common shares includes the impact of unvested performance stock units (“PSUs”) under the treasury method.

Unvested restricted stock containing rights to non-forfeitable dividends are considered participating securities prior to vesting and have been included in the earnings allocation in computing basic and diluted EPS under the two-class method.

The following table is a reconciliation of the components used to derive basic and diluted EPS for the periods indicated:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2023		2022		2023		2022
	(dollars in thousands, except per share amounts)
Basic EPS
Net income	$	18,796	$	27,169	$	61,408	$	72,915
Less: income allocated to unvested restricted stock		117		163		381		408
Income allocated to common shares	$	18,679	$	27,006	$	61,027	$	72,507
Weighted-average shares for basic EPS		30,251,961		30,314,439		30,296,991		30,289,068
Basic EPS (1)	$	0.62	$	0.89	$	2.01	$	2.39

Effect of dilutive stock options and unvested performance stock units		40,910		82,323		41,686		80,470

Diluted EPS
Income allocated to common shares	$	18,679	$	27,006	$	61,027	$	72,507
Weighted-average shares for diluted EPS		30,292,872		30,396,762		30,338,678		30,369,538
Diluted EPS (1)	$	0.62	$	0.89	$	2.01	$	2.39

(1)

Per share amounts may not be able to be recalculated using net income and weighted-average shares presented above due to rounding.

On a weighted-average basis, options to purchase 61,000 shares of common stock were excluded from the calculation of diluted earnings per share for the three and nine months ended September 30, 2023, because their effect would have been anti-dilutive. There were no anti-dilutive stock options for the three and nine months ended September 30, 2022. There were 54,765 and 50,460 anti-dilutive unvested PSUs outstanding for the three and nine months ended September 30, 2023, respectively.

During the nine months ended September 30, 2023, the Company issued 53,696 PSUs to executive officers from the 2021 Equity Compensation Plan with a fair value of $1.1 million. During the nine months ended September 30, 2022, the Company issued 38,036 PSUs to executive officers from the 2021 Equity Compensation Plan with a fair value of $1.0 million on the grant date of March 23, 2022. These units have a three-year cliff vesting period and include dividend equivalent rights. During the nine months ended September 30, 2023, 35,906 PSUs vested to an executive officer. Total PSUs outstanding as of September 30, 2023 were 134,358 with an aggregate grant fair value of $2.9 million. Total PSUs outstanding as of September 30, 2022 were 104,599 with an aggregate grant fair value of $2.0 million.

Note 10 — Regulatory Matters

Federal bank regulatory agencies require bank holding companies and banks to maintain a minimum ratio of qualifying total capital to risk-weighted assets of 8.0% and a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0%. In addition to the risk-based guidelines, federal bank regulatory agencies require bank holding companies and banks to maintain a minimum ratio of Tier 1 capital to average assets, referred to as the leverage ratio, of 4.0%.

In order for banks to be considered “well capitalized,” federal bank regulatory agencies require a minimum ratio of qualifying total capital to risk-weighted assets of 10.0% and a minimum ratio of Tier 1 capital to risk-weighted assets of 8.0%. In addition to the risk-based guidelines, federal bank regulatory agencies require depository institutions to maintain a minimum ratio of Tier 1 capital to average assets, referred to as the leverage ratio, of 5.0%.

At September 30, 2023, the Bank’s capital ratios exceeded the minimum requirements for the Bank to be considered “well capitalized” and the Company exceeded all of its applicable minimum regulatory capital ratio requirements.

A capital conservation buffer of 2.5% must be met to avoid limitations on the ability of the Bank and the Company to pay dividends, repurchase shares or pay discretionary bonuses. The Bank's capital conservation buffer was 6.42% and 5.86% and the Company's capital conservation buffer was 6.30% and 5.71% as of September 30, 2023 and December 31, 2022, respectively.

In March 2020, federal banking agencies announced an interim final rule to delay the impact on regulatory capital arising from the implementation of CECL. The interim final rule maintains the three-year transition option in the previous rule and provides banks the option to delay for two years an estimate of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period (five-year transition option). The Company and the Bank adopted the capital transition relief over the permissible five-year period.

The capital ratios of Hanmi Financial and the Bank as of September 30, 2023 and December 31, 2022 were as follows:


						Minimum					Minimum to Be
						Regulatory					Categorized as
	Actual					Requirement					“Well Capitalized”
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(dollars in thousands)
September 30, 2023
Total capital (to risk-weighted assets):
Hanmi Financial	$	933,916		15.07	%	$	495,714		8.00	%	N/A		N/A
Hanmi Bank	$	893,375		14.42	%	$	495,685		8.00	%	$	619,607		10.00	%
Tier 1 capital (to risk-weighted assets):
Hanmi Financial	$	761,969		12.30	%	$	371,786		6.00	%	N/A		N/A
Hanmi Bank	$	831,428		13.42	%	$	371,764		6.00	%	$	495,685		8.00	%
Common equity Tier 1 capital (to risk-weighted assets)
Hanmi Financial	$	740,411		11.95	%	$	278,839		4.50	%	N/A		N/A
Hanmi Bank	$	831,428		13.42	%	$	278,823		4.50	%	$	402,744		6.50	%
Tier 1 capital (to average assets):
Hanmi Financial	$	761,969		10.27	%	$	296,662		4.00	%	N/A		N/A
Hanmi Bank	$	831,428		11.25	%	$	295,515		4.00	%	$	369,394		5.00	%

December 31, 2022
Total capital (to risk-weighted assets):
Hanmi Financial	$	901,239		14.49	%	$	497,508		8.00	%	N/A		N/A
Hanmi Bank	$	860,503		13.86	%	$	496,607		8.00	%	$	620,758		10.00	%
Tier 1 capital (to risk-weighted assets):
Hanmi Financial	$	728,344		11.71	%	$	373,131		6.00	%	N/A		N/A
Hanmi Bank	$	797,608		12.85	%	$	372,455		6.00	%	$	496,607		8.00	%
Common equity Tier 1 capital (to risk-weighted assets)
Hanmi Financial	$	707,101		11.37	%	$	279,848		4.50	%	N/A		N/A
Hanmi Bank	$	797,608		12.85	%	$	279,341		4.50	%	$	403,493		6.50	%
Tier 1 capital (to average assets):
Hanmi Financial	$	728,344		10.07	%	$	289,311		4.00	%	N/A		N/A
Hanmi Bank	$	797,608		11.07	%	$	288,110		4.00	%	$	360,137		5.00	%

Note 11 — Fair Value Measurements

Fair Value Measurements

ASC 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value including a three-level valuation hierarchy, and expands disclosures about fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The three-level fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value are defined as follows:

•

Level 1 - Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

•

Level 2 - Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.

•

Level 3 - Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

Fair value is used on a recurring basis for certain assets and liabilities in which fair value is the primary basis of accounting. Additionally, fair value is used on a non-recurring basis to evaluate assets or liabilities for impairment or for disclosure purposes.

We record securities available for sale at fair value on a recurring basis. Certain other assets, such as loans held for sale, impaired loans, OREO, and core deposit intangible, are recorded at fair value on a non-recurring basis. Non-recurring fair value measurements typically involve assets that are periodically evaluated for impairment and for which any impairment is recorded in the period in which the re-measurement is performed.

The following methods and assumptions were used to estimate the fair value of each class of financial instrument below:

Securities available for sale - The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges. If quoted prices are not available, fair values are measured using matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities, or other model-based valuation techniques requiring observable inputs other than quoted prices such as yield curve, prepayment speeds, and default rates. Level 1 securities include U.S. Treasury securities that are traded on an active exchange or by dealers or brokers in active over-the-counter markets. The fair value of these securities is determined by quoted prices on an active exchange or over-the-counter market. Level 2 securities primarily include U.S. government agency and sponsored agency mortgage-backed securities, collateralized mortgage obligations and debt securities as well as municipal bonds in markets that are active. In determining the fair value of the securities categorized as Level 2, we obtain reports from nationally recognized broker-dealers detailing the fair value of each investment security held as of each reporting date. The broker-dealers use prices obtained from nationally recognized pricing services to value our fixed income securities. The fair value of the municipal securities is determined based on pricing data provided by nationally recognized pricing services. We review the prices obtained for reasonableness based on our understanding of the marketplace, and also consider any credit issues related to the bonds. As we have not made any adjustments to the market quotes provided to us and as they are based on observable market data, they have been categorized as Level 2 within the fair value hierarchy. Level 3 securities are instruments that are not traded in the market. As such, no observable market data for the instrument is available, which necessitates the use of significant unobservable inputs.

Derivatives – The fair values of derivatives are based on valuation models using observable market data as of the measurement date (Level 2). Our derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rates, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services.

Loans held for sale - Loans held for sale includes the guaranteed portion of SBA 7(a) loans carried at the lower of cost or fair value. Management obtains quotes, bids or pricing indication sheets on all or part of the loans directly from the purchasing financial institutions. Premiums received or to be received on the quotes, bids or pricing indication sheets are indicative of the fact that cost is lower than fair value. At September 30, 2023 and December 31, 2022, the entire balance of loans held for sale was recorded at its cost. We record loans held for sale on a nonrecurring basis with Level 2 inputs.

Nonperforming loans – Nonaccrual loans receivable and loans 90-days past due and still accruing interest are considered nonperforming for reporting purposes and are measured and recorded at fair value on a non-recurring basis. All nonperforming loans with a carrying balance over $250,000 are individually evaluated for the amount of impairment, if any. Nonperforming loans with a carrying balance of $250,000 or less are evaluated collectively. However, from time to time, nonrecurring fair value adjustments to collateral dependent nonperforming loans are recorded based on either the current appraised value of the collateral, or management’s judgment and estimation of value reported on older appraisals that are then adjusted based on recent market trends, and result in a Level 3 measurement.

OREO - Fair value of OREO is based primarily on third party appraisals, less costs to sell and result in a Level 3 classification of the inputs for determining fair value. Appraisals are required annually and may be updated more frequently as circumstances require and the fair value adjustments are made to OREO based on the updated appraised value of the property.

Servicing assets - On a quarterly basis, the Company utilizes a third party service to evaluate servicing assets related to loans sold to unaffiliated parties with servicing retained, and result in a Level 3 classification. Servicing assets are assessed for impairment or increased obligation based on fair value at each reporting date.

Other repossessed assets – Fair value of equipment from equipment financing agreements is based primarily on a third party valuation service, less costs to sell and result in a Level 3 classification of the inputs for determining fair value. Valuations are required at the time the asset is repossessed and may be subsequently updated periodically due to the Company’s short-term possession of the asset prior to sale or as circumstances require and the fair value adjustments are made to the asset based on its value prior to sale.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

As of September 30, 2023 and December 31, 2022, assets and liabilities measured at fair value on a recurring basis are as follows:


	Level 1		Level 2		Level 3
			Significant
			Observable
	Quoted Prices in		Inputs with No
	Active Markets		Active Market		Significant
	for Identical		with Identical		Unobservable
	Assets		Characteristics		Inputs		Total Fair Value
	(in thousands)
September 30, 2023
Assets:
Securities available for sale:
U.S. Treasury securities	$	70,922	$	—	$	—	$	70,922
U.S. government agency and sponsored agency obligations:
Mortgage-backed securities - residential		—		422,726		—		422,726
Mortgage-backed securities - commercial		—		45,966		—		45,966
Collateralized mortgage obligations		—		86,258		—		86,258
Debt securities		—		129,919		—		129,919
Total U.S. government agency and sponsored agency obligations		—		684,869		—		684,869
Municipal bonds-tax exempt		—		61,451		—		61,451
Total securities available for sale	$	70,922	$	746,320	$	—	$	817,242
Derivative financial instruments	$	—	$	8,602	$	—	$	8,602

Liabilities:
Derivative financial instruments	$	—	$	8,493	$	—	$	8,493

December 31, 2022
Assets:
Securities available for sale:
U.S. Treasury securities	$	48,026	$	—	$	—	$	48,026
U.S. government agency and sponsored agency obligations:
Mortgage-backed securities - residential		—		465,152		—		465,152
Mortgage-backed securities - commercial		—		51,292		—		51,292
Collateralized mortgage obligations		—		85,485		—		85,485
Debt securities		—		138,499		—		138,499
Total U.S. government agency and sponsored agency obligations		—		740,428		—		740,428
Municipal bonds-tax exempt		—		65,384		—		65,384
Total securities available for sale	$	48,026	$	805,812	$	—	$	853,838
Derivative financial instruments	$	—	$	7,507	$	—	$	7,507

Liabilities:
Derivative financial instruments	$	—	$	7,375	$	—	$	7,375

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

As of September 30, 2023 and December 31, 2022, assets and liabilities measured at fair value on a non-recurring basis are as follows:


			Level 1		Level 2		Level 3
					Significant
					Observable
			Quoted Prices in		Inputs With No
			Active Markets		Active Market		Significant
			for Identical		With Identical		Unobservable
	Total		Assets		Characteristics		Inputs
	(in thousands)
September 30, 2023
Assets:
Collateral dependent loans (1)	$	6,842	$	—	$	—	$	6,842
Other real estate owned		117		—		—		117
Repossessed personal property		1,320		—		—		1,320

December 31, 2022
Assets:
Collateral dependent loans (2)	$	2,694	$	—	$	—	$	2,694
Other real estate owned		117		—		—		117
Repossessed personal property		467		—		—		467
Servicing assets		7,176		—		—		7,176

(1)

Consisted of real estate loans of $2.0 million and commercial and industrial loans of $4.8 million, which were secured by real estate and business assets.

(2)

Consisted of real estate loans of $2.7 million.

The following table represents quantitative information about Level 3 fair value assumptions for assets measured at fair value on a non-recurring basis at September 30, 2023 and December 31, 2022:


	Fair Value		Valuation Techniques	Unobservable Input(s)	Range (Weighted Average)
	(in thousands)
September 30, 2023
Collateral dependent loans:
Real estate loans:
Commercial property
Retail	$	1,637	Market approach	Adjustments to market data	5% to 20% / 15%	(1)
Hospitality		333	Market approach	Adjustments to market data	(30)% to 35% / (3)%
Other		22	Market approach	Adjustments to market data	(25)% to 5% / (10%)	(1)
Residential		3	Market approach	Adjustments to market data	(15)% to 3% / (6)%	(1)
Total real estate loans		1,995
Commercial and industrial loans		4,847	Market approach	Adjustments to market data	(20)% to 55% / (3)%	(1)
Total	$	6,842

Other real estate owned	$	117	Market approach	Adjustments to market data	(10)% to 5% / (2)%	(1)

Repossessed personal property		1,320	Market approach	Adjustments to market data		(2)

December 31, 2022
Collateral dependent loans:
Real estate loans:
Commercial property
Retail	$	1,930	Market approach	Adjustments to market data	5% to 25% / 16%	(1)
Other		256	Market approach	Adjustments to market data	(42)% to 3% / (24)%	(1)
Residential		508	Market approach	Adjustments to market data	(15)% to 3% / (1)%	(1)
Total real estate loans		2,694
Total	$	2,694

Other real estate owned	$	117	Market approach	Adjustments to market data	(20)% to 20% / (2)%	(1)

Repossessed personal property		467	Market approach	Adjustments to market data		(2)

Servicing assets		7,176	Market approach	Prepayment rate Discount rate	11% to 17% / 16% 22% to 25% / 22%	(3)

(1)

Appraisal reports utilize a combination of valuation techniques including a market approach, where prices and other relevant information generated by market transactions involving similar or comparable properties are used to determine the appraised value. Appraisals may include an ‘as is’ and ‘upon completion’ valuation scenarios. Adjustments are routinely made in the appraisal process by third-party appraisers to adjust for differences between the comparable sales and income data. Adjustments also result from the consideration of relevant economic and demographic factors with the potential to affect property values. Also, prospective values are based on the market conditions which exist at the date of inspection combined with informed forecasts based on current trends in supply and demand for the property types under appraisal. Positive adjustments disclosed in this table represent increases to the sales comparison and negative adjustments represent decreases.

(2)

The equipment is usually too small in value to use a professional appraisal service. The values are determined internally using a combination of auction values, vendor recommendations and sales comparisons depending on the equipment type. Some highly commoditized equipment, such as commercial trucks have services that provide industry values.

(3)

Fair value is based on a valuation model using the present value of estimated future cash flows, prepayment speeds, default rates, and discount rates. Servicing assets are subsequently measured using the amortization method which requires servicing rights to be amortized into income over the period of the estimated future net servicing income of the underlying loans.

ASC 825, Financial Instruments, requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring

basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured on a recurring basis or non-recurring basis are discussed above.

The estimated fair value of financial instruments has been determined by using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data in order to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that we could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

Recognition and Measurement of Financial Assets and Financial Liabilities (Topic 825), among other provisions, requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. Other than certain financial instruments for which we had concluded that the carrying amounts approximate fair value, the fair value estimates shown below were based on an exit price notion as of September 30, 2023, as required by ASU 2016-01. The financial instruments for which we had concluded that the carrying amounts approximate fair value include, cash and due from banks, accrued interest receivable and payable, and noninterest-bearing deposits.

The estimated fair values of financial instruments were as follows:


	September 30, 2023
	Carrying		Fair Value
	Amount		Level 1		Level 2		Level 3
	(in thousands)
Financial assets:
Cash and due from banks	$	289,006	$	289,006	$	—	$	—
Securities available for sale		817,242		70,922		746,320		—
Loans held for sale		11,767		—		11,721		—
Loans receivable, net of allowance for credit losses		5,953,472		—		—		5,784,828
Accrued interest receivable		20,715		20,715		—		—
Financial liabilities:
Noninterest-bearing deposits		2,161,238		—		2,161,238		—
Interest-bearing deposits		4,098,834		—		—		4,098,244
Borrowings and subordinated debentures		292,360		—		159,632		127,334
Accrued interest payable		50,286		50,286		—		—


	December 31, 2022
	Carrying		Fair Value
	Amount		Level 1		Level 2		Level 3
	(in thousands)
Financial assets:
Cash and due from banks	$	352,421	$	352,421	$	—	$	—
Securities available for sale		853,838		48,026		805,812		—
Loans held for sale		8,043		—		8,423		—
Loans receivable, net of allowance for credit losses		5,895,610		—		—		5,808,190
Accrued interest receivable		18,537		18,537		—		—
Financial liabilities:
Noninterest-bearing deposits		2,539,602		—		2,539,602		—
Interest-bearing deposits		3,628,470		—		—		3,623,827
Borrowings and subordinated debentures		479,409		—		345,867		126,828
Accrued interest payable		7,792		7,792		—		—

The methods and assumptions used to estimate the fair value of each class of financial instruments for which it was practicable to estimate that value are explained below:

Cash and due from banks – The carrying amounts of cash and due from banks approximate fair value due to the short-term nature of these instruments (Level 1).

Securities – The fair value of securities, consisting of securities available for sale, is generally obtained from market bids

for similar or identical securities, from independent securities brokers or dealers, or from other model-based valuation techniques described above (Level 1 and 2).

Loans held for sale – Loans held for sale, representing the guaranteed portion of SBA loans, are carried at the lower of aggregate cost or fair market value, as determined based upon quotes, bids or sales contract prices (Level 2).

Loans receivable, net of allowance for credit losses – The fair value of loans receivable is estimated based on the discounted cash flow approach. To estimate the fair value of the loans, certain loan characteristics such as account types, remaining terms, annual interest rates or coupons, interest types, past delinquencies, timing of principal and interest payments, current market rates, loan-to-value ratios, loss exposures, and remaining balances are considered. Additionally, the Company’s prior charge-off rates and loss ratios as well as various other assumptions relating to credit, interest, and prepayment risks are used as part of valuing the loan portfolio. Subsequently, the loans were individually evaluated by sorting and pooling them based on loan types, credit risk grades, and payment types. Consistent with the requirements of ASU 2016-01, the fair value of the Company's loans receivable is considered to be an exit price notion as of September 30, 2023 (Level 3).

The fair value of collateral dependent loans is estimated based on the net realizable fair value of the collateral or the observable market price of the most recent sale or quoted price from loans held for sale. The Company does not record loans at fair value on a recurring basis. Nonrecurring fair value adjustments to collateral dependent loans are recorded based on the current appraised value of the collateral (Level 3).

Accrued interest receivable – The carrying amount of accrued interest receivable approximates its fair value (Level 1).

Noninterest-bearing deposits – The fair value of noninterest-bearing deposits is the amount payable on demand at the reporting date (Level 2).

Interest-bearing deposits – The fair value of interest-bearing deposits, such as savings accounts, money market checking, and certificates of deposit, is estimated based on discounted cash flows. The cash flows for non-maturity deposits, including savings accounts and money market checking, are estimated based on their historical decaying experiences. The discount rate used for fair valuation is based on interest rates currently being offered by the Bank on comparable deposits as to amount and term (Level 3).

Borrowings and subordinated debentures – Borrowings consist of FHLB advances, subordinated debentures and other borrowings. Discounted cash flows based on current market rates for borrowings with similar remaining maturities are used to estimate the fair value of borrowings (Level 2 and 3).

Accrued interest payable – The carrying amount of accrued interest payable approximates its fair value (Level 1).

Note 12 — Off-Balance Sheet Commitments

The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk similar to the risk involved with on-balance sheet items.

The Bank’s exposure to losses in the event of non-performance by the other party to commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for extending loan facilities to customers. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, was based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, premises and equipment, and income-producing or borrower-occupied properties.

The following table shows the distribution of total loan commitments as of the dates indicated:


	September 30,		December 31,
	2023		2022
	(in thousands)
Unused commitments to extend credit	$	848,886	$	780,543
Standby letters of credit		77,381		71,829
Commercial letters of credit		19,524		19,945
Total commitments	$	945,791	$	872,317

The allowance for credit losses related to off-balance sheet items was maintained at a level believed to be sufficient to absorb current expected lifetime losses related to these unfunded credit facilities. The determination of the allowance adequacy was based on periodic evaluations of the unfunded credit facilities including an assessment of the probability of commitment usage, credit risk factors for loans outstanding to these same customers, and the terms and expiration dates of the unfunded credit facilities.

Activity in the allowance for credit losses related to off-balance sheet items was as follows for the periods indicated:


	Three Months Ended September 30,					Nine Months Ended September 30,
	2023			2022		2023			2022
	(in thousands)
Balance at beginning of period	$	2,475		$	2,313	$	3,114		$	2,586
Provision expense (recovery) for credit losses		(13	)		936		(652	)		663
Balance at end of period	$	2,462		$	3,249	$	2,462		$	3,249

Note 13 — Leases

The Company enters into leases in the normal course of business primarily for bank branch offices, back-office operations locations, business development offices, information technology data centers and information technology equipment. The Company’s leases have remaining terms ranging from one to thirteen years, some of which include renewal or termination options to extend the lease for up to five years.

The Company includes lease extension and termination options in the lease term if, after considering relevant economic factors, it is reasonably certain the Company will exercise the option. In addition, the Company has elected to account for any non-lease components in its real estate leases as part of the associated lease component. The Company has also elected not to recognize leases with original lease terms of 12 months or less (short-term leases) on the Company’s balance sheet.

Leases are classified as operating or finance leases at the lease commencement date. Lease expense for operating leases and short-term leases is recognized on a straight-line basis over the term of the lease. Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of the lease payments over the lease term.

As of September 30, 2023, the outstanding balances for our right-of-use asset and lease liability were $43.0 million and $47.0 million, respectively. The outstanding balances of the right-of-use asset and lease liability were $40.4 million and $44.2 million,

respectively, as of December 31, 2022. The right-of-use asset is reported in prepaid expenses and other assets line item and lease liability is reported in accrued expenses and other liabilities line item on the Consolidated Balance Sheets.

In determining the discount rates, since most of our leases do not provide an implicit rate, we used our incremental borrowing rate provided by the FHLB of San Francisco based on the information available at the commencement date to calculate the present value of lease payments.

At September 30, 2023, future minimum rental commitments under these non-cancelable operating leases, with initial or remaining terms of one year or more, were as follows:


	Amount
	(in thousands)
2023	$	8,659
2024		7,988
2025		6,885
2026		6,248
2027		6,038
Thereafter		16,326
Remaining lease commitments		52,144
Interest		(5,184	)
Present value of lease liability	$	46,960

Weighted average remaining lease terms for the Company's operating leases were 7.05 years and 7.12 years as of September 30, 2023 and December 31, 2022, respectively. Weighted average discount rates used for the Company's operating leases were 2.92% and 2.42% as of September 30, 2023 and December 31, 2022, respectively. Net lease expense recognized for the three months ended September 30, 2023 and 2022 was $2.4 million and $2.1 million, respectively. Net lease expense recognized for the nine months ended September 30, 2023 and 2022 was $6.6 million and $6.2 million, respectively. This included operating lease costs of $2.3 million and $2.0 million for the three months ended September 30, 2023 and 2022, respectively. Operating lease costs were $6.5 million and $5.9 million for the nine months ended September 30, 2023 and 2022, respectively. Sublease income for operating leases was immaterial for both the nine months ended September 30, 2023 and 2022.

Cash paid and included in cash flows from operating activities for amounts used in the measurement of the lease liability of the Company's operating leases was $2.3 million and $1.9 million for the three months ended September 30, 2023 and 2022, respectively, and $6.4 million and $5.9 million for the nine months ended September 30, 2023 and 2022, respectively.

During the third quarter of 2023, the Company consummated a sale-leaseback transaction pursuant to which it sold a branch building for an aggregate cash purchase price of $7.8 million and concurrently agreed to separately lease the property for an initial term of 10 years, with two five year renewal options that the Company may exercise to extend the term of the lease. The pre-tax, net gain recorded associated with the sale of the building was $4.0 million, after deducting transaction-related expenses and after removing the branch building from "Premises and equipment, net" on the Balance Sheet. The aggregate annual lease expense associated with this building will be $0.4 million for the first 12 months of the lease term.

Note 14 — Liquidity

Hanmi Financial

As of September 30, 2023, Hanmi Financial had $8.7 million in cash on deposit with its bank subsidiary and $27.1 million of U.S. Treasury securities at fair value. As of December 31, 2022, the Company had $10.6 million in cash on deposit with its bank subsidiary and $17.7 million of U.S. Treasury securities at fair value. Management believes that Hanmi Financial, on a stand-alone basis, had adequate liquid assets to meet its current debt obligations.

Hanmi Bank

The principal objective of our liquidity management program is to maintain the Bank’s ability to meet the day-to-day cash flow requirements of its customers who wish either to withdraw funds or to draw upon credit facilities to meet their cash needs. Management believes that the Bank, on a stand-alone basis, has adequate liquid assets to meet its current obligations. The Bank’s primary funding source will continue to be deposits originating from its branch platform. The Bank’s wholesale funds historically consisted of FHLB advances and brokered deposits. As of September 30, 2023 and December 31, 2022, the Bank had $162.5 million and $350.0 million, respectively, of FHLB advances, and $73.1 million and $83.3 million, respectively, of brokered deposits.

We monitor the sources and uses of funds on a regular basis to maintain an acceptable liquidity position. The Bank’s primary source of borrowings is the FHLB, from which the Bank is eligible to borrow up to 30% of its assets. As of September 30, 2023 and December 31, 2022, the total borrowing capacity available, based on pledged collateral was $1.61 and $1.54 billion, respectively. The remaining available borrowing capacity was $1.32 billion and $1.07 billion as of September 30, 2023 and December 31, 2022, respectively.

The amount that the FHLB is willing to advance differs based on the quality and character of qualifying collateral pledged by the Bank, and the FHLB may adjust the advance rates for qualifying collateral upwards or downwards from time to time. To the extent deposit renewals and deposit growth are not sufficient to fund maturing and withdrawable deposits, repay maturing borrowings, fund existing and future loans, equipment financing agreements and securities, and otherwise fund working capital needs and capital expenditures, the Bank may utilize the remaining borrowing capacity from its FHLB borrowing arrangement.

As a means of augmenting its liquidity, the Bank had an available borrowing source of $23.9 million from the Federal Reserve Discount Window and the BTFP, to which the Bank pledged securities with a carrying value of $24.7 million, with no borrowings as of September 30, 2023. The Bank also maintains a line of credit for repurchase agreements up to $100.0 million. The Bank also had three unsecured federal funds lines of credit totaling $115.0 million with no outstanding balances as of September 30, 2023.

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 September 30, 2023 and December 31, 2022.


As of September 30, 2023	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	$	105,209	Other Assets	$	8,602	$	105,209	Other Liabilities	$	8,493
Total derivatives not designated as hedging instruments				$	8,602				$	8,493

As of December 31, 2022	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	$	61,460	Other Assets	$	7,507	$	61,460	Other Liabilities	$	7,375
Total derivatives not designated as hedging instruments				$	7,507				$	7,375

The table below presents the effect of the Company’s derivative financial instruments that are not designated as hedging instruments on the Income Statement for the nine months ended September 30, 2023 and 2022.


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
		Three Months Ended September 30,				Nine Months Ended September 30,
		2023		2022		2023			2022
		(in thousands)
Interest rate products	Other income	$	62	$	35	$	(23	)	$	148
Total		$	62	$	35	$	(23	)	$	148

The Company recognized $0.6 million of fee income from its derivative financial instruments for the nine months ended September 30, 2023. No fee income was earned for the three and nine months ended September 30, 2022.

The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives as of September 30, 2023 and December 31, 2022. 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 September 30, 2023
							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	$	8,602	$	—	$	8,602	$	8,493	$	110	$	—


Offsetting of Derivative Liabilities
As of September 30, 2023
							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	$	8,493	$	—	$	8,493	$	8,493	$	—	$	—


Offsetting of Derivative Assets
As of December 31, 2022
							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	$	7,507	$	—	$	7,507	$	7,375	$	132	$	—


Offsetting of Derivative Liabilities
As of December 31, 2022
							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	$	7,375	$	—	$	7,375	$	7,375	$	—	$	—

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 September 30, 2023 and December 31, 2022, 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 $8.6 million and $7.4 million, respectively. As of September 30, 2023, the Company had not posted any collateral with its counterparties related to these agreements and is adequately collateralized since its net asset position was $110,000 ($8.6 million of fair value of assets less $8.5 million of fair value of liabilities) as of September 30, 2023. As of December 31, 2022, the Company had not posted collateral related to these agreements and was adequately collateralized since its net asset position was $132,000 ($7.5 million of fair value of assets less $7.4 million of fair value of liabilities).

Note 16 — Subsequent Events

Cash Dividend

On October 26, 2023, the Company announced that the Board of Directors of the Company declared a quarterly cash dividend of $0.25 per share to be paid on November 22, 2023 to stockholders of record as of the close of business on November 6, 2023.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is management’s discussion and analysis of our results of operations and financial condition as of and for the three and nine months ended September 30, 2023. This analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Annual Report on Form 10-K”) and with the unaudited consolidated financial statements and notes thereto set forth in this Quarterly Report on Form 10-Q for the period ended September 30, 2023 (this “Report”).

Forward-Looking Statements

Some of the statements contained in this Report are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements in this Report other than statements of historical fact are “forward–looking statements” for purposes of federal and state securities laws, including, but not limited to, statements about anticipated future operating and financial performance, financial condition and liquidity, business strategies, regulatory and competitive outlook, investment and expenditure plans, capital and financing needs and availability, plans and objectives of management for future operations, developments regarding our capital and strategic plans and other similar forecasts and statements of expectation and statements of assumptions underlying any of the foregoing. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue,” or the negative of such terms and other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.

Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, financial condition, levels of activity, performance or achievements to differ from those expressed or implied by the forward-looking statements. These factors include the following: failure to maintain adequate levels of capital and liquidity to support our operations; the effect of potential future supervisory action against us or Hanmi and our ability to address any issues raised in our regulatory exams; general economic and business conditions internationally, nationally and in those areas in which we operate; volatility and deterioration in the credit and equity markets; changes in consumer spending, borrowing and savings habits; our ability to enter into new markets successfully and capitalize on growth opportunities; availability of capital from private and government sources; demographic changes; competition for loans and deposits and failure to attract or retain loans and deposits; fluctuations in interest rates and a decline in the level of our interest rate spread; inflation; potential recessionary conditions; risks of natural disasters; the current or anticipated impact of military conflict, terrorism or other geopolitical events; the impact of a potential government shutdown; a failure in or breach of our operational or security systems or infrastructure, including cyber-attacks; the failure to maintain current technologies; the inability to successfully implement future information technology enhancements; difficult business and economic conditions that can adversely affect our industry and business, including competition, fraudulent activity and negative publicity; risks associated with Small Business Administration loans; failure to attract or retain key employees; our ability to access cost-effective funding; changes in liquidity, including the size and composition of our deposit portfolio, including the percentage of uninsured deposits in the portfolio; fluctuations in real estate values; changes in accounting policies and practices; the continuing impact of the COVID-19 pandemic on our business and results of operation; changes in governmental regulation, including, but not limited to, any increase in Federal Deposit Insurance Corporation insurance premiums; changes in the fiscal and monetary policies of the Board of Governors of the Federal Reserve System; the ability of Hanmi Bank to make distributions to Hanmi Financial Corporation, which is restricted by certain factors, including Hanmi Bank’s retained earnings, net income, prior distributions made, and certain other financial tests; the ability to identify a suitable strategic partner or to consummate a strategic transaction; the adequacy of our allowance for credit losses; our credit quality and the effect of credit quality on our credit losses expense and allowance for credit losses; changes in the financial performance and/or condition of our borrowers and the ability of our borrowers to perform under the terms of their loans and other terms of credit agreements; our ability to control expenses; changes in securities markets; and risks as it relates to cyber security against our information technology infrastructure and those of our third party providers and vendors.

For additional information concerning risks we face, see “Part II, Item 1A. Risk Factors” in this Report and “Item 1A. Risk Factors” in Part I of the 2022 Annual Report on Form 10-K. We undertake no obligation to update these forward-looking statements to reflect events or circumstances that occur after the date on which such statements were made, except as required by law.

Critical Accounting Policies

We have established various accounting policies that govern the application of GAAP in the preparation of our financial statements. Our significant accounting policies are described in the Notes to the consolidated financial statements in our 2022 Annual Report on Form 10-K. We had no significant changes in our accounting policies since the filing of our 2022 Annual Report on Form 10-K.

Certain accounting policies require us to make significant estimates and assumptions that have a material impact on the carrying value of certain assets and liabilities, and we consider these critical accounting policies. For a description of these critical accounting policies, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies” in our 2022 Annual Report on Form 10-K. Actual results could differ significantly from these estimates and assumptions, which could have a material impact on the carrying value of assets and liabilities at the balance sheet dates and our results of operations for the reporting periods. Management has discussed the development and selection of these critical accounting policies with the Audit Committee of the Company’s Board of Directors.

Executive Overview

Net income was $18.8 million, or $0.62 per diluted share, for the three months ended September 30, 2023 compared with $27.2 million, or $0.89 per diluted share, for the same period a year ago. The decrease in net income was primarily driven by a decrease in net interest income of $8.2 million, a $1.0 million increase in noninterest expense primarily attributable to higher salaries and employee benefits, and an increase in credit loss expense of $4.6 million, offset partially by a $2.3 million increase in noninterest income and a $3.1 million decrease in income tax expense. Credit loss expense for the third quarter of 2023 included a $5.2 million provision for loan losses, compared to a $0.6 million in credit loss expense in the third quarter of 2022. Credit loss expense for the third quarter of 2022 included a $0.9 million provision for off-balance sheet items, offset partially by a $0.4 million recovery for loan losses.

For the nine months ended September 30, 2023, net income was $61.4 million, or $2.01 per diluted share, compared with $72.9 million in net income, or $2.39 per diluted share, for the same period a year ago. The decrease in net income was primarily driven by a decrease in net interest income of $5.0 million, a $4.9 million increase in noninterest expense primarily attributable to higher salaries and employee benefits, and an increase of $6.4 million in credit loss expense, offset partially by increase in noninterest income of $0.8 million and a $4.0 million decrease in income tax expense. Credit loss expense for the nine months of 2023 included a $7.9 million provision for loan losses and a $0.7 million recovery for off-balance sheet items compared with a $0.1 million provision for loan losses and a $0.7 million provision for off-balance sheet items for the nine months of 2022.

Other financial highlights include the following:

•

Cash and due from banks decreased $63.4 million to $289.0 million as of September 30, 2023 from $352.4 million at December 31, 2022.

•

Securities decreased $36.6 million to $817.2 million at September 30, 2023 from $853.8 million at December 31, 2022.

•

Loans receivable, before the allowance for credit losses, were $6.02 billion at September 30, 2023 compared with $5.97 billion at December 31, 2022.

•

Deposits were $6.26 billion at September 30, 2023 compared with $6.17 billion at December 31, 2022.

•

Stockholders’ equity at September 30, 2023 was $663.4 million, compared with $637.5 million at December 31, 2022.

•

Return on average assets and return on average stockholders’ equity for the quarter ended September 30, 2023 were 1.00% and 9.88%, respectively. For the nine months of 2023, return on average assets and return on average stockholders’ equity were 1.11% and 11.05%, respectively.

Results of Operations

Net Interest Income

Our primary source of revenue is net interest income, which is the difference between interest derived from earning 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 receivable are affected principally by changes to market interest rates, the demand for loans receivable, 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.

The following table shows the average balance of assets, liabilities and stockholders’ equity; the amount of interest income, on a tax-equivalent basis, 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 for the periods indicated. All average balances are daily average balances.


	Three Months Ended
	September 30, 2023								September 30, 2022
				Interest		Average						Interest		Average
	Average			Income /		Yield /			Average			Income /		Yield /
	Balance			Expense		Rate			Balance			Expense		Rate
Assets	(dollars in thousands)
Interest-earning assets:
Loans receivable (1)	$	5,915,423		$	85,398		5.73	%	$	5,696,587		$	66,976		4.67	%
Securities (2)		955,473			4,204		1.79	%		956,989			3,271		1.40	%
FHLB stock		16,385			317		7.67	%		16,385			245		5.93	%
Interest-bearing deposits in other banks		317,498			4,153		5.19	%		181,401			958		2.09	%
Total interest-earning assets		7,204,779			94,072		5.19	%		6,851,362			71,450		4.15	%

Noninterest-earning assets:
Cash and due from banks		59,994								66,865
Allowance for credit losses		(70,173	)							(73,338	)
Other assets		240,145								250,500
Total assets	$	7,434,745							$	7,095,389

Liabilities and Stockholders’ Equity
Interest-bearing liabilities:
Deposits:
Demand: interest-bearing	$	94,703		$	32		0.13	%	$	121,269		$	32		0.10	%
Money market and savings		1,601,826			12,485		3.09	%		2,079,490			3,807		0.73	%
Time deposits		2,438,112			24,301		3.95	%		1,120,149			2,728		0.97	%
Total interest-bearing deposits		4,134,641			36,818		3.53	%		3,320,908			6,567		0.78	%
Borrowings		120,381			753		2.48	%		123,370			349		1.24	%
Subordinated debentures		129,780			1,646		5.07	%		129,176			1,448		4.37	%
Total interest-bearing liabilities		4,384,802			39,217		3.55	%		3,573,454			8,364		0.93	%

Noninterest-bearing liabilities and equity:
Demand deposits: noninterest-bearing		2,136,156								2,717,810
Other liabilities		159,127								112,336
Stockholders’ equity		754,660								691,789
Total liabilities and stockholders’ equity	$	7,434,745							$	7,095,389

Net interest income				$	54,855							$	63,086

Cost of deposits (3)							2.33	%							0.43	%
Net interest spread (taxable equivalent basis) (4)							1.64	%							3.22	%
Net interest margin (taxable equivalent basis) (5)							3.03	%							3.66	%

(1)

Loans receivable include loans held for sale and exclude the allowance for credit losses. Nonaccrual loans receivable are included in the average loans receivable 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.

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. The variances attributable to simultaneous volume and rate changes have been allocated to the change due to volume and the change due to rate categories in proportion to the relationship of the absolute dollar amount attributable solely to the change in volume and to the change in rate.


	Three Months Ended
	September 30, 2023 vs September 30, 2022
	Increases (Decreases) Due to Change In
	Volume			Rate			Total
	(in thousands)
Interest and dividend income:
Loans receivable (1)	$	2,565		$	15,857		$	18,422
Securities (2)		(5	)		938			933
FHLB stock		—			72			72
Interest-bearing deposits in other banks		718			2,477			3,195
Total interest and dividend income		3,278			19,344			22,622

Interest expense:
Demand: interest-bearing	$	(7	)	$	7		$	—
Money market and savings		(743	)		9,421			8,678
Time deposits		3,868			17,705			21,573
Borrowings		(46	)		450			404
Subordinated debentures		7			191			198
Total interest expense		3,079			27,774			30,853
Change in net interest income	$	199		$	(8,430	)	$	(8,231	)

(1)

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

(2)

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

For the three months ended September 30, 2023 and 2022, net interest income was $54.9 million and $63.1 million, respectively. The net interest spread and net interest margin, on a taxable equivalent basis, for the quarter ended September 30, 2023, were 1.64% and 3.03%, respectively, compared with 3.22% and 3.66%, respectively, for the same period in 2022. Interest and dividend income increased $22.6 million, or 31.7%, to $94.1 million for the three months ended September 30, 2023 from $71.5 million for the same period in 2022, primarily due to higher average interest-earning asset yields and, to a lesser extent, higher loan average balances. Interest expense increased $30.9 million, or 368.9%, to $39.2 million for the three months ended September 30, 2023 from $8.4 million for the same period in 2022 primarily due to higher deposit and borrowing rates due to the rising interest rate environment and due to a higher average balance of deposits.

The average balance of interest earning assets increased $353.4 million, or 5.2%, to $7.20 billion for the three months ended September 30, 2023 from $6.85 billion for the three months ended September 30, 2022. The average balance of loans increased $218.8 million, or 3.8%, to $5.92 billion for the three months ended September 30, 2023 from $5.70 billion for the three months ended September 30, 2022. The average balance of securities decreased $1.5 million, or 0.2%, to $955.5 million for the three months ended September 30, 2023 from $957.0 million for the three months ended September 30, 2022. The average balance of interest-bearing deposits at other banks increased $136.1 million to $317.5 million for the three months ended September 30, 2023 from $181.4 million for the three months ended September 30, 2022.

The average yield on interest-earning assets, on a taxable equivalent basis, increased 104 basis points to 5.19% for the three months ended September 30, 2023, from 4.15% for the three months ended September 30, 2022. The average yield on loans increased to 5.73% for the three months ended September 30, 2023, from 4.67% for the three months ended September 30, 2022. The average yield on securities, on a taxable equivalent basis, increased to 1.79% for the three months ended September 30, 2023, from 1.40% for the three months ended September 30, 2022. The average yield on interest-bearing deposits in other banks increased 310 basis points to 5.19% for the three months ended September 30, 2023, from 2.09% for the three months ended September 30, 2022. The increased yields were primarily due to increases in market interest rates.

The average balance of interest-bearing liabilities increased $811.3 million, or 22.7%, to $4.38 billion for the three months ended September 30, 2023 compared to $3.57 billion for the three months ended September 30, 2022. The average balance of time deposits increased $1.32 billion, offset by decreases in the average balance of money market and savings accounts, interest-bearing demand deposits, and borrowings of $477.7 million, $26.6 million, and $3.0 million, respectively.

The average cost of interest-bearing liabilities was 3.55% and 0.93% for the three months ended September 30, 2023 and 2022, respectively. The average cost of interest-bearing deposits increased 275 basis points to 3.53% for the three months ended September 30, 2023, compared to 0.78% for the three months ended September 30, 2022. The average cost of time deposits increased 298 basis points to 3.95% for the three months ended September 30, 2023 compared to 0.97% for the three months ended September 30, 2022. The average cost of money market and savings accounts increased 236 basis points to 3.09% for the three months ended September 30, 2023 compared to 0.73% for the three months ended September 30, 2022.The average cost of subordinated debentures increased 70 basis points to 5.07% for the three months ended September 30, 2023 compared to 4.37% for the three months ended September 30, 2022. The average cost of borrowings increased 124 basis points to 2.48% for the three months ended September 30, 2023 compared to 1.24% for the three months ended September 30, 2022. The increased costs were primarily due to increases in market interest rates.

The following table shows: the average balance of assets, liabilities and stockholders’ equity; the amount of interest income, on a tax-equivalent basis, and net 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 for the periods indicated. All average balances are daily average balances.


	Nine Months Ended
	September 30, 2023								September 30, 2022
				Interest		Average						Interest		Average
	Average			Income /		Yield /			Average			Income /		Yield /
	Balance			Expense		Rate			Balance			Expense		Rate
Assets	(dollars in thousands)
Interest-earning assets:
Loans receivable (1)	$	5,933,525		$	249,888		5.63	%	$	5,501,957		$	180,755		4.39	%
Securities (2)		969,146			12,356		1.73	%		944,359			8,718		1.89	%
FHLB stock		16,385			888		7.25	%		16,385			735		6.00	%
Interest-bearing deposits in other banks		247,581			9,012		4.87	%		269,772			1,366		0.68	%
Total interest-earning assets		7,166,637			272,144		5.08	%		6,732,473			191,574		3.81	%

Noninterest-earning assets:
Cash and due from banks		62,354								65,911
Allowance for credit losses		(71,236	)							(73,471	)
Other assets		237,111								245,259
Total assets	$	7,394,866							$	6,970,172

Liabilities and Stockholders’ Equity
Interest-bearing liabilities:
Deposits:
Demand: interest-bearing	$	100,997		$	88		0.12	%	$	122,964		$	68		0.07	%
Money market and savings		1,506,776			29,687		2.63	%		2,108,232			6,566		0.42	%
Time deposits		2,355,923			64,656		3.67	%		984,517			4,404		0.60	%
Total interest-bearing deposits		3,963,696			94,431		3.19	%		3,215,713			11,038		0.46	%
Borrowings		194,530			4,755		3.27	%		131,364			1,056		1.13	%
Subordinated debentures		129,632			4,828		4.97	%		156,817			6,394		5.39	%
Total interest-bearing liabilities		4,287,858			104,014		3.24	%		3,503,894			18,488		0.70	%

Noninterest-bearing liabilities and equity:
Demand deposits: noninterest-bearing		2,223,891								2,689,807
Other liabilities		140,070								101,685
Stockholders’ equity		743,047								674,786
Total liabilities and stockholders’ equity	$	7,394,866							$	6,970,172

Net interest income				$	168,130							$	173,086

Cost of deposits (3)							2.04	%							0.25	%
Net interest spread (taxable equivalent basis) (4)							1.84	%							3.10	%
Net interest margin (taxable equivalent basis) (5)							3.14	%							3.44	%

(1)

Loans receivable include loans held for sale and exclude the allowance for credit losses. Nonaccrual loans receivable are included in the average loans receivable 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.


	Nine Months Ended
	September 30, 2023 vs September 30, 2022
	Increases (Decreases) Due to Change In
	Volume			Rate			Total
	(in thousands)
Interest and dividend income:
Loans receivable (1)	$	14,087		$	55,046		$	69,133
Securities (2)		229			3,409			3,638
FHLB stock		—			153			153
Interest-bearing deposits in other banks		(112	)		7,758			7,646
Total interest and dividend income		14,204			66,366			80,570

Interest expense:
Demand: interest-bearing	$	(12	)	$	32		$	20
Money market and savings		(1,719	)		24,840			23,121
Time deposits		6,943			53,309			60,252
Borrowings		508			3,191			3,699
Subordinated debentures		(1,157	)		(409	)		(1,566	)
Total interest expense		4,563			80,963			85,526
Change in net interest income	$	9,641		$	(14,597	)	$	(4,956	)

(1)

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

(2)

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

For the nine months ended September 30, 2023 and 2022, net interest income was $168.1 million and $173.1 million, respectively. The net interest spread and net interest margin, on a taxable equivalent basis, for the nine months ended September 30, 2023, were 1.84% and 3.14%, respectively, compared with 3.10% and 3.44%, respectively, for the same period in 2022. Interest and dividend income increased $80.6 million, or 42.1%, to $272.1 million for the nine months ended September 30, 2023 from $191.6 million for the same period in 2022 due to higher average interest-earning asset yields and higher loan average balances. Interest expense increased $85.5 million, or 462.6%, to $104.0 million for the nine months ended September 30, 2023 from $18.5 million for the same period in 2022 primarily due to higher deposit and borrowing rates due to the rising interest rate environment and higher average deposit balances.

The average balance of interest earning assets increased $434.2 million, or 6.4%, to $7.17 billion for the nine months ended September 30, 2023 from $6.73 billion for the nine months ended September 30, 2022. The average balance of loans increased $431.6 million, or 7.8%, to $5.93 billion for the nine months ended September 30, 2023 from $5.50 billion for the nine months ended September 30, 2022. The average balance of securities increased $24.8 million, or 2.6%, to $969.1 million for the nine months ended September 30, 2023 from $944.4 million for the nine months ended September 30, 2022. The average balance of interest-bearing deposits at other banks decreased $22.2 million to $247.6 million for the nine months ended September 30, 2023 from $269.8 million for the nine months ended September 30, 2022.

The average yield on interest-earning assets, on a taxable equivalent basis, increased 127 basis points to 5.08% for the nine months ended September 30, 2023 from 3.81% for the nine months ended September 30, 2022. The average yield on loans increased to 5.63% for the nine months ended September 30, 2023 from 4.39% for the nine months ended September 30, 2022. The average yield on securities, on a taxable equivalent basis, decreased to 1.73% for the nine months ended September 30, 2023 from 1.89% for the nine months ended September 30, 2022. The average yield on interest-bearing deposits in other banks increased 419 basis points to 4.87% for the nine months ended September 30, 2023, from 0.68% for the nine months ended September 30, 2022. The increased yields were primarily due to increases in market interest rates.

The average balance of interest-bearing liabilities increased $784.0 million, or 22.4%, to $4.29 billion for the nine months ended September 30, 2023 compared to $3.50 billion for the nine months ended September 30, 2022. The average balance of time deposits and borrowings increased $1.40 billion and $63.2 million, respectively, offset by decreases in the average balance of money

market and savings accounts, subordinated debentures, and interest-bearing demand deposits of $601.5 million, $27.2 million, and $22.0 million, respectively.

The average cost of interest-bearing liabilities was 3.24% and 0.70% for the nine months ended September 30, 2023 and 2022, respectively. The average cost of interest-bearing deposits increased 273 basis points to 3.19% for the nine months ended September 30, 2023, compared to 0.46% for the nine months ended September 30, 2022. The average cost of time deposits increased 307 basis points to 3.67% for the nine months ended September 30, 2023 compared to 0.60% for the nine months ended September 30, 2022. The average cost of money market and savings accounts increased 221 basis points to 2.63% for the nine months ended September 30, 2023 compared to 0.42% for the nine months ended September 30, 2022. The average cost of subordinated debentures decreased 42 basis points to 4.97% for the nine months ended September 30, 2023 compared to 5.39% for the nine months ended September 30, 2022, due to a pre-tax charge of $1.1 million for the nine months ended September 30, 2022 for the remaining debt issuance costs due upon redemption on the 2027 Notes. The average cost of borrowings increased 214 basis points to 3.27% for the nine months ended September 30, 2023 compared to 1.13% for the nine months ended September 30, 2022. The increased costs were primarily due to increases in market interest rates.

Credit Loss Expense

For the third quarter of 2023, the Company recorded $5.2 million of credit loss expense, comprised of a $5.2 million provision for loan losses. For the same period in 2022, the Company recorded $0.6 million of credit loss expense, comprised of a $0.4 million recovery of credit loss expense for loan losses, and a $0.9 million provision for off-balance sheet items. The credit loss expense for the three months ended September 30, 2023 was mainly attributable to $6.1 million of charge-offs, for which there were specific reserve allocations of $4.3 million in the first six months in 2023. The credit loss expense for the three months ended September 30, 2022 resulted from strong loan growth, offset by a combination of overall improvements in asset quality and economic forecasts.

For the nine months ended September 30, 2023, the Company recorded $7.2 million of credit loss expense, comprised of a $7.9 million provision for loan losses, and a $0.7 million negative provision for off-balance sheet items. For the same period in 2022, the Company recorded a $0.8 million of credit loss expense, comprised of a $0.1 million provision for loan losses, and a $0.7 million provision for off-balance sheet items. The credit loss expense for the nine months ended September 30, 2023 was mainly attributable to a $5.2 million charge-off, of which there was a specific reserve allocation of $3.3 million in the first six months in 2023, on a $10.0 million nonperforming commercial and industrial loan in the health-care industry, and a $1.0 million charge-off, of which there was a specific reserve allocation of $1.0 million in the first six months in 2023, on a nonperforming commercial and industrial loan. The credit loss expense for the nine months ended September 30, 2022 resulted from a combination of overall improvements in asset quality and economic forecasts.

See also “Allowance for Credit Losses and Allowance for Credit Losses Related to Off-Balance Sheet Items” for further details.

Noninterest Income

The following table sets forth the various components of noninterest income for the periods indicated:


	Three Months Ended September 30,				Increase (Decrease)			Increase (Decrease)
	2023		2022		Amount			Percent
	(in thousands)
Service charges on deposit accounts	$	2,605	$	2,996	$	(391	)		(13.05	)%
Trade finance and other service charges and fees		1,155		1,132		23			2.03
Servicing income		838		635		203			31.97
Bank-owned life insurance income		280		245		35			14.29
All other operating income		1,178		1,656		(478	)		(28.86	)
Service charges, fees & other		6,056		6,664		(608	)		(9.12	)
Gain on sale of SBA loans		1,172		2,250		(1,078	)		(47.91	)
Gain on sale of bank premises		4,000		—		4,000			100.00	%
Total noninterest income	$	11,228	$	8,914	$	2,314			25.96	%

For the three months ended September 30, 2023, noninterest income was $11.2 million, an increase of $2.3 million, or 26.0%, compared with $8.9 million for the same period in 2022. The increase was attributable to a $4.0 million gain on the sale-leaseback of a branch property (see "Note 13 - Leases" to the consolidated financial statements for more details), partially offset by

a $1.1 million decrease in the gain on loan sales resulting from lower volume and net trade premiums, and a $0.4 million decrease in service charges on deposit accounts.

The following table sets forth the various components of noninterest income for the periods indicated:


	Nine Months Ended September 30,					Increase (Decrease)			Increase (Decrease)
	2023			2022		Amount			Percent
	(in thousands)
Service charges on deposit accounts	$	7,756		$	8,745	$	(989	)		(11.31	)%
Trade finance and other service charges and fees		3,586			3,690		(104	)		(2.82	)
Servicing income		2,405			2,032		373			18.36
Bank-owned life insurance income		821			735		86			11.70
All other operating income		4,606			3,996		610			15.27
Service charges, fees & other		19,174			19,198		(24	)		(0.13	)
Gain on sale of SBA loans		4,253			7,545		(3,292	)		(43.63	)
Net gain (loss) on sales of securities		(1,871	)		—		(1,871	)		(100.00	)%
Gain on sale of bank premises		4,000			—		4,000			100.00	%
Legal settlement		1,943			—		1,943			100.00	%
Total noninterest income	$	27,499		$	26,743	$	756			2.83	%

For the nine months ended September 30, 2023, noninterest income was $27.5 million, an increase of $0.8 million, or 2.8%, compared with $26.7 million for the same period in 2022. The increase was attributable to a $4.0 million gain on the sale-leaseback of a branch property (see "Note 13 - Leases" to the consolidated financial statements for more details) and a $1.9 million legal settlement, offset by a $3.3 million decrease in gain on loan sales resulting from lower volume and net trade premiums, and a $1.9 million net loss on sales of $8.1 million of securities.

Noninterest Expense

The following table sets forth the components of noninterest expense for the periods indicated:


	Three Months Ended September 30,					Increase (Decrease)			Increase (Decrease)
	2023		2022			Amount			Percent
	(in thousands)
Salaries and employee benefits	$	20,361	$	19,365		$	996			5.14	%
Occupancy and equipment		4,825		4,736			89			1.88
Data processing		3,490		3,352			138			4.12
Professional fees		1,568		1,249			319			25.54
Supplies and communications		552		710			(158	)		(22.25	)
Advertising and promotion		534		1,186			(652	)		(54.97	)
All other operating expenses		2,852		2,698			154			5.71
Subtotal		34,182		33,296			886			2.66
Other real estate owned expense		16		2			14			700.00
Repossessed personal property expense (income)		47		(23	)		70			(304.35	)
Total noninterest expense	$	34,245	$	33,275		$	970			2.92	%

For the three months ended September 30, 2023, noninterest expense was $34.2 million, an increase of $1.0 million, or 2.9%, compared with $33.3 million for the same period in 2022. Salaries and employee benefits increased due to annual merit increases and a decrease in capitalized loan origination costs from lower loan originations.

The following table sets forth the components of noninterest expense for the periods indicated:


	Nine Months Ended September 30,						Increase (Decrease)			Increase (Decrease)
	2023			2022			Amount			Percent
	(in thousands)
Salaries and employee benefits	$	61,336		$	55,861		$	5,475			9.80	%
Occupancy and equipment		13,737			13,979			(242	)		(1.73	)
Data processing		10,208			9,702			506			5.22
Professional fees		4,278			3,909			369			9.44
Supplies and communications		1,866			1,956			(90	)		(4.60	)
Advertising and promotion		2,114			2,664			(550	)		(20.65	)
All other operating expenses		8,054			8,346			(292	)		(3.50	)
Subtotal		101,593			96,417			5,176			5.37
Other real estate owned expense (income)		(181	)		64			(245	)		(382.81	)
Repossessed personal property expense (income)		(96	)		(40	)		(56	)		140.00
Total noninterest expense	$	101,316		$	96,441		$	4,875			5.05	%

For the nine months ended September 30, 2023, noninterest expense was $101.3 million, an increase of $4.9 million, or 5.1%, compared with $96.4 million for the same period in 2022, primarily due to a $5.5 million increase in salaries and employee benefits. Salaries and employee benefits increased due to annual merit and bonus increases and a decrease in capitalized loan origination costs resulting from lower loan originations.

Income Tax Expense

Income tax expense was $7.9 million and $11.0 million representing an effective income tax rate of 29.6% and 28.8% for the three months ended September 30, 2023 and 2022, respectively. The increase in the effective tax rate for the three months ended September 30, 2023, compared to the same period in 2022 was principally due to an increase in permanently non-deductible expenses.

Income tax expense was $25.7 million and $29.7 million representing an effective income tax rate of 29.5% and 28.9% for the nine months ended September 30, 2023 and 2022, respectively. The increase in the effective tax rate for the nine months ended September 30, 2023, compared to the same period in 2022 was principally due to an increase in permanently non-deductible expenses.

Financial Condition

Securities

As of September 30, 2023, our securities portfolio consisted of U.S. government agency and sponsored agency mortgage-backed securities, collateralized mortgage obligations and debt securities, tax-exempt municipal bonds and U.S. Treasury securities. Most of these securities carry fixed interest rates. Other than holdings of U.S. government agency and sponsored agency obligations, there were no securities of any one issuer exceeding 10% of stockholders’ equity as of September 30, 2023 or December 31, 2022. Securities decreased $36.6 million to $817.2 million at September 30, 2023 from $853.8 million at December 31, 2022, mainly attributed to $74.0 million in paydowns and maturities and $8.1 million in securities sales, offset partially by $64.8 million in securities purchases.

The following table summarizes the contractual maturity schedule for securities, at amortized cost, and their cost weighted average yield, which is calculated using amortized cost as the weight, as of September 30, 2023:


						After One Year But					After Five Years But
	Within One Year					Within Five Years					Within Ten Years					After Ten Years					Total
	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
	(dollars in thousands)
Securities available for sale:
U.S. Treasury securities	$	30,588		3.86	%	$	41,973		3.48	%	$	—		0.00	%	$	—		0.00	%	$	72,561		3.64	%
U.S. government agency and sponsored agency obligations:
Mortgage-backed securities - residential		15		2.85			53		2.97			14,059		4.19			493,795		1.56			507,922		1.63
Mortgage-backed securities - commercial		—		—			8,672		2.22			—		—			51,735		1.55			60,407		1.65
Collateralized mortgage obligations		—		—			209		1.28			533		2.43			97,853		2.65			98,595		2.65
Debt securities		20,439		2.44			119,970		1.24			—		—			—		—			140,409		1.41
Total U.S. government agency and sponsored agency obligations		20,454		2.44			128,904		1.31			14,592		4.13			643,383		1.72			807,333		1.72
Municipal bonds-tax exempt												23,105		1.38			54,273		1.32			77,378		1.34
Total securities available for sale	$	51,042		3.29	%	$	170,877		1.84	%	$	37,697		2.44	%	$	697,656		1.69	%	$	957,272		1.84	%

Loans Receivable

As of September 30, 2023 and December 31, 2022, loans receivable (excluding loans held for sale), net of deferred loan fees and costs, discounts and allowance for credit losses, were $5.95 billion and $5.90 billion, respectively. The increase primarily reflected $899.1 million in new loan production, offset partially by $381.2 million in loan sales and payoffs, and amortization and other reductions of $460.7 million. Loan production primarily consisted of residential mortgages of $252.4 million, commercial real estate of $222.7 million, equipment financing agreements of $191.3 million, SBA loans of $101.5 million and commercial and industrial loans of $131.3 million.

The table below shows the maturity distribution of outstanding loans, before the allowance for credit losses as of September 30, 2023. In addition, the table shows the distribution of such loans between those with floating or variable interest rates and those with fixed or predetermined interest rates.


	Within One Year		After One Year but Within Three Years		After Three Years but Within Five Years		After Five Years but Within Fifteen Years		After Fifteen Years		Total
	(in thousands)
Real estate loans:
Commercial property
Retail	$	106,850	$	309,381	$	326,972	$	304,862	$	49,585	$	1,097,650
Hospitality		112,762		221,180		203,189		150,096		18,508		705,735
Office		47,098		224,249		260,424		36,986		6,562		575,319
Other		115,740		455,935		413,306		272,611		51,915		1,309,507
Total commercial property loans		382,450		1,210,745		1,203,891		764,555		126,570		3,688,211
Construction		54,417		28,300		2,087		—		—		84,804
Residential		4,146		87		13		4,748		917,332		926,326
Total real estate loans		441,013		1,239,132		1,205,991		769,303		1,043,902		4,699,341
Commercial and industrial loans		261,849		208,382		146,895		111,666		—		728,792
Equipment financing agreements		27,961		187,771		351,805		25,115		—		592,652
Loans receivable	$	730,823	$	1,635,285	$	1,704,691	$	906,084	$	1,043,902	$	6,020,785
Loans with predetermined interest rates		340,129		1,127,237		1,240,803		142,827		267,051		3,118,047
Loans with variable interest rates		390,694		508,048		463,888		763,257		776,851		2,902,738

The table below shows the maturity distribution of outstanding loans, before the allowance for credit losses, with fixed or predetermined interest rates due after one year, as of September 30, 2023.


	After One Year but Within Three Years		After Three Years but Within Five Years		After Five Years but Within Fifteen Years		After Fifteen Years		Total
	(in thousands)
Real estate loans:
Commercial property
Retail	$	281,108	$	229,594	$	44,492	$	247	$	555,441
Hospitality		77,037		171,531		5,583		—		254,151
Office		162,339		200,159		2,579		—		365,077
Other		388,010		281,785		52,671		7,342		729,808
Total commercial property loans		908,494		883,069		105,325		7,589		1,904,477
Construction		28,300		—		—		—		28,300
Residential		87		13		2,624		259,462		262,186
Total real estate loans		936,881		883,082		107,949		267,051		2,194,963
Commercial and industrial loans		2,585		5,917		9,763		—		18,265
Equipment financing agreements		187,771		351,804		25,115		—		564,690
Loans receivable	$	1,127,237	$	1,240,803	$	142,827	$	267,051	$	2,777,918

The table below shows the maturity distribution of outstanding loans, before the allowance for credit losses, with floating or variable interest rates (including hybrids) due after one year, as of September 30, 2023.


	After One Year but Within Three Years		After Three Years but Within Five Years		After Five Years but Within Fifteen Years		After Fifteen Years		Total
	(in thousands)
Real estate loans:
Commercial property
Retail	$	28,273	$	97,378	$	260,370	$	49,339	$	435,360
Hospitality		144,143		31,658		144,513		18,508		338,822
Office		61,910		60,265		34,407		6,562		163,144
Other		67,925		131,522		219,941		44,571		463,959
Total commercial property loans		302,251		320,823		659,231		118,980		1,401,285
Construction		—		2,087		—		—		2,087
Residential		—		—		2,124		657,871		659,995
Total real estate loans		302,251		322,910		661,355		776,851		2,063,367
Commercial and industrial loans		205,797		140,978		101,902		—		448,677
Loans receivable	$	508,048	$	463,888	$	763,257	$	776,851	$	2,512,044

Industry

As of September 30, 2023, the loan portfolio included the following concentrations of loans to one type of industry that were greater than 10.0% of loans receivable outstanding:


			Percentage of
	Balance as of		Loans Receivable
	September 30, 2023		Outstanding
	(in thousands)
Lessor of nonresidential buildings	$	1,740,544		28.9	%
Hospitality		709,757		11.8	%

Loan Quality Indicators

Loans 30 to 89 days past due and still accruing were $9.5 million at September 30, 2023, compared with $7.5 million at December 31, 2022, attributable mainly to an increase of $1.3 million in past due residential loans and a $0.7 million multifamily commercial real estate relationship.

At September 30, 2023 and December 31, 2022, there were no loans 90 days or more past due and still accruing interest.

Special mention loans were $76.5 million at September 30, 2023 compared with $79.0 million at December 31, 2022. The $2.5 million decrease in special mention loans included upgrades to pass loans of $51.3 million, downgrades to classified loans of $10.2 million, and pay downs and payoffs of $1.8 million, offset by downgrades from pass loans of $60.8 million.

Classified loans were $33.1 million at September 30, 2023 compared with $46.2 million at December 31, 2022. The $13.1 million decrease was primarily driven by loan upgrades of $18.4 million, pay downs and payoffs of $5.9 million, and charge-offs of $13.1 million, offset by the downgrade of one previously mentioned nonperforming commercial and industrial health-care industry loan in the amount of $10.0 million, downgrades of $4.5 million in equipment financing agreements, and $11.2 million in other loan downgrades.

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


	Special Mention			Classified
	(in thousands)
September 30, 2023
Balance at January 1, 2023	$	79,013		$	46,192
Additions		60,814			14,226
Reductions		(63,355	)		(27,284	)
Balance at September 30, 2023	$	76,473		$	33,134

December 31, 2022
Balance at January 1, 2022	$	95,294		$	60,633
Additions		133,134			15,808
Reductions		(149,415	)		(30,249	)
Balance at December 31, 2022	$	79,013		$	46,192

Nonperforming Assets

Nonperforming loans consist of loans receivable on nonaccrual status 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. Interest income is recognized on the accrual basis for impaired loans not meeting the criteria for nonaccrual. OREO consists of properties acquired by foreclosure or similar means, or vacant bank properties for which their usage for operations has ceased and management intends to offer them for sale.

Except for nonaccrual loans, management is not aware of any other loans as of September 30, 2023 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 or equipment financing agreement repayment terms, or any known events that would result in a loan or equipment financing agreement being designated as nonperforming at some future date. Management cannot, however, predict the extent to which a deterioration in general economic conditions, real estate values, increases in general rates of interest, inflation or changes in the financial condition or business of borrowers may adversely affect a borrower’s ability to pay.

Nonperforming loans were $15.8 million at September 30, 2023, or 0.26% of loans, compared with $9.8 million at December 31, 2022, or 0.17% of the portfolio. The increase primarily reflects the addition of a $10.0 million nonperforming commercial and industrial loan in the health-care industry, on which a charge-off of $5.1 million occurred in the three months ended September 30, 2023.

Nonperforming assets were $15.9 million at September 30, 2023, or 0.22% of total assets, compared with $10.0 million, or 0.14%, at December 31, 2022. Additionally, not included in nonperforming assets were repossessed personal property assets associated with equipment finance agreements of $1.3 million and $0.5 million at September 30, 2023 and December 31, 2022, 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 were $15.8 million and $9.8 million as of September 30, 2023 and December 31, 2022, respectively, representing an increase of $5.9 million, or 60.3%. The increase primarily reflects the addition of a $10.0 million nonperforming commercial and industrial loan in the health-care industry, of which $5.2 million was charged off in the nine months ended September 30, 2023. Specific allowances associated with individually evaluated loans decreased $0.4 million to $2.9 million as of September 30, 2023 compared with $3.3 million as of December 31, 2022.

No loans were modified to borrowers with financial difficulties during the three and nine months ended September 30, 2023 or 2022.

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

The Company’s estimate of the allowance for credit losses at September 30, 2023 and December 31, 2022 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.

Management utilized three loss methodologies for its collective allowance estimation. At September 30, 2023, the Company used the discounted cash flow (“DCF”) method to estimate allowances for credit losses for the commercial and industrial loan portfolio, the Probability of Default/Loss Given Default (“PD/LGD”) method for the commercial real estate, construction, SBA and residential real estate portfolios, and the Weighted Average Remaining Maturity (“WARM”) method to estimate expected credit losses for the equipment financing agreements portfolio. Loans that do not share similar risk characteristics are individually evaluated for allowances.

For the loans utilizing the DCF method, the Company determined that four quarters represented a reasonable and supportable forecast period and reverted to a historical loss rate over twelve quarters on a straight-line basis. Reasonable and supportable forecasts of economic conditions are embedded in the DCF model.

For each of the loan segments identified above, the Company applied an annualized historical PD/LGD using all available historical periods. The PD/LGD method incorporates a forecast of economic conditions into loss estimates using a qualitative adjustment.

The Company applied an expected loss ratio based on internal historical losses adjusted as appropriate for qualitative factors when applying the WARM method.

As of September 30, 2023 and December 31, 2022, the Company relied on the economic projections from Moody’s to inform its loss driver forecasts over the four-quarter forecast period. For all loan pools, the Company utilizes and forecasts the national unemployment rate as the primary loss driver.

To adjust the historical and forecast periods to current conditions under the PD/LGD and WARM methods, the Company applies various qualitative factors derived from market, industry or business specific data, changes in the underlying portfolio composition, trends relating to credit quality, delinquency, nonperforming and adversely rated equipment financing agreements, and reasonable and supportable forecasts of economic conditions.

The allowance for credit losses was $67.3 million at September 30, 2023 compared with $71.5 million at December 31, 2022. The allowance attributed to individually evaluated loans was $2.9 million at September 30, 2023 compared with $3.3 million at December 31, 2022. The allowance attributed to collectively evaluated loans was $64.5 million at September 30, 2023 compared with $68.2 million at December 31, 2022, and considered the impact of changes in macroeconomic assumptions, normalized interest rate forecasts for the subsequent four quarters, and a net reduction in specific qualitative factors allocated to criticized hospitality loans impacted by the pandemic.

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:


	September 30, 2023										December 31, 2022
	Allowance Amount		Percentage of Total Allowance			Total Loans		Percentage of Total Loans			Allowance Amount		Percentage of Total Allowance			Total Loans		Percentage of Total Loans
	(dollars in thousands)
Real estate loans:
Commercial property
Retail	$	10,083		15.0	%	$	1,097,650		18.3	%	$	7,872		11.0	%	$	1,023,608		17.2	%
Hospitality		15,083		22.4			705,735		11.7			13,407		18.7			646,893		10.8
Office		2,884		4.3			575,319		9.6			2,293		3.2			499,946		8.4
Other		8,321		12.3			1,309,507		21.7			13,056		18.3			1,553,729		26.0
Total commercial property loans		36,371		54.0			3,688,211		61.3			36,628		51.2			3,724,176		62.4
Construction		2,594		3.9			84,804		1.4			4,022		5.7			109,205		1.8
Residential		4,871		7.2			926,326		15.4			3,376		4.7			734,472		12.4
Total real estate loans		43,836		65.1			4,699,341		78.1			44,026		61.6			4,567,853		76.6
Commercial and industrial loans		11,242		16.7			728,792		12.1			15,267		21.3			804,492		13.4
Equipment financing agreements		12,235		18.2			592,652		9.8			12,230		17.1			594,788		10.0
Total	$	67,313		100.0	%	$	6,020,785		100.0	%	$	71,523		100.0	%	$	5,967,133		100.0	%

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


	As of
	September 30, 2023			December 31, 2022
	(dollars in thousands)
Ratios:
Allowance for credit losses to loans receivable		1.12	%		1.20	%
Nonaccrual loans to loans		0.26	%		0.17	%
Allowance for credit losses to nonaccrual loans		426.49	%		726.34	%

Balance:
Nonaccrual loans at end of period	$	15,783		$	9,847
Nonperforming loans at end of period	$	15,783		$	9,847

As of September 30, 2023 and December 31, 2022, the allowance for credit losses related to off-balance sheet items, primarily unfunded loan commitments, was $2.5 million and $3.1 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 and prevailing economic conditions, we believe these allowances were adequate for current expected lifetime losses in the loan portfolio and off-balance sheet exposure as of September 30, 2023.

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


	Three Months Ended								Nine Months Ended
	Average Loans		Net (Charge-Offs) Recoveries			Net (Charge-Offs) Recoveries to Average Loans (1)			Average Loans		Net (Charge-Offs) Recoveries			Net (Charge-Offs) Recoveries to Average Loans (1)
	(dollars in thousands)
September 30, 2023
Commercial real estate loans	$	3,719,876	$	(166	)		(0.02	)%	$	3,759,932	$	(453	)		(0.02	)%
Residential loans		906,977		—			—			847,633		6			0.00
Commercial and industrial loans		697,454		(6,182	)		(3.55	)		729,893		(5,704	)		(1.04	)
Equipment financing agreements		591,116		(2,530	)		(1.71	)		596,067		(5,921	)		(1.32	)
Total	$	5,915,423	$	(8,878	)		(0.60	)%	$	5,933,525	$	(12,072	)		(0.27	)%

September 30, 2022
Commercial real estate loans	$	3,845,616	$	984			0.10	%	$	3,825,584	$	1,256			0.04	%
Residential loans		583,190		(1,967	)		(1.35	)		488,420		(2,510	)		(0.69	)
Commercial and industrial loans		713,746		220			0.12			666,911		592			0.12
Equipment financing agreements		554,035		(347	)		(0.25	)		521,042		(431	)		(0.11	)
Total	$	5,696,587	$	(1,110	)		(0.08	)%	$	5,501,957	$	(1,093	)		(0.03	)%

(1)

Annualized

For the three months ended September 30, 2023, gross charge-offs were $9.4 million, an increase of $7.3 million, from $2.1 million for the same period in 2022 and gross recoveries were $0.5 million, a decrease of $0.5 million, from $1.0 million for the three months ended September 30, 2022. Net loan charge-offs were $8.9 million, or 0.60% of average loans, compared with net loan charge-offs of $1.1 million, or 0.08% of average loans, for the three months ended September 30, 2023 and 2022, respectively. Gross charge-offs for the three months ended September 30, 2023 primarily consisted of the $5.1 million charge-off on a nonperforming commercial and industrial loan in the health-care industry, the $1.0 million charge-off on a nonperforming commercial and industrial loan, and equipment financing arrangement charge-offs of $2.8 million.

For the nine months ended September 30, 2023, gross charge-offs were $14.3 million, an increase of $10.8 million, from $3.5 million for the same period in 2022 and gross recoveries were $2.2 million, a decrease of $0.2 million, from $2.4 million for the nine months ended September 30, 2022. Net loan charge-offs were $12.1 million, or 0.27% of average loans, compared with net loan charge-offs of $1.1 million, or 0.03% of average loans, for the nine months ended September 30, 2023 and 2022, respectively. Gross charge-offs for the nine months ended September 30, 2023 primarily consisted of the $5.1 million charge-off on a nonperforming commercial and industrial loan in the health-care industry, the $1.0 million charge-off on a nonperforming commercial and industrial loan, and $7.1 million of charge-offs of equipment financing arrangements.

Deposits

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


	September 30, 2023					December 31, 2022
	Balance		Percent			Balance		Percent
	(dollars in thousands)
Demand – noninterest-bearing	$	2,161,238		34.5	%	$	2,539,602		41.3	%
Interest-bearing:
Demand		88,133		1.4			115,573		1.9
Money market and savings		1,576,006		25.2			1,556,690		25.2
Uninsured amount of time deposits more than $250,000:
Three months or less		148,401		2.4			44,828		0.7
Over three months through six months		338,893		5.4			123,471		2.0
Over six months through twelve months		200,456		3.2			191,248		3.1
Over twelve months		4,254		0.1			138,451		2.2
All other insured time deposits		1,742,691		27.8			1,458,209		23.6
Total deposits	$	6,260,072		100.0	%	$	6,168,072		100.0	%

Total deposits were $6.26 billion and $6.17 billion as of September 30, 2023 and December 31, 2022, respectively, representing an increase of $92.0 million, or 1.5%. The increase in deposits was primarily driven by an increase of $478.5 million in time deposits, offset by a decrease of $386.5 million in demand deposits due to rising market rates and the shift to time deposits. At September 30, 2023, the loan-to-deposit ratio was 96.2% compared with 96.7% at December 31, 2022.

As of September 30, 2023, the aggregate amount of uninsured deposits (deposits in amounts greater than $250,000, which is the maximum amount for federal deposit insurance) was $2.49 billion, of which $1.80 billion were demand, money market and savings deposits and $692.0 million were time deposits. As of December 31, 2022, the aggregate amount of uninsured deposits was $2.65 billion, consisting of $2.15 billion in demand, money market and savings deposits and $498.0 million in time deposits.

Borrowings and Subordinated Debentures

Borrowings mostly take the form of advances from the FHLB. At September 30, 2023 and December 31, 2022, total advances from the FHLB were $162.5 million and $350.0 million, respectively. The Bank had $50.0 million and $250.0 million of overnight advances from the FHLB at September 30, 2023 and December 31, 2022, respectively. Excess funds from deposit growth were used to pay off borrowings.

The weighted-average interest rate of all FHLB advances at September 30, 2023 and December 31, 2022 was 3.69% and 3.57%, respectively.

The FHLB maximum amount outstanding at any month end during each of the year-to-date periods ended September 30, 2023 and December 31, 2022 was $450.0 million and $350.0 million, respectively.

The following is a summary of contractual maturities of FHLB advances greater than twelve months:


	September 30, 2023					December 31, 2022
FHLB of San Francisco	Outstanding Balance		Weighted Average Rate			Outstanding Balance		Weighted Average Rate
	(dollars in thousands)
Advances due over 12 months through 24 months	$	12,500		1.90	%	$	37,500		0.40	%
Advances due over 24 months through 36 months		62,500		4.37			12,500		1.90
Outstanding advances over 12 months	$	75,000		3.96	%	$	50,000		0.78	%

Subordinated debentures were $129.9 million and $129.4 million as of September 30, 2023 and December 31, 2022, respectively. Subordinated debentures are comprised of fixed-to-floating subordinated notes of $108.3 million and $108.2 million as of September 30, 2023 and December 31, 2022, respectively, and junior subordinated deferrable interest debentures of $21.6 million and $21.2 million as of September 30, 2023 and December 31, 2022, respectively. See “Note 8 – Borrowings and Subordinated Debentures” to the consolidated financial statements for more details.

Stockholders' Equity

Stockholders’ equity at September 30, 2023 was $663.4 million, compared with $637.5 million at December 31, 2022. The increase was primarily due to $61.4 million of net income for the nine months ended September 30, 2023, offset by $22.9 million of cash dividends, a $10.4 million unrealized after-tax loss due to changes in the value of the securities portfolio, and $3.3 million to repurchase 200,000 shares of Company stock.

Interest Rate Risk Management

The spread between interest income on interest-earning assets and interest expense on interest-bearing liabilities is the principal component of net interest income, and interest rate changes substantially affect our financial performance. We emphasize capital protection through stable earnings. In order to achieve stable earnings, we prudently manage our assets and liabilities and closely monitor the percentage changes in net interest income and equity value in relation to limits established within our guidelines.

The Company performs simulation modeling to estimate the potential effects of interest rate changes. The following table summarizes one of the stress simulations performed to forecast the impact of changing interest rates on net interest income and the value of interest-earning assets and interest-bearing liabilities reflected on our balance sheet (i.e., an instantaneous parallel shift in the yield curve of the magnitude indicated below) as of September 30, 2023. The Company compares this stress simulation to policy limits, which specify the maximum tolerance level for net interest income exposure over a 1- to 12-month and a 13- to 24- month horizon, given the basis point adjustment in interest rates reflected below.


	Net Interest Income Simulation
	1- to 12-Month Horizon						13- to 24-Month Horizon
Change in Interest	Dollar			Percentage			Dollar			Percentage
Rates (Basis Points)	Change			Change			Change			Change
	(dollars in thousands)
300	$	(2,959	)		(1.29	%)	$	7,690			2.98	%
200	$	(2,880	)		(1.25	%)	$	2,768			1.07	%
100	$	(518	)		(0.23	%)	$	3,524			1.37	%
-100	$	(1,272	)		(0.55	%)	$	(7,326	)		(2.84	%)
-200	$	(4,316	)		(1.88	%)	$	(18,706	)		(7.25	%)
-300	$	(8,856	)		(3.85	%)	$	(34,055	)		(13.20	%)


	Economic Value of Equity (EVE)
Change in Interest	Dollar			Percentage
Rates (Basis Points)	Change			Change
	(dollars in thousands)
300	$	(65,578	)		(8.56	%)
200	$	(46,754	)		(6.10	%)
100	$	(13,809	)		(1.80	%)
-100	$	(4,035	)		(0.53	%)
-200	$	(29,532	)		(3.85	%)
-300	$	(75,957	)		(9.91	%)

The estimated sensitivity does not necessarily represent our forecast, and the results may not be indicative of actual changes to our net interest income. These estimates are based upon a number of assumptions, including the timing and magnitude of interest rate changes, prepayments on loans receivable and securities, pricing strategies on loans receivable and deposits, and replacement of asset and liability cash flows.

The key assumptions, based upon loans receivable, securities and deposits, are as follows:


Conditional prepayment rates*:
Loans receivable	15	%
Securities	6	%
Deposit rate betas*:
NOW, savings, money market demand	47	%
Time deposits, retail and wholesale	76	%

* Balance-weighted average

While the assumptions used are based on current economic and local market conditions, there is no assurance as to the predictive nature of these conditions, including how customer preferences or competitor influences might change.

Capital Resources and Liquidity

Capital Resources

Historically, our primary source of capital has been the retention of operating earnings. In order to ensure adequate capital levels, the Board regularly assesses projected sources and uses of capital, expected loan growth, anticipated strategic actions (such as stock repurchases and dividends), and projected capital thresholds under adverse and severely adverse economic conditions. In addition, the Board considers the Company’s access to capital from financial markets through the issuance of additional debt and securities, including common stock or notes, to meet its capital needs.

In response to the uncertainty surrounding the COVID-19 pandemic, the Board reduced the quarterly cash dividends paid on common stock beginning in the second quarter of 2020. Due to the continued stabilization of Company results and financial condition, the Board authorized an increase in the quarterly cash dividend for the second quarter of 2021. As the effects of the pandemic continued to subside and the Company’s results and financial condition improved, the Board again increased the dividend from $0.20 per share for the fourth quarter of 2021, to $0.22 per share for the first and second quarters of 2022, and then to $0.25 per share for the third and fourth quarters of 2022. The dividend continued at $0.25 per share for each quarter of 2023.

The Company’s ability to pay dividends to shareholders depends in part upon dividends it receives from the Bank. California law restricts the amount available for cash dividends to the lesser of a bank’s retained earnings or net income for its last three fiscal years (less any distributions to shareholders made during such period). Where the above test is not met, cash dividends may still be paid, with the prior approval of the Department of Financial Protection and Innovation (“DFPI”), in an amount not exceeding the greater of: (1) retained earnings of the bank; (2) net income of the bank for its last fiscal year; or (3) the net income of the bank for its current fiscal year. As of October 1, 2023, the Bank has the ability to pay dividends of approximately $130.1 million, after giving effect to the $0.25 dividend declared for the fourth quarter of 2023, without the prior approval of the Commissioner of the DFPI.

At September 30, 2023, the Bank’s total risk-based capital ratio of 14.42%, Tier 1 risk-based capital ratio of 13.42%, common equity Tier 1 capital ratio of 13.42% and Tier 1 leverage capital ratio of 11.25%, placed the Bank in the “well capitalized” category pursuant to capital rules, which is defined as institutions with total risk-based capital ratio equal to or greater than 10.00%,

Tier 1 risk-based capital ratio equal to or greater than 8.00%, common equity Tier 1 capital ratios equal to or greater than 6.50%, and Tier 1 leverage capital ratio equal to or greater than 5.00%.

At September 30, 2023, the Company's total risk-based capital ratio was 15.07%, Tier 1 risk-based capital ratio was 12.30%, common equity Tier 1 capital ratio was 11.95% and Tier 1 leverage capital ratio was 10.27%.

For a discussion of implemented changes to the capital adequacy framework prompted by Basel III and the Dodd- Frank Wall Street Reform and Consumer Protection Act, see our 2022 Annual Report on Form 10-K.

Liquidity

For a discussion of liquidity for the Company, see Note 14 - Liquidity included in the notes to unaudited consolidated financial statements in this Report and Note 22 – Liquidity in our 2022 Annual Report on Form 10-K.

Off-Balance Sheet Arrangements

For a discussion of off-balance sheet arrangements, see Note 12 - Off-Balance Sheet Commitments included in the notes to unaudited consolidated financial statements in this Report and “Item 1. Business - Off-Balance Sheet Commitments” in our 2022 Annual Report on Form 10-K.

Contractual Obligations

There have been no material changes to the contractual obligations described in our 2022 Annual Report on Form 10-K.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

For quantitative and qualitative disclosures regarding market risks, see “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Interest Rate Risk Management” in this Report.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Management is responsible for the disclosure controls and procedures of the Corporation. Disclosure controls and procedures are controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods required by the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of the Corporation’s management, including the Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures. Based on that evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of September 30, 2023.

Changes in Internal Control over Financial Reporting

There were no changes in the Corporation's internal control over financial reporting (as defined in Rule 13a-15(f)) during the quarter ended September 30, 2023 that materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

Part II — Other Information

Item 1. Legal Proceedings

From time to time, Hanmi Financial and its subsidiaries are parties to litigation that arises in the ordinary course of business, such as claims to enforce liens, claims involving the origination and servicing of loans, and other issues related to the business of Hanmi Financial and its subsidiaries. In the opinion of management, the resolution of any such issues would not have a material adverse impact on the financial condition, results of operations, or liquidity of Hanmi Financial or its subsidiaries.

Item 1A. Risk Factors

Except as provided below, there have been no material changes in risk factors applicable to the Corporation from those described in “Risk Factors” in Part I, Item 1A of the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022 and in “Risk Factors” in Part I, Item 1A of the Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023.

Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities

On January 24, 2019, the Company announced a stock repurchase program that authorized the repurchase of up to 5% of its outstanding shares or approximately 1.5 million shares of common stock. As of September 30, 2023, 459,972 shares remained available for future purchases under that stock repurchase program.

The following table represents information with respect to repurchases of common stock made by the Company during the three months ended September 30, 2023:


Purchase Date:	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Program		Maximum Shares That May Yet Be Purchased Under the Program
July 1, 2023 - July 31, 2023	$	—		—		559,972
August 1, 2023 - August 31, 2023		19.02		100,000		459,972
September 1, 2023 - September 30, 2023		—		—		459,972
Total	$	19.02		100,000		459,972

The Company acquired 76,262 shares from employees in connection with the satisfaction of employee tax withholding obligations incurred through vesting of Company stock awards for the nine months ended September 30, 2023. Shares withheld to cover income taxes upon the vesting of stock awards are repurchased pursuant to the terms of the applicable plan and not under the Company's repurchase program.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Securities Trading Plans of Directors and Executive Officers

During the three months ended September 30, 2023, none of our directors or executive officers adopted or terminated any contract, instruction or written plan for the purchase or sale of Hanmi securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement.”

Item 6. Exhibits


Exhibit Number		Document

31.1		Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS		Inline XBRL Instance Document *

101.SCH		Inline XBRL Taxonomy Extension Schema Document *

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document *

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document *

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document *

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document *

104		The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, formatted in Inline XBRL

* Attached as Exhibit 101 to this report are documents formatted in Inline XBRL (Extensible Business Reporting Language).

† Constitutes a management contract or compensatory plan or arrangement.

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.