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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, 2022

or

 

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 2, 2022, there were 30,486,115 outstanding shares of the Registrant’s Common Stock.

 

 


 

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

Three Months Ended September 30, 2022

Table of Contents

 

 

 

Part I – Financial Information

 

 

 

 

 

 

 

Item 1.

 

Financial Statements

 

3

 

 

 

 

 

 

 

Consolidated Balance Sheets at September 30, 2022 (unaudited) and December 31, 2021

 

3

 

 

 

 

 

 

 

Consolidated Statements of Income for the three and nine months ended September 30, 2022 and 2021 (unaudited)

 

4

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2022 and 2021 (unaudited)

 

5

 

 

 

 

 

 

 

Consolidated Statements of Changes in Stockholders’ Equity for the three and nine months ended September 30, 2022 and 2021 (unaudited)

 

6

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021 (unaudited)

 

8

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

 

9

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

40

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

59

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

59

 

 

 

 

 

 

 

Part II – Other Information

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

60

 

 

 

 

 

Item 1A.

 

Risk Factors

 

60

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

60

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

60

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

60

 

 

 

 

 

Item 5.

 

Other Information

 

60

 

 

 

 

 

Item 6.

 

Exhibits

 

61

 

 

 

Signatures

 

62

 

2


 

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,

 

 

 

2022

 

 

2021

 

 

 

(Unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

Cash and due from banks

 

$

275,159

 

 

$

608,965

 

Securities available for sale, at fair value (amortized cost of $967,383 and $922,654 as of September 30, 2022 and December 31, 2021, respectively)

 

 

830,151

 

 

 

910,790

 

Loans held for sale, at the lower of cost or fair value

 

 

10,044

 

 

 

13,342

 

Loans receivable, net of allowance for credit losses of $71,584 and $72,557 as of September 30, 2022 and December 31, 2021, respectively

 

 

5,729,407

 

 

 

5,078,984

 

Accrued interest receivable

 

 

15,356

 

 

 

11,976

 

Premises and equipment, net

 

 

23,591

 

 

 

24,788

 

Customers' liability on acceptances

 

 

200

 

 

 

 

Servicing assets

 

 

7,424

 

 

 

7,080

 

Goodwill and other intangible assets, net

 

 

11,267

 

 

 

11,395

 

Federal Home Loan Bank ("FHLB") stock, at cost

 

 

16,385

 

 

 

16,385

 

Income tax assets

 

 

66,217

 

 

 

44,060

 

Bank-owned life insurance

 

 

55,641

 

 

 

54,905

 

Prepaid expenses and other assets

 

 

87,669

 

 

 

75,917

 

Total assets

 

$

7,128,511

 

 

$

6,858,587

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

Noninterest-bearing

 

$

2,771,498

 

 

$

2,574,517

 

Interest-bearing

 

 

3,429,878

 

 

 

3,211,752

 

Total deposits

 

 

6,201,376

 

 

 

5,786,269

 

Accrued interest payable

 

 

2,180

 

 

 

1,161

 

Bank's liability on acceptances

 

 

200

 

 

 

 

Borrowings

 

 

100,000

 

 

 

137,500

 

Subordinated debentures ($136,800 and $224,100 face amount less unamortized discount and debt issuance costs of $7,539 and $9,094 as of September 30, 2022 and December 31, 2021, respectively)

 

 

129,261

 

 

 

215,006

 

Accrued expenses and other liabilities

 

 

86,601

 

 

 

75,234

 

Total liabilities

 

 

6,519,618

 

 

 

6,215,170

 

Stockholders’ equity:

 

 

 

 

 

 

Preferred stock, $0.001 par value; authorized 10,000,000 shares; no shares issued as of September 30, 2022 and December 31, 2021

 

 

 

 

 

 

Common stock, $0.001 par value; authorized 62,500,000 shares; issued 33,705,973 shares (30,484,004 shares outstanding) and 33,603,839 shares (30,407,261 shares outstanding) as of September 30, 2022 and December 31, 2021, respectively

 

 

33

 

 

 

33

 

Additional paid-in capital

 

 

582,695

 

 

 

580,796

 

Accumulated other comprehensive income (loss), net of tax benefit of $41,170 and $3,421 as of September 30, 2022 and December 31, 2021, respectively

 

 

(96,062

)

 

 

(8,443

)

Retained earnings

 

 

248,684

 

 

 

196,784

 

Less treasury stock; 3,221,969 shares and 3,196,578 shares as of September 30, 2022 and December 31, 2021, respectively

 

 

(126,457

)

 

 

(125,753

)

Total stockholders’ equity

 

 

608,893

 

 

 

643,417

 

Total liabilities and stockholders’ equity

 

$

7,128,511

 

 

$

6,858,587

 

 

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

3


 

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,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Interest and dividend income:

 

 

 

 

 

 

 

 

 

 

 

 

Interest and fees on loans receivable

 

$

66,976

 

 

$

52,961

 

 

$

180,755

 

 

$

156,361

 

Interest on securities

 

 

3,271

 

 

 

1,865

 

 

 

8,718

 

 

 

4,409

 

Dividends on FHLB stock

 

 

245

 

 

 

245

 

 

 

735

 

 

 

693

 

Interest on deposits in other banks

 

 

958

 

 

 

329

 

 

 

1,366

 

 

 

601

 

Total interest and dividend income

 

 

71,450

 

 

 

55,400

 

 

 

191,574

 

 

 

162,064

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

Interest on deposits

 

 

6,567

 

 

 

2,466

 

 

 

11,038

 

 

 

9,419

 

Interest on borrowings

 

 

349

 

 

 

409

 

 

 

1,056

 

 

 

1,332

 

Interest on subordinated debentures

 

 

1,448

 

 

 

2,545

 

 

 

6,394

 

 

 

5,759

 

Total interest expense

 

 

8,364

 

 

 

5,420

 

 

 

18,488

 

 

 

16,510

 

Net interest income before credit loss expense

 

 

63,086

 

 

 

49,980

 

 

 

173,086

 

 

 

145,554

 

Credit loss expense (recovery)

 

 

563

 

 

 

(7,234

)

 

 

783

 

 

 

(8,452

)

Net interest income after credit loss expense (recovery)

 

 

62,523

 

 

 

57,214

 

 

 

172,303

 

 

 

154,006

 

Noninterest income:

 

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

 

2,996

 

 

 

3,437

 

 

 

8,745

 

 

 

8,036

 

Trade finance and other service charges and fees

 

 

1,132

 

 

 

1,188

 

 

 

3,690

 

 

 

3,468

 

Gain on sale of Small Business Administration ("SBA") loans

 

 

2,250

 

 

 

5,842

 

 

 

7,545

 

 

 

13,475

 

Net gain on sales of securities

 

 

 

 

 

 

 

 

 

 

 

99

 

Other operating income

 

 

2,536

 

 

 

2,042

 

 

 

6,763

 

 

 

6,123

 

Total noninterest income

 

 

8,914

 

 

 

12,509

 

 

 

26,743

 

 

 

31,201

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

19,365

 

 

 

18,795

 

 

 

55,861

 

 

 

53,917

 

Occupancy and equipment

 

 

4,736

 

 

 

5,037

 

 

 

13,979

 

 

 

14,235

 

Data processing

 

 

3,352

 

 

 

2,934

 

 

 

9,702

 

 

 

8,775

 

Professional fees

 

 

1,249

 

 

 

1,263

 

 

 

3,909

 

 

 

4,123

 

Supplies and communications

 

 

710

 

 

 

741

 

 

 

1,956

 

 

 

2,231

 

Advertising and promotion

 

 

1,186

 

 

 

953

 

 

 

2,664

 

 

 

1,685

 

Other operating expenses

 

 

2,677

 

 

 

2,779

 

 

 

8,370

 

 

 

7,852

 

Total noninterest expense

 

 

33,275

 

 

 

32,502

 

 

 

96,441

 

 

 

92,818

 

Income before tax

 

 

38,162

 

 

 

37,221

 

 

 

102,605

 

 

 

92,389

 

Income tax expense

 

 

10,993

 

 

 

10,656

 

 

 

29,690

 

 

 

27,042

 

Net income

 

$

27,169

 

 

$

26,565

 

 

$

72,915

 

 

$

65,346

 

Basic earnings per share

 

$

0.89

 

 

$

0.87

 

 

$

2.39

 

 

$

2.13

 

Diluted earnings per share

 

$

0.89

 

 

$

0.86

 

 

$

2.39

 

 

$

2.13

 

Weighted-average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

30,314,439

 

 

 

30,474,391

 

 

 

30,289,068

 

 

 

30,222,978

 

Diluted

 

 

30,396,762

 

 

 

30,552,196

 

 

 

30,369,538

 

 

 

30,298,553

 

 

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

4


 

Hanmi Financial Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

(in thousands)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Net income

 

$

27,169

 

 

$

26,565

 

 

$

72,915

 

 

$

65,346

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on securities:

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding (loss) gain arising during period

 

 

(42,135

)

 

 

(3,568

)

 

 

(125,368

)

 

 

(11,877

)

Less: reclassification adjustment for net gain included in net income

 

 

 

 

 

 

 

 

 

 

 

(99

)

Income tax benefit (expense) related to items of other comprehensive income

 

 

12,641

 

 

 

1,070

 

 

 

37,749

 

 

 

3,543

 

Other comprehensive income (loss), net of tax

 

 

(29,494

)

 

 

(2,498

)

 

 

(87,619

)

 

 

(8,433

)

Comprehensive income (loss)

 

$

(2,325

)

 

$

24,067

 

 

$

(14,704

)

 

$

56,913

 

 

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

5


 

Hanmi Financial Corporation and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

For the Three Months Ended September 30, 2022 and 2021

(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

 

 

Income (Loss)

 

 

Earnings

 

 

at Cost

 

 

Equity

 

Balance at July 1, 2021

 

 

33,617,311

 

 

 

(2,919,659

)

 

 

30,697,652

 

 

$

33

 

 

$

579,595

 

 

$

(2,859

)

 

$

146,651

 

 

$

(120,443

)

 

$

602,977

 

Restricted stock awards, net of forfeitures

 

 

(185

)

 

 

 

 

 

(185

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

664

 

 

 

 

 

 

 

 

 

 

 

 

664

 

Restricted stock surrendered due to employee tax liability

 

 

 

 

 

(5,946

)

 

 

(5,946

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(80

)

 

 

(80

)

Repurchase of common stock

 

 

 

 

 

(249,920

)

 

 

(249,920

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,891

)

 

 

(4,891

)

Cash dividends paid (common stock, $0.12/share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,682

)

 

 

 

 

 

(3,682

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

26,565

 

 

 

 

 

 

26,565

 

Change in unrealized gain (loss) on securities available for sale, net of income taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,498

)

 

 

 

 

 

 

 

 

(2,498

)

Balance at September 30, 2021

 

 

33,617,126

 

 

 

(3,175,525

)

 

 

30,441,601

 

 

$

33

 

 

$

580,259

 

 

$

(5,357

)

 

$

169,534

 

 

$

(125,414

)

 

$

619,055

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

Restricted stock awards, net of forfeitures

 

 

4,189

 

 

 

 

 

 

4,189

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

664

 

 

 

 

 

 

 

 

 

 

 

 

664

 

Restricted stock surrendered due to employee tax liability

 

 

 

 

 

(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

 

 

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

 

6


 

Hanmi Financial Corporation and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

For the Nine Months Ended September 30, 2022 and 2021

(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

 

 

Income (Loss)

 

 

Earnings

 

 

at Cost

 

 

Equity

 

Balance at January 1, 2021

 

 

33,560,801

 

 

 

(2,842,966

)

 

 

30,717,835

 

 

$

33

 

 

$

578,360

 

 

$

3,076

 

 

$

114,621

 

 

$

(119,046

)

 

$

577,044

 

Restricted stock awards, net of forfeitures

 

 

56,325

 

 

 

 

 

 

56,325

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,899

 

 

 

 

 

 

 

 

 

 

 

 

1,899

 

Restricted stock surrendered due to employee tax liability

 

 

 

 

 

(27,639

)

 

 

(27,639

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(531

)

 

 

(531

)

Repurchase of common stock

 

 

 

 

 

(304,920

)

 

 

(304,920

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,837

)

 

 

(5,837

)

Cash dividends paid (common stock, $0.34/share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(10,433

)

 

 

 

 

 

(10,433

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

65,346

 

 

 

 

 

 

65,346

 

Change in unrealized gain (loss) on securities available for sale, net of income taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,433

)

 

 

 

 

 

 

 

 

(8,433

)

Balance at September 30, 2021

 

 

33,617,126

 

 

 

(3,175,525

)

 

 

30,441,601

 

 

$

33

 

 

$

580,259

 

 

$

(5,357

)

 

$

169,534

 

 

$

(125,414

)

 

$

619,055

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

Restricted stock awards, net of forfeitures

 

 

102,134

 

 

 

 

 

 

102,134

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,886

 

 

 

 

 

 

 

 

 

 

 

 

1,886

 

Restricted stock surrendered due to employee tax liability

 

 

 

 

 

(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

 

 

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

 

 

7


 

Hanmi Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

 

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

72,915

 

 

$

65,346

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

12,463

 

 

 

12,186

 

Share-based compensation expense

 

 

1,886

 

 

 

1,899

 

Credit loss expense (recovery)

 

 

783

 

 

 

(8,452

)

Gain on sales of securities

 

 

 

 

 

(99

)

Gain on sales of SBA loans

 

 

(7,545

)

 

 

(13,475

)

Origination of SBA loans held for sale

 

 

(111,915

)

 

 

(233,642

)

Proceeds from sales of SBA loans

 

 

122,744

 

 

 

233,711

 

Change in bank-owned life insurance

 

 

(736

)

 

 

(759

)

Change in prepaid expenses and other assets

 

 

(21,443

)

 

 

5,531

 

Change in income tax assets

 

 

15,592

 

 

 

3,407

 

Change in accrued expenses and other liabilities

 

 

15,646

 

 

 

(188

)

Net cash provided by (used in) operating activities

 

 

100,390

 

 

 

65,465

 

Cash flows from investing activities:

 

 

 

 

 

 

Purchases of securities available for sale

 

 

(132,966

)

 

 

(402,259

)

Proceeds from matured, called and repayment of securities

 

 

84,669

 

 

 

223,129

 

Proceeds from sales of securities available for sale

 

 

 

 

 

8,035

 

Purchases of loans receivable

 

 

(11,130

)

 

 

(1,500

)

Purchases of premises and equipment

 

 

(1,750

)

 

 

(2,450

)

Proceeds from disposition of premises and equipment

 

 

 

 

 

45

 

Proceeds from sales of other real estate owned ("OREO")

 

 

 

 

 

1,479

 

Change in loans receivable, excluding purchases

 

 

(641,619

)

 

 

20,415

 

Net cash provided by (used in) investing activities

 

 

(702,796

)

 

 

(153,106

)

Cash flows from financing activities:

 

 

 

 

 

 

Change in deposits

 

 

415,107

 

 

 

454,528

 

Proceeds from borrowings

 

 

399,819

 

 

 

45,750

 

Repayment of borrowings

 

 

(437,320

)

 

 

(58,250

)

Proceeds from redeemed subordinated debentures

 

 

12,700

 

 

 

 

Issuance of subordinated debentures

 

 

 

 

 

107,956

 

Redemption of subordinated debentures

 

 

(100,000

)

 

 

(13,043

)

Proceeds from exercise of stock options

 

 

13

 

 

 

 

Cash paid for surrender of vested shares due to employee tax liability

 

 

(704

)

 

 

(531

)

Repurchase of common stock

 

 

 

 

 

(5,837

)

Cash dividends paid

 

 

(21,015

)

 

 

(10,433

)

Net cash provided by (used in) financing activities

 

 

268,600

 

 

 

520,140

 

Net increase (decrease) in cash and due from banks

 

 

(333,806

)

 

 

432,498

 

Cash and due from banks at beginning of year

 

 

608,965

 

 

 

391,849

 

Cash and due from banks at end of period

 

$

275,159

 

 

$

824,347

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

Interest paid

 

$

17,469

 

 

$

19,839

 

Income taxes paid

 

$

12,725

 

 

$

22,265

 

Non-cash activities:

 

 

 

 

 

 

Transfer of loans receivable to other real estate owned

 

$

117

 

 

$

 

Income tax benefit related to items of other comprehensive income

 

$

37,749

 

 

$

3,543

 

Change in right-of-use asset obtained in exchange for lease liability

 

$

108

 

 

$

2,905

 

 

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

8


 

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, 2022, 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. The interim information should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 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.

 

The extent to which the COVID-19 pandemic may impact business activity or financial results will depend on future developments, including new variants that may emerge and the actions required to contain the coronavirus or treat its impact, among others, which are highly uncertain and cannot be predicted. This uncertainty may impact the accuracy of our significant estimates, which includes the allowance for credit losses, the allowance for credit losses related to off-balance sheet items, and the valuation of intangible assets, including deferred tax assets, goodwill, and servicing assets.

 

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 2021 Annual Report on Form 10-K.

9


 

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, 2022

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

34,876

 

 

$

 

 

$

(1,716

)

 

$

33,160

 

U.S. government agency and sponsored agency obligations:

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

 

615,335

 

 

 

 

 

 

(92,965

)

 

 

522,370

 

Collateralized mortgage obligations

 

 

98,872

 

 

 

 

 

 

(12,466

)

 

 

86,406

 

Debt securities

 

 

139,904

 

 

 

 

 

 

(12,270

)

 

 

127,634

 

Total U.S. government agency and sponsored agency obligations

 

 

854,111

 

 

 

 

 

 

(117,701

)

 

 

736,410

 

Municipal bonds-tax exempt

 

 

78,396

 

 

 

 

 

 

(17,815

)

 

 

60,581

 

Total securities available for sale

 

$

967,383

 

 

$

 

 

$

(137,232

)

 

$

830,151

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

15,457

 

 

$

1

 

 

$

(61

)

 

$

15,397

 

U.S. government agency and sponsored agency obligations:

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

 

615,393

 

 

 

18

 

 

 

(7,906

)

 

 

607,505

 

Collateralized mortgage obligations

 

 

95,153

 

 

 

41

 

 

 

(1,590

)

 

 

93,604

 

Debt securities

 

 

117,499

 

 

 

 

 

 

(1,603

)

 

 

115,896

 

Total U.S. government agency and sponsored agency obligations

 

 

828,045

 

 

 

59

 

 

 

(11,099

)

 

 

817,005

 

Municipal bonds-tax exempt

 

 

79,152

 

 

 

117

 

 

 

(881

)

 

 

78,388

 

Total securities available for sale

 

$

922,654

 

 

$

177

 

 

$

(12,041

)

 

$

910,790

 

 

The amortized cost and estimated fair value of securities as of September 30, 2022 and December 31, 2021, 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, 2022

 

 

December 31, 2021

 

 

 

Available for Sale

 

 

Available for Sale

 

 

 

Amortized

 

 

Estimated

 

 

Amortized

 

 

Estimated

 

 

 

Cost

 

 

Fair Value

 

 

Cost

 

 

Fair Value

 

 

 

(in thousands)

 

Within one year

 

$

14,984

 

 

$

14,649

 

 

$

1,103

 

 

$

1,108

 

Over one year through five years

 

 

169,164

 

 

 

155,085

 

 

 

126,483

 

 

 

125,069

 

Over five years through ten years

 

 

36,905

 

 

 

32,703

 

 

 

51,338

 

 

 

50,770

 

Over ten years

 

 

746,330

 

 

 

627,714

 

 

 

743,730

 

 

 

733,843

 

Total

 

$

967,383

 

 

$

830,151

 

 

$

922,654

 

 

$

910,790

 

 

10


 

 

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, 2022 and December 31, 2021, 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, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

(1,145

)

 

$

28,773

 

 

 

12

 

 

$

(571

)

 

$

4,387

 

 

 

1

 

 

$

(1,716

)

 

$

33,160

 

 

 

13

 

U.S. government agency and sponsored agency obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

 

(14,222

)

 

 

104,500

 

 

 

33

 

 

 

(78,743

)

 

 

417,870

 

 

 

105

 

 

 

(92,965

)

 

 

522,370

 

 

 

138

 

Collateralized mortgage obligations

 

 

(1,526

)

 

 

25,479

 

 

 

10

 

 

 

(10,940

)

 

 

60,927

 

 

 

18

 

 

 

(12,466

)

 

 

86,406

 

 

 

28

 

Debt securities

 

 

(2,390

)

 

 

38,488

 

 

 

9

 

 

 

(9,880

)

 

 

89,146

 

 

 

18

 

 

 

(12,270

)

 

 

127,634

 

 

 

27

 

Total U.S. government agency and sponsored agency obligations

 

 

(18,138

)

 

 

168,467

 

 

 

52

 

 

 

(99,563

)

 

 

567,943

 

 

 

141

 

 

 

(117,701

)

 

 

736,410

 

 

 

193

 

Municipal bonds-tax exempt

 

 

(2,735

)

 

 

10,906

 

 

 

3

 

 

 

(15,080

)

 

 

49,675

 

 

 

16

 

 

 

(17,815

)

 

 

60,581

 

 

 

19

 

Total

 

$

(22,018

)

 

$

208,146

 

 

 

67

 

 

$

(115,214

)

 

$

622,005

 

 

 

158

 

 

$

(137,232

)

 

$

830,151

 

 

 

225

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

(61

)

 

$

8,391

 

 

 

2

 

 

$

 

 

$

 

 

 

 

 

$

(61

)

 

$

8,391

 

 

 

2

 

U.S. government agency and sponsored agency obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

 

(6,252

)

 

 

535,610

 

 

 

102

 

 

 

(1,654

)

 

 

59,457

 

 

 

11

 

 

 

(7,906

)

 

 

595,067

 

 

 

113

 

Collateralized mortgage obligations

 

 

(1,256

)

 

 

76,894

 

 

 

16

 

 

 

(334

)

 

 

12,548

 

 

 

3

 

 

 

(1,590

)

 

 

89,442

 

 

 

19

 

Debt securities

 

 

(1,503

)

 

 

110,996

 

 

 

21

 

 

 

(100

)

 

 

4,900

 

 

 

1

 

 

 

(1,603

)

 

 

115,896

 

 

 

22

 

Total U.S. government agency and sponsored agency obligations

 

 

(9,011

)

 

 

723,500

 

 

 

139

 

 

 

(2,088

)

 

 

76,905

 

 

 

15

 

 

 

(11,099

)

 

 

800,405

 

 

 

154

 

Municipal bonds-tax exempt

 

 

(881

)

 

 

68,548

 

 

 

17

 

 

 

 

 

 

 

 

 

 

 

 

(881

)

 

 

68,548

 

 

 

17

 

Total

 

$

(9,953

)

 

$

800,439

 

 

 

158

 

 

$

(2,088

)

 

$

76,905

 

 

 

15

 

 

$

(12,041

)

 

$

877,344

 

 

 

173

 

 

The Company evaluates its available-for-sale securities portfolio for impairment on a quarterly basis. This 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, 2022, the Company determined that no credit losses are 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,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

 

 

(in thousands)

 

Gross realized gains on sales of securities

 

$

 

 

$

 

 

$

 

 

$

99

 

Gross realized losses on sales of securities

 

 

 

 

 

 

 

 

 

 

 

 

Net realized gains on sales of securities

 

$

 

 

$

 

 

$

 

 

$

99

 

Proceeds from sales of securities

 

$

 

 

$

 

 

$

 

 

$

8,035

 

 

There were no sales of securities during the three months ended September 30, 2022 or 2021.

 

During the nine months ended September 30, 2022, there were no sale of securities. During the nine months ended September 30, 2021, there were $0.1 million in net gains in earnings resulting from the sale of $8.0 million of securities previously recorded with $0.1 million unrealized gains in accumulated other comprehensive income.

Securities available for sale with market values of $24.5 million and $34.7 million as of September 30, 2022 and December 31, 2021, respectively, were pledged to secure borrowings from the Federal Reserve Bank (“FRB”) Discount Window.

11


 

At September 30, 2022, 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 percent of shareholders’ equity.

Note 3 — Loans

Loans Receivable

Loans consisted of the following as of the dates indicated:

 

 

 

September 30, 2022

 

 

December 31, 2021

 

 

 

(in thousands)

 

Real estate loans:

 

 

 

 

 

 

Commercial property

 

 

 

 

 

 

Retail

 

$

1,044,287

 

 

$

970,134

 

Hospitality

 

 

662,438

 

 

 

717,692

 

Other (1)

 

 

2,044,878

 

 

 

1,919,033

 

Total commercial property loans

 

 

3,751,603

 

 

 

3,606,859

 

Construction

 

 

102,342

 

 

 

95,006

 

Residential (2)

 

 

649,589

 

 

 

400,546

 

Total real estate loans

 

 

4,503,534

 

 

 

4,102,411

 

Commercial and industrial loans (3)

 

 

732,033

 

 

 

561,831

 

Equipment financing agreements

 

 

565,424

 

 

 

487,299

 

Loans receivable

 

 

5,800,991

 

 

 

5,151,541

 

Allowance for credit losses

 

 

(71,584

)

 

 

(72,557

)

Loans receivable, net

 

$

5,729,407

 

 

$

5,078,984

 

 

(1)
Includes mixed-use, multifamily, office, industrial, gas stations, faith-based facilities, medical and warehouse; all other property types represent less than one percent of total loans receivable.
(2)
Includes $2.4 million and $3.9 million of home equity loans and lines, and $5.6 million and $6.0 of personal loans at September 30, 2022 and December 31, 2021, respectively.
(3)
At September 30, 2022 and December 31, 2021, Paycheck Protection Program ("PPP") loans were $1.0 million and $3.0 million, respectively.

Accrued interest on loans was $13.2 million and $10.1 million at September 30, 2022 and December 31, 2021, respectively.

At September 30, 2022 and December 31, 2021, loans of $2.36 billion and $2.30 billion, respectively, were pledged to secure advances from the FHLB.

12


 

Loans Held for Sale

The following is the activity for loans held for sale for the three months ended September 30, 2022 and 2021:

 

 

 

Real Estate

 

 

Commercial and Industrial

 

 

Total

 

 

 

(in thousands)

 

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

 

 

 

 

 

 

 

 

 

 

 

September 30, 2021

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

13,092

 

 

$

22,938

 

 

$

36,030

 

Originations and transfers

 

 

28,537

 

 

 

15,228

 

 

 

43,765

 

Sales

 

 

(27,513

)

 

 

(34,956

)

 

 

(62,469

)

Principal paydowns and amortization

 

 

(4

)

 

 

559

 

 

 

555

 

Balance at end of period

 

$

14,112

 

 

$

3,769

 

 

$

17,881

 

 

Loans held for sale was comprised of $10.0 million and $13.3 million of the guaranteed portion of SBA 7(a) loans at September 30, 2022 and December 31, 2021, respectively. All second draw PPP loans were sold by the third quarter of 2021. For the three and nine months ended September 30, 2021, the Company recognized $0.3 million and $3.0 million, respectively, of gains on the sale of $14.6 million and $132.7 million, respectively, of second draw PPP loans.

 

The following is the activity for loans held for sale for the nine months ended September 30, 2022 and 2021:

 

 

 

Real Estate

 

 

Commercial and Industrial

 

 

Total

 

 

 

(in thousands)

 

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

 

 

 

 

 

 

 

 

 

 

 

September 30, 2021

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

8,042

 

 

$

526

 

 

$

8,568

 

Originations and transfers

 

 

71,005

 

 

 

162,637

 

 

 

233,642

 

Sales

 

 

(64,930

)

 

 

(160,293

)

 

 

(225,223

)

Principal payoffs and amortization

 

 

(5

)

 

 

899

 

 

 

894

 

Balance at end of period

 

$

14,112

 

 

$

3,769

 

 

$

17,881

 

 

13


 

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, 2022 and 2021:

 

 

 

Real Estate

 

 

Commercial and Industrial

 

 

Equipment Financing Agreements

 

 

Total

 

 

 

(in thousands)

 

September 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

46,112

 

 

$

14,275

 

 

$

12,680

 

 

$

73,067

 

Less loans charged off

 

 

1,356

 

 

 

8

 

 

 

716

 

 

 

2,080

 

Recoveries on loans receivable previously charged off

 

 

(373

)

 

 

(228

)

 

 

(369

)

 

 

(970

)

Provision (recovery) for credit losses

 

 

395

 

 

 

381

 

 

 

(1,149

)

 

 

(373

)

Ending balance

 

$

45,524

 

 

$

14,876

 

 

$

11,184

 

 

$

71,584

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

63,029

 

 

$

8,059

 

 

$

12,284

 

 

$

83,372

 

Less loans charged off

 

 

 

 

 

186

 

 

 

791

 

 

 

977

 

Recoveries on loans receivable previously charged off

 

 

(1,162

)

 

 

(330

)

 

 

(350

)

 

 

(1,842

)

Provision (recovery) for credit losses

 

 

(8,128

)

 

 

507

 

 

 

(3

)

 

 

(7,624

)

Ending balance

 

$

56,063

 

 

$

8,710

 

 

$

11,840

 

 

$

76,613

 

 

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, 2022 and 2021:

 

 

 

Real Estate

 

 

Commercial and Industrial

 

 

Equipment Financing Agreements

 

 

Total

 

 

 

(in thousands)

 

September 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

48,890

 

 

$

12,418

 

 

$

11,249

 

 

 

72,557

 

Less loans charged off

 

 

1,886

 

 

 

87

 

 

 

1,548

 

 

 

3,521

 

Recoveries on loans receivable previously charged off

 

 

(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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

51,876

 

 

$

21,410

 

 

$

17,140

 

 

$

90,426

 

Less loans charged off

 

 

1,491

 

 

 

550

 

 

 

3,893

 

 

 

5,934

 

Recoveries on loans receivable previously charged off

 

 

(1,597

)

 

 

(602

)

 

 

(694

)

 

 

(2,893

)

Provision (recovery) for credit losses

 

 

4,081

 

 

 

(12,752

)

 

 

(2,101

)

 

 

(10,772

)

Ending balance

 

$

56,063

 

 

$

8,710

 

 

$

11,840

 

 

$

76,613

 

 

14


 

 

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, 2022

 

 

December 31, 2021

 

 

 

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

 

$

7,758

 

 

 

10.8

%

 

$

1,044,287

 

 

 

18.0

%

 

$

6,579

 

 

 

9.1

%

 

$

970,134

 

 

 

18.8

%

Hospitality

 

 

15,417

 

 

 

21.5

%

 

 

662,438

 

 

 

11.4

%

 

 

22,670

 

 

 

31.2

%

 

 

717,692

 

 

 

13.9

%

Other

 

 

15,450

 

 

 

21.7

%

 

 

2,044,878

 

 

 

35.3

%

 

 

15,065

 

 

 

20.8

%

 

 

1,919,033

 

 

 

37.3

%

Total commercial property loans

 

 

38,625

 

 

 

54.0

%

 

 

3,751,603

 

 

 

64.7

%

 

 

44,314

 

 

 

61.1

%

 

 

3,606,859

 

 

 

70.0

%

Construction

 

 

4,034

 

 

 

5.6

%

 

 

102,342

 

 

 

1.8

%

 

 

4,078

 

 

 

5.6

%

 

 

95,006

 

 

 

1.8

%

Residential

 

 

2,865

 

 

 

4.0

%

 

 

649,589

 

 

 

11.2

%

 

 

498

 

 

 

0.7

%

 

 

400,546

 

 

 

7.8

%

Total real estate loans

 

 

45,524

 

 

 

63.6

%

 

 

4,503,534

 

 

 

77.7

%

 

 

48,890

 

 

 

67.4

%

 

 

4,102,411

 

 

 

79.6

%

Commercial and industrial loans

 

 

14,876

 

 

 

20.8

%

 

 

732,033

 

 

 

12.6

%

 

 

12,418

 

 

 

17.1

%

 

 

561,831

 

 

 

10.9

%

Equipment financing agreements

 

 

11,184

 

 

 

15.6

%

 

 

565,424

 

 

 

9.7

%

 

 

11,249

 

 

 

15.5

%

 

 

487,299

 

 

 

9.5

%

Total

 

$

71,584

 

 

 

100.0

%

 

$

5,800,991

 

 

 

100.0

%

 

$

72,557

 

 

 

100.0

%

 

$

5,151,541

 

 

 

100.0

%

 

The following table represents the amortized cost basis of collateral-dependent loans by class of loans as of September 30, 2022 and December 31, 2021, for which repayment is expected to be obtained through the sale of the underlying collateral.

 

 

 

September 30, 2022

 

 

December 31, 2021

 

 

 

Amortized Cost

 

 

Amortized Cost

 

 

 

(in thousands)

 

Real estate loans:

 

 

 

 

 

 

Commercial property

 

 

 

 

 

 

Retail

 

$

3,531

 

 

$

1,917

 

Hospitality

 

 

 

 

 

 

Other (1)

 

 

608

 

 

 

499

 

Total commercial property loans

 

 

4,139

 

 

 

2,416

 

Residential

 

 

912

 

 

 

982

 

Total real estate loans

 

 

5,051

 

 

 

3,398

 

Total

 

$

5,051

 

 

$

3,398

 

 

(1)
Includes mixed-use, multifamily, office, industrial, gas stations, faith-based facilities, medical and warehouse; all other property types represent less than one percent of total loans receivable.

 

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 0 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 (0-4), 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.

15


 

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.

16


 

Loans by Vintage Year and Risk Rating

 

 

 

Term Loans

 

 

 

 

 

 

 

 

 

Amortized Cost Basis by Origination Year (1)

 

 

 

 

 

 

 

 

 

2022

 

 

2021

 

 

2020

 

 

2019

 

 

2018

 

 

Prior

 

 

Revolving
Loans
Amortized
Cost Basis

 

 

Total

 

 

 

(in thousands)

 

September 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial property

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Rating

 

 

 

 

 

 

 

 

 

 

`

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass / Pass-Watch

 

$

1,035,752

 

 

$

924,041

 

 

$

629,274

 

 

$

422,378

 

 

$

320,721

 

 

$

252,048

 

 

$

57,112

 

 

$

3,641,326

 

Special Mention

 

 

 

 

 

13,504

 

 

 

18,154

 

 

 

7,159

 

 

 

21,469

 

 

 

9,570

 

 

 

1,701

 

 

 

71,557

 

Classified

 

 

851

 

 

 

 

 

 

 

 

 

5,816

 

 

 

13,983

 

 

 

18,070

 

 

 

 

 

 

38,720

 

Total commercial property

 

 

1,036,603

 

 

 

937,545

 

 

 

647,428

 

 

 

435,353

 

 

 

356,173

 

 

 

279,688

 

 

 

58,813

 

 

 

3,751,603

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Rating

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass / Pass-Watch

 

 

39,090

 

 

 

63,252

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

102,342

 

Special Mention

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Classified

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total construction

 

 

39,090

 

 

 

63,252

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

102,342

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Rating

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass / Pass-Watch

 

 

310,794

 

 

 

176,295

 

 

 

13,146

 

 

 

236

 

 

 

737

 

 

 

140,285

 

 

 

6,476

 

 

 

647,969

 

Special Mention

 

 

 

 

 

 

 

 

343

 

 

 

 

 

 

 

 

 

 

 

 

350

 

 

 

693

 

Classified

 

 

15

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

912

 

 

 

 

 

 

927

 

Total residential

 

 

310,809

 

 

 

176,295

 

 

 

13,489

 

 

 

236

 

 

 

737

 

 

 

141,197

 

 

 

6,826

 

 

 

649,589

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total real estate loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Rating

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass / Pass-Watch

 

 

1,385,636

 

 

 

1,163,588

 

 

 

642,420

 

 

 

422,614

 

 

 

321,458

 

 

 

392,333

 

 

 

63,588

 

 

 

4,391,637

 

Special Mention

 

 

 

 

 

13,504

 

 

 

18,497

 

 

 

7,159

 

 

 

21,469

 

 

 

9,570

 

 

 

2,051

 

 

 

72,250

 

Classified

 

 

866

 

 

 

 

 

 

 

 

 

5,816

 

 

 

13,983

 

 

 

18,982

 

 

 

 

 

 

39,647

 

Total real estate loans

 

 

1,386,502

 

 

 

1,177,092

 

 

 

660,917

 

 

 

435,589

 

 

 

356,910

 

 

 

420,885

 

 

 

65,639

 

 

 

4,503,534

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Rating

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass / Pass-Watch

 

 

283,314

 

 

 

110,850

 

 

 

45,219

 

 

 

29,583

 

 

 

11,656

 

 

 

13,864

 

 

 

184,223

 

 

 

678,709

 

Special Mention

 

 

 

 

 

9,609

 

 

 

 

 

 

13,514

 

 

 

 

 

 

107

 

 

 

27,472

 

 

 

50,702

 

Classified

 

 

 

 

 

35

 

 

 

171

 

 

 

1,183

 

 

 

97

 

 

 

495

 

 

 

641

 

 

 

2,622

 

Total commercial and industrial loans

 

 

283,314

 

 

 

120,494

 

 

 

45,390

 

 

 

44,280

 

 

 

11,753

 

 

 

14,466

 

 

 

212,336

 

 

 

732,033

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equipment financing agreements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Rating

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass / Pass-Watch

 

 

233,883

 

 

 

183,731

 

 

 

53,553

 

 

 

62,107

 

 

 

23,802

 

 

 

2,878

 

 

 

 

 

 

559,954

 

Special Mention

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Classified

 

 

108

 

 

 

1,568

 

 

 

265

 

 

 

2,582

 

 

 

814

 

 

 

133

 

 

 

 

 

 

5,470

 

Total equipment financing agreements

 

 

233,991

 

 

 

185,299

 

 

 

53,818

 

 

 

64,689

 

 

 

24,616

 

 

 

3,011

 

 

 

 

 

 

565,424

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans receivable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Rating

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass / Pass-Watch

 

 

1,902,833

 

 

 

1,458,169

 

 

 

741,192

 

 

 

514,304

 

 

 

356,916

 

 

 

409,075

 

 

 

247,811

 

 

 

5,630,300

 

Special Mention

 

 

 

 

 

23,113

 

 

 

18,497

 

 

 

20,673

 

 

 

21,469

 

 

 

9,677

 

 

 

29,523

 

 

 

122,952

 

Classified

 

 

974

 

 

 

1,603

 

 

 

436

 

 

 

9,581

 

 

 

14,894

 

 

 

19,610

 

 

 

641

 

 

 

47,739

 

Total loans receivable

 

$

1,903,807

 

 

$

1,482,885

 

 

$

760,125

 

 

$

544,558

 

 

$

393,279

 

 

$

438,362

 

 

$

277,975

 

 

$

5,800,991

 

 

(1)
Includes extensions, renewals, or modifications of credit contracts, which consist of a new credit decision.

17


 

 

 

 

Term Loans

 

 

 

 

 

 

 

 

 

Amortized Cost Basis by Origination Year (1)

 

 

 

 

 

 

 

 

 

2021

 

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

Prior

 

 

Revolving
Loans
Amortized
Cost Basis

 

 

Total

 

 

 

 

 

December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial property

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Rating

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass / Pass-Watch

 

$

1,203,197

 

 

$

706,470

 

 

$

488,250

 

 

$

406,288

 

 

$

277,680

 

 

$

384,064

 

 

$

41,413

 

 

$

3,507,362

 

Special Mention

 

 

 

 

 

18,869

 

 

 

7,593

 

 

 

 

 

 

6,999

 

 

 

16,879

 

 

 

1,703

 

 

 

52,043

 

Classified

 

 

 

 

 

 

 

 

5,450

 

 

 

17,247

 

 

 

2,965

 

 

 

21,792

 

 

 

 

 

 

47,454

 

Total commercial property

 

 

1,203,197

 

 

 

725,339

 

 

 

501,293

 

 

 

423,535

 

 

 

287,644

 

 

 

422,735

 

 

 

43,116

 

 

 

3,606,859

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Rating

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass / Pass-Watch

 

 

73,808

 

 

 

631

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

74,439

 

Special Mention

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20,567

 

 

 

 

 

 

20,567

 

Classified

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total construction

 

 

73,808

 

 

 

631

 

 

 

 

 

 

 

 

 

 

 

 

20,567

 

 

 

 

 

 

95,006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Rating

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass / Pass-Watch

 

 

194,948

 

 

 

16,975

 

 

 

247

 

 

 

19,813

 

 

 

73,567

 

 

 

82,076

 

 

 

8,381

 

 

 

396,007

 

Special Mention

 

 

 

 

 

 

 

 

 

 

 

930

 

 

 

406

 

 

 

2,221

 

 

 

 

 

 

3,557

 

Classified

 

 

 

 

 

 

 

 

 

 

 

 

 

 

965

 

 

 

17

 

 

 

 

 

 

982

 

Total residential

 

 

194,948

 

 

 

16,975

 

 

 

247

 

 

 

20,743

 

 

 

74,938

 

 

 

84,314

 

 

 

8,381

 

 

 

400,546

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total real estate loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Rating

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass / Pass-Watch

 

 

1,471,953

 

 

 

724,076

 

 

 

488,497

 

 

 

426,101

 

 

 

351,247

 

 

 

466,140

 

 

 

49,794

 

 

 

3,977,808

 

Special Mention

 

 

 

 

 

18,869

 

 

 

7,593

 

 

 

930

 

 

 

7,405

 

 

 

39,667

 

 

 

1,703

 

 

 

76,167

 

Classified

 

 

 

 

 

 

 

 

5,450

 

 

 

17,247

 

 

 

3,930

 

 

 

21,809

 

 

 

 

 

 

48,436

 

Total real estate loans

 

 

1,471,953

 

 

 

742,945

 

 

 

501,540

 

 

 

444,278

 

 

 

362,582

 

 

 

527,616

 

 

 

51,497

 

 

 

4,102,411

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Rating

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass / Pass-Watch

 

 

264,762

 

 

 

55,135

 

 

 

36,937

 

 

 

15,780

 

 

 

10,874

 

 

 

6,016

 

 

 

148,148

 

 

 

537,652

 

Special Mention

 

 

 

 

 

274

 

 

 

13,989

 

 

 

 

 

 

67

 

 

 

4,802

 

 

 

(5

)

 

 

19,127

 

Classified

 

 

 

 

 

3

 

 

 

708

 

 

 

145

 

 

 

19

 

 

 

886

 

 

 

3,291

 

 

 

5,052

 

Total commercial and industrial loans

 

 

264,762

 

 

 

55,412

 

 

 

51,634

 

 

 

15,925

 

 

 

10,960

 

 

 

11,704

 

 

 

151,434

 

 

 

561,831

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equipment financing agreements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Rating

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass / Pass-Watch

 

 

239,738

 

 

 

79,400

 

 

 

101,460

 

 

 

47,485

 

 

 

10,683

 

 

 

1,388

 

 

 

 

 

 

480,154

 

Special Mention

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Classified

 

 

716

 

 

 

981

 

 

 

3,575

 

 

 

1,328

 

 

 

347

 

 

 

198

 

 

 

 

 

 

7,145

 

Total equipment financing agreements

 

 

240,454

 

 

 

80,381

 

 

 

105,035

 

 

 

48,813

 

 

 

11,030

 

 

 

1,586

 

 

 

 

 

 

487,299

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans receivable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Rating

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass / Pass-Watch

 

 

1,976,453

 

 

 

858,611

 

 

 

626,894

 

 

 

489,366

 

 

 

372,804

 

 

 

473,544

 

 

 

197,942

 

 

 

4,995,614

 

Special Mention

 

 

 

 

 

19,143

 

 

 

21,582

 

 

 

930

 

 

 

7,472

 

 

 

44,469

 

 

 

1,698

 

 

 

95,294

 

Classified

 

 

716

 

 

 

984

 

 

 

9,733

 

 

 

18,720

 

 

 

4,296

 

 

 

22,893

 

 

 

3,291

 

 

 

60,633

 

Total loans receivable

 

$

1,977,169

 

 

$

878,738

 

 

$

658,209

 

 

$

509,016

 

 

$

384,572

 

 

$

540,906

 

 

$

202,931

 

 

$

5,151,541

 

 

(1)
Includes extensions, renewals, or modifications of credit contracts, which consist of a new credit decision.

18


 

Loans by Vintage Year and Payment Performance

 

 

 

 

Term Loans

 

 

 

 

 

 

 

 

 

Amortized Cost Basis by Origination Year (1)

 

 

 

 

 

 

 

 

 

2022

 

 

2021

 

 

2020

 

 

2019

 

 

2018

 

 

Prior

 

 

Revolving
Loans
Amortized
Cost Basis

 

 

Total

 

 

 

(in thousands)

 

September 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial property

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payment performance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

1,036,603

 

 

$

937,545

 

 

$

647,428

 

 

$

435,353

 

 

$

352,642

 

 

$

278,434

 

 

$

58,813

 

 

$

3,746,818

 

Nonperforming

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,531

 

 

 

1,254

 

 

 

 

 

 

4,785

 

Total commercial property

 

 

1,036,603

 

 

 

937,545

 

 

 

647,428

 

 

 

435,353

 

 

 

356,173

 

 

 

279,688

 

 

 

58,813

 

 

 

3,751,603

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payment performance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

 

39,090

 

 

 

63,252

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

102,342

 

Nonperforming

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total construction

 

 

39,090

 

 

 

63,252

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

102,342

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payment performance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

 

310,794

 

 

 

176,295

 

 

 

13,489

 

 

 

236

 

 

 

737

 

 

 

140,285

 

 

 

6,826

 

 

 

648,662

 

Nonperforming

 

 

15

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

912

 

 

 

 

 

 

927

 

Total residential

 

 

310,809

 

 

 

176,295

 

 

 

13,489

 

 

 

236

 

 

 

737

 

 

 

141,197

 

 

 

6,826

 

 

 

649,589

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total real estate loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payment performance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

 

1,386,487

 

 

 

1,177,092

 

 

 

660,917

 

 

 

435,589

 

 

 

353,379

 

 

 

418,719

 

 

 

65,639

 

 

 

4,497,822

 

Nonperforming

 

 

15

 

 

 

 

 

 

 

 

 

 

 

 

3,531

 

 

 

2,166

 

 

 

 

 

 

5,712

 

Total real estate loans

 

 

1,386,502

 

 

 

1,177,092

 

 

 

660,917

 

 

 

435,589

 

 

 

356,910

 

 

 

420,885

 

 

 

65,639

 

 

 

4,503,534

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payment performance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

 

283,314

 

 

 

120,459

 

 

 

45,219

 

 

 

44,280

 

 

 

11,753

 

 

 

14,263

 

 

 

212,336

 

 

 

731,624

 

Nonperforming

 

 

 

 

 

35

 

 

 

171

 

 

 

 

 

 

 

 

 

203

 

 

 

 

 

 

409

 

Total commercial and industrial loans

 

 

283,314

 

 

 

120,494

 

 

 

45,390

 

 

 

44,280

 

 

 

11,753

 

 

 

14,466

 

 

 

212,336

 

 

 

732,033

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equipment financing agreements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payment performance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

 

233,883

 

 

 

183,731

 

 

 

53,553

 

 

 

62,107

 

 

 

23,802

 

 

 

2,878

 

 

 

 

 

 

559,954

 

Nonperforming

 

 

108

 

 

 

1,568

 

 

 

265

 

 

 

2,582

 

 

 

814

 

 

 

133

 

 

 

 

 

 

5,470

 

Total equipment financing agreements

 

 

233,991

 

 

 

185,299

 

 

 

53,818

 

 

 

64,689

 

 

 

24,616

 

 

 

3,011

 

 

 

 

 

 

565,424

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans receivable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payment performance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

 

1,903,684

 

 

 

1,481,282

 

 

 

759,689

 

 

 

541,976

 

 

 

388,934

 

 

 

435,860

 

 

 

277,975

 

 

 

5,789,400

 

Nonperforming

 

 

123

 

 

 

1,603

 

 

 

436

 

 

 

2,582

 

 

 

4,345

 

 

 

2,502

 

 

 

 

 

 

11,591

 

Total loans receivable

 

$

1,903,807

 

 

$

1,482,885

 

 

$

760,125

 

 

$

544,558

 

 

$

393,279

 

 

$

438,362

 

 

$

277,975

 

 

$

5,800,991

 

 

(1)
Includes extensions, renewals, or modifications of credit contracts, which consist of a new credit decision.

19


 

 

 

 

Term Loans

 

 

 

 

 

 

 

 

 

Amortized Cost Basis by Origination Year (1)

 

 

 

 

 

 

 

 

 

2021

 

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

Prior

 

 

Revolving
Loans
Amortized
Cost Basis

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial property

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payment performance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

1,203,197

 

 

$

725,339

 

 

$

501,293

 

 

$

423,515

 

 

$

286,935

 

 

$

419,464

 

 

$

43,116

 

 

$

3,602,859

 

Nonperforming

 

 

 

 

 

 

 

 

 

 

 

20

 

 

 

709

 

 

 

3,271

 

 

 

 

 

 

4,000

 

Total commercial property

 

 

1,203,197

 

 

 

725,339

 

 

 

501,293

 

 

 

423,535

 

 

 

287,644

 

 

 

422,735

 

 

 

43,116

 

 

 

3,606,859

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payment performance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

 

73,808

 

 

 

631

 

 

 

 

 

 

 

 

 

 

 

 

20,567

 

 

 

 

 

 

95,006

 

Nonperforming

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total construction

 

 

73,808

 

 

 

631

 

 

 

 

 

 

 

 

 

 

 

 

20,567

 

 

 

 

 

 

95,006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payment performance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

 

194,948

 

 

 

16,975

 

 

 

247

 

 

 

20,743

 

 

 

73,973

 

 

 

84,052

 

 

 

8,381

 

 

 

399,319

 

Nonperforming

 

 

 

 

 

 

 

 

 

 

 

 

 

 

965

 

 

 

262

 

 

 

 

 

 

1,227

 

Total residential

 

 

194,948

 

 

 

16,975

 

 

 

247

 

 

 

20,743

 

 

 

74,938

 

 

 

84,314

 

 

 

8,381

 

 

 

400,546

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total real estate loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payment performance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

 

1,471,953

 

 

 

742,945

 

 

 

501,540

 

 

 

444,258

 

 

 

360,908

 

 

 

524,083

 

 

 

51,497

 

 

 

4,097,184

 

Nonperforming

 

 

 

 

 

 

 

 

 

 

 

20

 

 

 

1,674

 

 

 

3,533

 

 

 

 

 

 

5,227

 

Total real estate loans

 

 

1,471,953

 

 

 

742,945

 

 

 

501,540

 

 

 

444,278

 

 

 

362,582

 

 

 

527,616

 

 

 

51,497

 

 

 

4,102,411

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payment performance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

 

264,762

 

 

 

55,409

 

 

 

50,926

 

 

 

15,925

 

 

 

10,956

 

 

 

11,431

 

 

 

151,434

 

 

 

560,843

 

Nonperforming

 

 

 

 

 

3

 

 

 

708

 

 

 

 

 

 

4

 

 

 

273

 

 

 

 

 

 

988

 

Total commercial and industrial loans

 

 

264,762

 

 

 

55,412

 

 

 

51,634

 

 

 

15,925

 

 

 

10,960

 

 

 

11,704

 

 

 

151,434

 

 

 

561,831

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equipment financing agreements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payment performance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

 

239,738

 

 

 

79,400

 

 

 

101,460

 

 

 

47,484

 

 

 

10,684

 

 

 

1,388

 

 

 

 

 

 

480,154

 

Nonperforming

 

 

716

 

 

 

981

 

 

 

3,575

 

 

 

1,329

 

 

 

346

 

 

 

198

 

 

 

 

 

 

7,145

 

Total equipment financing agreements

 

 

240,454

 

 

 

80,381

 

 

 

105,035

 

 

 

48,813

 

 

 

11,030

 

 

 

1,586

 

 

 

 

 

 

487,299

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans receivable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payment performance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

 

1,976,453

 

 

 

877,754

 

 

 

653,926

 

 

 

507,667

 

 

 

382,548

 

 

 

536,902

 

 

 

202,931

 

 

 

5,138,181

 

Nonperforming

 

 

716

 

 

 

984

 

 

 

4,283

 

 

 

1,349

 

 

 

2,024

 

 

 

4,004

 

 

 

 

 

 

13,360

 

Total loans receivable

 

$

1,977,169

 

 

$

878,738

 

 

$

658,209

 

 

$

509,016

 

 

$

384,572

 

 

$

540,906

 

 

$

202,931

 

 

$

5,151,541

 

 

(1)
Includes extensions, renewals, or modifications of credit contracts, which consist of a new credit decision.

 

20


 

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

 

 

Accruing
90 Days
or More
Past Due

 

 

 

(in thousands)

 

September 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial property

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 

$

3,531

 

 

$

 

 

$

 

 

$

3,531

 

 

$

1,040,756

 

 

$

1,044,287

 

 

$

 

Hospitality

 

 

991

 

 

 

 

 

 

 

 

 

991

 

 

 

661,447

 

 

 

662,438

 

 

 

 

Other

 

 

214

 

 

 

 

 

 

269

 

 

 

483

 

 

 

2,044,395

 

 

 

2,044,878

 

 

 

 

Total commercial property loans

 

 

4,736

 

 

 

 

 

 

269

 

 

 

5,005

 

 

 

3,746,598

 

 

 

3,751,603

 

 

 

 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

102,342

 

 

 

102,342

 

 

 

 

Residential

 

 

404

 

 

 

 

 

 

10

 

 

 

414

 

 

 

649,175

 

 

 

649,589

 

 

 

 

Total real estate loans

 

 

5,140

 

 

 

 

 

 

279

 

 

 

5,419

 

 

 

4,498,115

 

 

 

4,503,534

 

 

 

 

Commercial and industrial loans

 

 

82

 

 

 

35

 

 

 

 

 

 

117

 

 

 

731,916

 

 

 

732,033

 

 

 

 

Equipment financing agreements

 

 

3,666

 

 

 

1,130

 

 

 

1,586

 

 

 

6,382

 

 

 

559,042

 

 

 

565,424

 

 

 

 

Total loans receivable

 

$

8,888

 

 

$

1,165

 

 

$

1,865

 

 

$

11,918

 

 

$

5,789,073

 

 

$

5,800,991

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial property

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 

$

 

 

$

 

 

$

 

 

$

 

 

$

970,134

 

 

$

970,134

 

 

$

 

Hospitality

 

 

556

 

 

 

 

 

 

 

 

 

556

 

 

 

717,136

 

 

 

717,692

 

 

 

 

Other

 

 

92

 

 

 

691

 

 

 

499

 

 

 

1,282

 

 

 

1,917,751

 

 

 

1,919,033

 

 

 

 

Total commercial property loans

 

 

648

 

 

 

691

 

 

 

499

 

 

 

1,838

 

 

 

3,605,021

 

 

 

3,606,859

 

 

 

 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

95,006

 

 

 

95,006

 

 

 

 

Residential

 

 

570

 

 

 

750

 

 

 

556

 

 

 

1,876

 

 

 

398,670

 

 

 

400,546

 

 

 

 

Total real estate loans

 

 

1,218

 

 

 

1,441

 

 

 

1,055

 

 

 

3,714

 

 

 

4,098,697

 

 

 

4,102,411

 

 

 

 

Commercial and industrial loans

 

 

56

 

 

 

9

 

 

 

 

 

 

65

 

 

 

561,766

 

 

 

561,831

 

 

 

 

Equipment financing agreements

 

 

3,764

 

 

 

1,992

 

 

 

1,181

 

 

 

6,937

 

 

 

480,362

 

 

 

487,299

 

 

 

 

Total loans receivable

 

$

5,038

 

 

$

3,442

 

 

$

2,236

 

 

$

10,716

 

 

$

5,140,825

 

 

$

5,151,541

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

21


 

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, 2022 and December 31, 2021.

 

 

 

September 30, 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

 

$

3,530

 

 

$

 

 

$

 

 

$

3,530

 

Other

 

 

914

 

 

 

341

 

 

 

 

 

 

1,255

 

Total commercial property loans

 

 

4,444

 

 

 

341

 

 

 

 

 

 

4,785

 

Residential

 

 

912

 

 

 

15

 

 

 

 

 

 

927

 

Total real estate loans

 

 

5,356

 

 

 

356

 

 

 

 

 

 

5,712

 

Commercial and industrial loans

 

 

 

 

 

409

 

 

 

 

 

 

409

 

Equipment financing agreements

 

 

368

 

 

 

5,102

 

 

 

 

 

 

5,470

 

Total

 

$

5,724

 

 

$

5,867

 

 

$

 

 

$

11,591

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2021

 

 

 

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

 

$

1,918

 

 

$

 

 

$

 

 

$

1,918

 

Other

 

 

1,745

 

 

 

337

 

 

 

 

 

 

2,082

 

Total commercial property loans

 

 

3,663

 

 

 

337

 

 

 

 

 

 

4,000

 

Residential

 

 

982

 

 

 

245

 

 

 

 

 

 

1,227

 

Total real estate loans

 

 

4,645

 

 

 

582

 

 

 

 

 

 

5,227

 

Commercial and industrial loans

 

 

8

 

 

 

980

 

 

 

 

 

 

988

 

Equipment financing agreements

 

 

1,172

 

 

 

5,973

 

 

 

 

 

 

7,145

 

Total

 

$

5,825

 

 

$

7,535

 

 

$

 

 

$

13,360

 

 

The Company did not recognize any interest income on nonaccrual loans for the three and nine months ended September 30, 2022 or 2021.

 

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

 

 

 

September 30, 2022

 

 

December 31, 2021

 

 

 

(in thousands)

 

Nonaccrual loans

 

$

11,591

 

 

$

13,360

 

Loans receivable 90 days or more past due and still accruing

 

 

 

 

 

 

Total nonperforming loans receivable

 

 

11,591

 

 

 

13,360

 

Other real estate owned ("OREO")

 

 

792

 

 

 

675

 

Total nonperforming assets

 

$

12,383

 

 

$

14,035

 

 

 

 

 

 

 

 

 

OREO is included in prepaid expenses and other assets in the accompanying Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021.

22


 

Troubled Debt Restructurings ("TDRs")

As of September 30, 2022 and December 31, 2021, TDRs were $1.6 million and $2.9 million, respectively. A debt restructuring is considered a TDR if we grant a concession that we would not have otherwise considered to a borrower for economic or legal reasons related to the borrower’s financial difficulties.

The following table details TDRs as of September 30, 2022 and December 31, 2021:

 

 

 

Nonaccrual TDRs

 

 

Accrual TDRs

 

 

 

Deferral of
Principal

 

 

Deferral of
Principal
and Interest

 

 

Reduction
of Principal
and Interest

 

 

Extension
of Maturity

 

 

Total

 

 

Deferral of
Principal

 

 

Deferral of
Principal
and Interest

 

 

Reduction
of Principal
and Interest

 

 

Extension
of Maturity

 

 

Total

 

 

 

(in thousands)

 

September 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans

 

$

274

 

 

$

 

 

$

88

 

 

$

 

 

$

362

 

 

$

 

 

$

1,144

 

 

$

 

 

$

 

 

$

1,144

 

Commercial and industrial loans

 

 

 

 

 

111

 

 

 

 

 

 

 

 

 

111

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

274

 

 

$

111

 

 

$

88

 

 

$

 

 

$

473

 

 

$

 

 

$

1,144

 

 

$

 

 

$

 

 

$

1,144

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans

 

$

346

 

 

$

2,046

 

 

$

372

 

 

$

 

 

$

2,764

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Commercial and industrial loans

 

 

 

 

 

124

 

 

 

 

 

 

 

 

 

124

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

346

 

 

$

2,170

 

 

$

372

 

 

$

 

 

$

2,888

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

The following table presents the number of loans by class modified as TDRs that occurred during the periods indicated, with their pre- and post-modification recorded amounts.

 

 

 

Three Months Ended

 

 

Twelve Months Ended

 

 

 

September 30, 2022

 

 

December 31, 2021

 

 

 

Number of
Loans

 

 

Pre-
Modification
Outstanding
Recorded
Investment

 

 

Post-
Modification
Outstanding
Recorded
Investment

 

 

Number of
Loans

 

 

Pre-
Modification
Outstanding
Recorded
Investment

 

 

Post-
Modification
Outstanding
Recorded
Investment

 

 

 

(in thousands except for number of loans)

 

Real estate loans

 

 

 

 

$

 

 

$

 

 

 

 

 

$

 

 

$

 

Total

 

 

 

 

$

 

 

$

 

 

 

 

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

Twelve Months Ended

 

 

 

September 30, 2022

 

 

December 31, 2021

 

 

 

Number of
Loans

 

 

Pre-
Modification
Outstanding
Recorded
Investment

 

 

Post-
Modification
Outstanding
Recorded
Investment

 

 

Number of
Loans

 

 

Pre-
Modification
Outstanding
Recorded
Investment

 

 

Post-
Modification
Outstanding
Recorded
Investment

 

 

 

(in thousands except for number of loans)

 

Real estate loans

 

 

1

 

 

$

92

 

 

$

88

 

 

 

 

 

$

 

 

$

 

Total

 

 

1

 

 

$

92

 

 

$

88

 

 

 

 

 

$

 

 

$

 

 

All TDRs are individually analyzed using one of three criteria: (1) the present value of expected future cash flows discounted at the loan’s effective interest rate; (2) the loan’s observable market price; or (3) the fair value of the collateral if the loan is collateral dependent. At September 30, 2022 and December 31, 2021, the allowance resulting from the individual evaluation of TDRs was immaterial.

A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms. No loans defaulted during the three or nine months ended September 30, 2022 following modification. During the year ended December 31, 2021, no loans defaulted within the twelve-month period following modification.

 

23


 

Note 4 — Servicing Assets

The changes in servicing assets for the three and nine months ended September 30, 2022 and 2021 were as follows:

 

 

 

Three Months Ended September 30,

 

 

 

2022

 

 

2021

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

7,354

 

 

$

6,199

 

Addition related to sale of SBA loans

 

 

828

 

 

 

1,171

 

Amortization

 

 

(758

)

 

 

(532

)

Balance at end of period

 

$

7,424

 

 

$

6,838

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

7,080

 

 

$

6,212

 

Addition related to sale of SBA loans

 

 

2,377

 

 

 

2,328

 

Amortization

 

 

(2,033

)

 

 

(1,702

)

Balance at end of period

 

$

7,424

 

 

$

6,838

 

 

At September 30, 2022 and December 31, 2021, we serviced loans sold to unaffiliated parties of $505.2 million and $473.5 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 and $1.1 million for the three months ended September 30, 2022 and 2021, respectively, and $3.7 million and $3.4 million for the nine months ended September 30, 2022 and 2021, 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 $758,000 and $532,000 for the three months ended September 30, 2022 and 2021, respectively, and $2.0 million and $1.7 million for the nine months ended September 30, 2022 and 2021, respectively.

The fair value of servicing rights was $7.7 million at September 30, 2022. The fair value at September 30, 2022 was determined using discount rates ranging from 15.6 percent to 18.3 percent and prepayment speeds ranging from 11.0 percent to 17.0 percent, depending on the stratification of the specific right. The fair value of servicing rights was $8.1 million at December 31, 2021. The fair value at December 31, 2021 was determined using discount rates ranging from 10.4 percent to 16.7 percent and prepayment speeds ranging from 10.2 percent to 12.8 percent, depending on the stratification of the specific right.

 

Note 5 — Income Taxes

The Company’s income tax expense was $11.0 million and $10.7 million, representing an effective income tax rate of 28.8 percent and 28.6 percent for the three months ended September 30, 2022 and 2021, respectively. The Company’s income tax expense was $29.7 million and $27.0 million, representing an effective income tax rate of 28.9 percent and 29.3 percent for the nine months ended September 30, 2022 and 2021, respectively.

Management concluded that as of September 30, 2022 and December 31, 2021, a valuation allowance of $1.6 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 $66.2 million and $44.1 million as of September 30, 2022 and December 31, 2021, respectively.

As of September 30, 2022, the Company was subject to examination by various taxing authorities for its federal tax returns for the periods ending on or after December 31, 2018 and state tax returns for the periods ending on or after December 31, 2017. During the quarter ended September 30, 2022, 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.

24


 

Note 6 — Goodwill and other Intangibles

The third-party originators 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, 2022

 

 

December 31, 2021

 

 

 

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

 

 

$

(1,998

)

 

$

215

 

 

$

2,213

 

 

$

(1,900

)

 

$

313

 

Third-party originators intangible

 

7 years

 

 

483

 

 

 

(461

)

 

 

22

 

 

 

483

 

 

 

(432

)

 

 

51

 

Goodwill

 

N/A

 

 

11,031

 

 

 

 

 

 

11,031

 

 

 

11,031

 

 

 

 

 

 

11,031

 

Total intangible assets

 

 

 

$

13,727

 

 

$

(2,460

)

 

$

11,267

 

 

$

13,727

 

 

$

(2,332

)

 

$

11,395

 

 

The Company performed an impairment analysis on its goodwill and other intangible assets as of December 31, 2021 and determined there was no impairment. No triggering event has occurred subsequent to December 31, 2021 that would require a reassessment of goodwill and other intangible assets.

Note 7 — Deposits

Time deposits exceeding the FDIC insurance limit of $250,000 as of September 30, 2022 and December 31, 2021 were $258.1 million and $173.5 million, respectively.

 

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

 

At September 30, 2022

 

Time
Deposits of
$250,000
or More

 

 

Other Time
Deposits

 

 

Total

 

 

 

(in thousands)

 

2022

 

$

73,828

 

 

$

105,193

 

 

$

179,021

 

2023

 

 

246,457

 

 

 

750,316

 

 

 

996,773

 

2024

 

 

 

 

 

65,396

 

 

 

65,396

 

2025

 

 

265

 

 

 

2,942

 

 

 

3,207

 

2026 and thereafter

 

 

263

 

 

 

3,017

 

 

 

3,280

 

Total

 

$

320,813

 

 

$

926,864

 

 

$

1,247,677

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2021

 

 

 

 

 

 

 

 

 

2022

 

$

206,478

 

 

$

672,821

 

 

$

879,299

 

2023

 

 

1,522

 

 

 

40,564

 

 

 

42,086

 

2024

 

 

 

 

 

60,854

 

 

 

60,854

 

2025

 

 

265

 

 

 

1,919

 

 

 

2,184

 

2026 and thereafter

 

 

262

 

 

 

2,503

 

 

 

2,765

 

Total

 

$

208,527

 

 

$

778,661

 

 

$

987,188

 

 

Accrued interest payable on deposits was $2.2 million and $1.2 million at September 30, 2022 and December 31, 2021, respectively. Total deposits reclassified to loans due to overdrafts at September 30, 2022 and December 31, 2021 were $700,000 and $277,000, respectively.

25


 

Note 8 — Borrowings and Subordinated Debentures

At September 30, 2022, the Bank had no overnight advances and $100.0 million of term advances outstanding with the FHLB with a weighted average interest rate of 0.87 percent. At December 31, 2021, the Bank had no overnight advances and $137.5 million of term advances with the FHLB with a weighted average rate of 1.05 percent. Interest expense on borrowings for the three months ended September 30, 2022 and 2021 was $349,000 and $409,000, respectively. Interest expense on borrowings for the nine months ended September 30, 2022 and 2021 was $1.1 million and $1.3 million, respectively.

 

 

 

September 30, 2022

 

 

December 31, 2021

 

 

 

Outstanding
Balance

 

 

Weighted
Average Rate

 

 

Outstanding
Balance

 

 

Weighted
Average Rate

 

 

 

(dollars in thousands)

 

Overnight advances

 

$

 

 

 

0.00

%

 

$

 

 

 

0.00

%

Advances due within 12 months

 

 

50,000

 

 

 

0.97

%

 

 

50,000

 

 

 

1.62

%

Advances due over 12 months through 24 months

 

 

37,500

 

 

 

0.40

%

 

 

50,000

 

 

 

0.97

%

Advances due over 24 months through 36 months

 

 

12,500

 

 

 

1.90

%

 

 

37,500

 

 

 

0.40

%

Outstanding advances

 

$

100,000

 

 

 

0.87

%

 

$

137,500

 

 

 

1.05

%

 

The following is financial data pertaining to FHLB advances:

 

 

 

September 30, 2022

 

 

December 31, 2021

 

 

 

(dollars in thousands)

 

Weighted-average interest rate at end of period

 

 

0.87

%

 

 

1.05

%

Weighted-average interest rate during the period

 

 

1.07

%

 

 

1.17

%

Average balance of FHLB advances

 

$

131,337

 

 

$

145,277

 

Maximum amount outstanding at any month-end

 

$

215,000

 

 

$

162,500

 

 

The Bank maintains a secured credit facility with the FHLB, allowing the Bank to borrow on an overnight and term basis. The Bank had $2.36 billion and $2.30 billion of loans pledged as collateral with the FHLB as of September 30, 2022 and December 31, 2021, respectively. The FHLB statutory lending limit was $1.86 billion and $1.80 billion at September 30, 2022 and December 31, 2021, respectively. The remaining available borrowing capacity was $1.39 billion and $1.61 billion at September 30, 2022 and December 31, 2021, respectively.

The Bank also had securities with market values of $24.5 million and $34.7 million at September 30, 2022 and December 31, 2021, respectively, pledged with the FRB, which provided $23.0 million and $32.8 million in available borrowing capacity through the Fed Discount Window as of September 30, 2022 and December 31, 2021, respectively.

On August 20, 2021, the Company issued $110.0 million of Fixed-to-Floating Subordinated Notes (“2021 Notes”) with a maturity date of September 1, 2031. The 2021 Notes have an initial fixed interest rate of 3.75 percent 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 2021 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 2021 Notes’ maturity date. At September 30, 2022 and December 31, 2021, the balance of the 2021 Notes included in the Company’s Consolidated Balance Sheet, net of issuance cost, was $108.1 million and $108.0 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 percent per annum. From and including March 30, 2022 and thereafter, the 2027 Notes bore interest at a floating rate equal to the then current three-month LIBOR, as calculated on each applicable date of determination, plus 3.315 percent 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 percent 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.

 

At September 30, 2022 and December 31, 2021, the balance of the 2027 Notes included in the Company’s Consolidated Balance Sheet, net of debt issuance cost, was $0 and $86.2 million, respectively.

26


 

 

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 percent fixed rate for the first five years and a variable rate of three-month LIBOR plus 140 basis points thereafter. 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, 2022 and December 31, 2021, the balance of Subordinated Debentures included in the Company’s Consolidated Balance Sheets, net of discount of $5.7 million and $6.0 million, was $21.1 million and $20.8 million, respectively. The amortization of discount was $104,000 and $102,000 for the three months ended September 30, 2022 and 2021, respectively, and $308,000 and $300,000 for the nine months ended September 30, 2022 and 2021, 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-based restricted stock 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,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

 

 

(dollars in thousands, except per share amounts)

 

Basic EPS

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

27,169

 

 

$

26,565

 

 

$

72,915

 

 

$

65,346

 

Less: income allocated to unvested restricted stock

 

 

163

 

 

 

138

 

 

 

408

 

 

 

948

 

Income allocated to common shares

 

$

27,006

 

 

$

26,427

 

 

$

72,507

 

 

$

64,398

 

Weighted-average shares for basic EPS

 

 

30,314,439

 

 

 

30,474,391

 

 

 

30,289,068

 

 

 

30,222,978

 

Basic EPS (1)

 

$

0.89

 

 

$

0.87

 

 

$

2.39

 

 

$

2.13

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of dilutive stock options and unvested performance stock units

 

 

82,323

 

 

 

77,805

 

 

 

80,470

 

 

 

75,575

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted EPS

 

 

 

 

 

 

 

 

 

 

 

 

Income allocated to common shares

 

$

27,006

 

 

$

26,427

 

 

$

72,507

 

 

$

64,398

 

Weighted-average shares for diluted EPS

 

 

30,396,762

 

 

 

30,552,196

 

 

 

30,369,538

 

 

 

30,298,553

 

Diluted EPS (1)

 

$

0.89

 

 

$

0.86

 

 

$

2.39

 

 

$

2.13

 

 

(1)
Per share amounts may not be able to be recalculated using net income and weighted-average shares presented above due to rounding.

 

There were no anti-dilutive stock options outstanding for the three months ended September 30, 2022 or 2021.

 

During the nine months ended September 30, 2022, the Company issued 38,036 performance stock units to executive officers from the 2021 Equity Compensation plan fair valued at $955,000 on the grant date of March 23, 2022. During the nine months ended September 30, 2021, the Company issued 42,626 performance stock units to executive officers from the 2013 Equity Compensation Plan fair valued at $784,000 on the grant date of March 24, 2021. These units have a three-year cliff vesting period and include dividend equivalent rights. Total performance stock units outstanding as of September 30, 2022 were 104,599 with an aggregate grant fair value of $2.0 million. As of September 30, 2022 and 2021, there were 104,599 and 66,563 performance stock units outstanding, respectively. In accordance with the treasury method, unvested performance stock units were included in the weighted average number of common shares for the diluted EPS calculation in the table above.

 

27


 

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 percent and a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0 percent. 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 percent.

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 percent and a minimum ratio of Tier 1 capital to risk-weighted assets of 8.0 percent. 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 percent.

At September 30, 2022, 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 percent 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 5.76 percent and 6.70 percent and the Company's capital conservation buffer was 5.55 percent and 5.93 percent as of September 30, 2022 and December 31, 2021, 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, 2022 and December 31, 2021 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, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total capital (to risk-weighted assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hanmi Financial

 

$

879,761

 

 

 

14.38

%

 

$

489,404

 

 

 

8.00

%

 

N/A

 

 

N/A

 

Hanmi Bank

 

$

840,236

 

 

 

13.76

%

 

$

488,565

 

 

 

8.00

%

 

$

610,706

 

 

 

10.00

%

Tier 1 capital (to risk-weighted assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hanmi Financial

 

$

706,670

 

 

 

11.55

%

 

$

367,053

 

 

 

6.00

%

 

N/A

 

 

N/A

 

Hanmi Bank

 

$

777,145

 

 

 

12.73

%

 

$

366,424

 

 

 

6.00

%

 

$

488,565

 

 

 

8.00

%

Common equity Tier 1 capital (to risk-weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hanmi Financial

 

$

685,531

 

 

 

11.21

%

 

$

275,290

 

 

 

4.50

%

 

N/A

 

 

N/A

 

Hanmi Bank

 

$

777,145

 

 

 

12.73

%

 

$

274,818

 

 

 

4.50

%

 

$

396,959

 

 

 

6.50

%

Tier 1 capital (to average assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hanmi Financial

 

$

706,670

 

 

 

9.99

%

 

$

283,039

 

 

 

4.00

%

 

N/A

 

 

N/A

 

Hanmi Bank

 

$

777,145

 

 

 

11.02

%

 

$

282,187

 

 

 

4.00

%

 

$

352,734

 

 

 

5.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total capital (to risk-weighted assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hanmi Financial

 

$

912,527

 

 

 

16.57

%

 

$

440,639

 

 

 

8.00

%

 

N/A

 

 

N/A

 

Hanmi Bank

 

$

809,279

 

 

 

14.70

%

 

$

440,493

 

 

 

8.00

%

 

$

550,616

 

 

 

10.00

%

Tier 1 capital (to risk-weighted assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hanmi Financial

 

$

657,250

 

 

 

11.93

%

 

$

330,479

 

 

 

6.00

%

 

N/A

 

 

N/A

 

Hanmi Bank

 

$

748,177

 

 

 

13.59

%

 

$

330,369

 

 

 

6.00

%

 

$

440,493

 

 

 

8.00

%

Common equity Tier 1 capital (to risk-weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hanmi Financial

 

$

636,419

 

 

 

11.55

%

 

$

247,859

 

 

 

4.50

%

 

N/A

 

 

N/A

 

Hanmi Bank

 

$

748,177

 

 

 

13.59

%

 

$

247,777

 

 

 

4.50

%

 

$

357,900

 

 

 

6.50

%

Tier 1 capital (to average assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hanmi Financial

 

$

657,250

 

 

 

9.63

%

 

$

273,133

 

 

 

4.00

%

 

N/A

 

 

N/A

 

Hanmi Bank

 

$

748,177

 

 

 

10.96

%

 

$

273,101

 

 

 

4.00

%

 

$

341,376

 

 

 

5.00

%

 

28


 

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.

29


 

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, 2022 and December 31, 2021, 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, a Level 2 measurement, or management’s judgment and estimation of value reported on older appraisals that are then adjusted based on recent market trends, 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. 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 contracts 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.

30


 

Assets and Liabilities Measured at Fair Value on a Recurring Basis

As of September 30, 2022 and December 31, 2021, 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, 2022

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

33,160

 

 

$

 

 

$

 

 

$

33,160

 

U.S. government agency and sponsored agency obligations:

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

 

 

 

 

522,370

 

 

 

 

 

 

522,370

 

Collateralized mortgage obligations

 

 

 

 

 

86,406

 

 

 

 

 

 

86,406

 

Debt securities

 

 

 

 

 

127,634

 

 

 

 

 

 

127,634

 

Total U.S. government agency and sponsored agency obligations

 

 

 

 

 

736,410

 

 

 

 

 

 

736,410

 

Municipal bonds-tax exempt

 

 

 

 

 

60,581

 

 

 

 

 

 

60,581

 

Total securities available for sale

 

$

33,160

 

 

$

796,991

 

 

$

 

 

$

830,151

 

Derivative financial instruments

 

$

 

 

$

7,891

 

 

$

 

 

$

7,891

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

$

 

 

$

7,724

 

 

$

 

 

$

7,724

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

15,397

 

 

$

 

 

$

 

 

$

15,397

 

U.S. government agency and sponsored agency obligations:

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

 

 

 

 

607,505

 

 

 

 

 

 

607,505

 

Collateralized mortgage obligations

 

 

 

 

 

93,604

 

 

 

 

 

 

93,604

 

Debt securities

 

 

 

 

 

115,896

 

 

 

 

 

 

115,896

 

Total U.S. government agency and sponsored agency obligations

 

 

 

 

 

817,005

 

 

 

 

 

 

817,005

 

Municipal bonds-tax exempt

 

 

 

 

 

78,388

 

 

 

 

 

 

78,388

 

Total securities available for sale

 

$

15,397

 

 

$

895,393

 

 

$

 

 

$

910,790

 

Derivative financial instruments

 

$

 

 

$

1,379

 

 

$

 

 

$

1,379

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

$

 

 

$

1,360

 

 

$

 

 

$

1,360

 

 

31


 

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

As of September 30, 2022 and December 31, 2021, 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, 2022

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Collateral dependent loans (1)

 

$

5,051

 

 

$

 

 

$

 

 

$

5,051

 

Other real estate owned

 

 

792

 

 

 

 

 

 

 

 

 

792

 

Repossessed personal property

 

 

224

 

 

 

 

 

 

 

 

 

224

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Collateral dependent loans (2)

 

$

3,398

 

 

$

 

 

$

 

 

$

3,398

 

Other real estate owned

 

 

675

 

 

 

 

 

 

 

 

 

675

 

Repossessed personal property

 

 

8

 

 

 

 

 

 

 

 

 

8

 

 

(1)
Consisted of real estate loans of $5.1 million.
(2)
Consisted of real estate loans of $3.4 million.

32


 

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, 2022 and December 31, 2021:

 

 

 

Fair Value

 

 

Valuation
Techniques

 

Unobservable
Input(s)

 

Range (Weighted
Average)

 

 

 

(in thousands)

 

September 30, 2022

 

 

 

 

 

 

 

 

 

 

Collateral dependent loans:

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

Commercial property

 

 

 

 

 

 

 

 

 

 

Retail

 

$

3,531

 

 

Market approach

 

Market data comparison

 

5% to 25% / 16%

(1)

Other

 

 

608

 

 

Market approach

 

Market data comparison

 

(35)% to 20% / (11)%

(1)

Residential

 

 

912

 

 

Market approach

 

Market data comparison

 

(19)% to 10% / 2%

(1)

Total real estate loans

 

 

5,051

 

 

 

 

 

 

 

 

Total

 

$

5,051

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other real estate owned

 

$

792

 

 

Market approach

 

Market data comparison

 

(20)% to 20% / (3)%

 

 

 

 

 

 

 

 

 

 

 

 

Repossessed personal property

 

 

224

 

 

Market approach

 

Market data comparison

 

 

(2)

 

 

 

 

 

 

 

 

 

 

 

December 31, 2021

 

 

 

 

 

 

 

 

 

 

Collateral dependent loans:

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

Commercial property

 

 

 

 

 

 

 

 

 

 

Retail

 

$

1,917

 

 

Market approach

 

Market data comparison

 

(28)% to 23% / (6)%

(1)

Other

 

 

499

 

 

Market approach

 

Market data comparison

 

(20)% to 20% / 0%

(1)

Residential

 

 

982

 

 

Market approach

 

Market data comparison

 

(19)% to 8% / 3%

(1)

Total real estate loans

 

 

3,398

 

 

 

 

 

 

 

 

Total

 

$

3,398

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other real estate owned

 

$

675

 

 

Market approach

 

Market data comparison

 

(20)% to (5)% / (12)%

 

 

 

 

 

 

 

 

 

 

 

 

Repossessed personal property

 

 

8

 

 

Market approach

 

Market data comparison

 

 

(2)

 

(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 adjustment represent decreases.
(2)
The equipment is usually too low 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.

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.

33


 

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, 2022, 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 fair values of off-balance sheet items were based upon the difference between the current value of similar loans and the price at which the Bank has committed to make the loans.

The estimated fair values of financial instruments were as follows:

 

 

 

September 30, 2022

 

 

 

Carrying

 

 

Fair Value

 

 

 

Amount

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(in thousands)

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

275,159

 

 

$

275,159

 

 

$

 

 

$

 

Securities available for sale

 

 

830,151

 

 

 

33,160

 

 

 

796,991

 

 

 

 

Loans held for sale

 

 

10,044

 

 

 

 

 

 

10,562

 

 

 

 

Loans receivable, net of allowance for credit losses

 

 

5,729,407

 

 

 

 

 

 

 

 

 

5,640,118

 

Accrued interest receivable

 

 

15,356

 

 

 

15,356

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

 

2,771,498

 

 

 

 

 

 

2,771,498

 

 

 

 

Interest-bearing deposits

 

 

3,429,878

 

 

 

 

 

 

 

 

 

3,433,676

 

Borrowings and subordinated debentures

 

 

229,261

 

 

 

 

 

 

95,861

 

 

 

122,747

 

Accrued interest payable

 

 

2,180

 

 

 

2,180

 

 

 

 

 

 

 

 

 

 

December 31, 2021

 

 

 

Carrying

 

 

Fair Value

 

 

 

Amount

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(in thousands)

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

608,965

 

 

$

608,965

 

 

$

 

 

$

 

Securities available for sale

 

 

910,790

 

 

 

15,397

 

 

 

895,393

 

 

 

 

Loans held for sale

 

 

13,342

 

 

 

 

 

 

14,723

 

 

 

 

Loans receivable, net of allowance for credit losses

 

 

5,078,984

 

 

 

 

 

 

 

 

 

5,072,282

 

Accrued interest receivable

 

 

11,976

 

 

 

11,976

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

 

2,574,517

 

 

 

 

 

 

2,574,517

 

 

 

 

Interest-bearing deposits

 

 

3,211,752

 

 

 

 

 

 

 

 

 

3,211,708

 

Borrowings and subordinated debentures

 

 

352,506

 

 

 

 

 

 

137,198

 

 

 

213,179

 

Accrued interest payable

 

 

1,161

 

 

 

1,161

 

 

 

 

 

 

 

 

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 our 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.

34


 

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

 

 

 

September 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

 

 

(in thousands)

 

Unused commitments to extend credit

 

$

746,354

 

 

$

626,474

 

Standby letters of credit

 

 

63,597

 

 

 

49,287

 

Commercial letters of credit

 

 

19,511

 

 

 

39,261

 

Total commitments

 

$

829,462

 

 

$

715,022

 

 

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,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

 

 

(in thousands)

 

Balance at beginning of period

 

$

2,313

 

 

$

3,643

 

 

$

2,586

 

 

$

2,792

 

Provision expense (recovery) for credit losses

 

 

936

 

 

 

1,208

 

 

 

663

 

 

 

2,059

 

Balance at end of period

 

$

3,249

 

 

$

4,851

 

 

$

3,249

 

 

$

4,851

 

 

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, 2022, the outstanding balances for our right-of-use asset and lease liability were $42.0 million and $45.8 million, respectively. The outstanding balances of the right-of-use asset and lease liability were $46.3 million and $49.7 million, respectively, as of December 31, 2021.

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.

35


 

At September 30, 2022, 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)

 

2022

 

$

8,076

 

2023

 

 

7,465

 

2024

 

 

7,061

 

2025

 

 

5,881

 

2026

 

 

5,181

 

Thereafter

 

 

16,305

 

Remaining lease commitments

 

 

49,969

 

Interest

 

 

(4,194

)

Present value of lease liability

 

$

45,775

 

 

Weighted average remaining lease terms for the Company's operating leases were 7.25 years and 7.85 years as of September 30, 2022 and December 31, 2021, respectively. Weighted average discount rates used for the Company's operating leases were 2.38 percent as of September 30, 2022 and December 31, 2021. Net lease expense recognized for each of the three months and nine months ended September 30, 2022 and 2021 was $2.1 million and $6.2 million, respectively. This included operating lease costs of $2.0 million for each of the three months ended September 30, 2022 and 2021, respectively. For the nine months ended September 30, 2022 and 2021, operating lease costs were $5.9 million and $6.1 million, respectively. Sublease income for operating leases was immaterial for the three and nine months ended September 30, 2022 and 2021.

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 $1.9 million for each of the three months ended September 30, 2022 and 2021, and $5.9 million and $6.0 million for the nine months ended September 30, 2022 and 2021, respectively.

Note 14 — Liquidity

Hanmi Financial

As of September 30, 2022, Hanmi Financial had $14.9 million in cash on deposit with its bank subsidiary and $11.8 million of U.S. Treasury securities at fair value. As of December 31, 2021, the Company had $94.9 million in cash on deposit with its bank subsidiary. 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 our 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, 2022 and December 31, 2021, the Bank had $100.0 million and $137.5 million, respectively, of FHLB advances, and $93.3 million and $141.8 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 30.0 percent of its assets. As of September 30, 2022 and December 31, 2021, the total borrowing capacity available, based on pledged collateral was $1.61 billion and $1.84 billion, respectively. The remaining available borrowing capacity was $1.39 billion and $1.61 billion as of September 30, 2022 and December 31, 2021, 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.

36


 

As a means of augmenting its liquidity, the Bank had an available borrowing source of $23.0 million from the Federal Reserve Discount Window, to which the Bank pledged securities with a carrying value of $28.6 million, with no borrowings as of September 30, 2022. 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, 2022.

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, 2022 and December 31, 2021.

 

As of September 30, 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

 

$

61,589

 

 

Other Assets

 

$

7,891

 

 

$

61,589

 

 

Other Liabilities

 

$

7,724

 

Total derivatives not designated as hedging instruments

 

 

 

 

 

 

$

7,891

 

 

 

 

 

 

 

$

7,724

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2021

 

Derivative Assets

 

 

Derivative Liabilities

 

 

 

Notional Amount

 

 

Balance Sheet Location

 

Fair Value

 

 

Notional Amount

 

 

Balance Sheet Location

 

Fair Value

 

 

 

(in thousands)

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate products

 

$

61,968

 

 

Other Assets

 

$

1,379

 

 

$

61,968

 

 

Other Liabilities

 

$

1,360

 

Total derivatives not designated as hedging instruments

 

 

 

 

 

 

$

1,379

 

 

 

 

 

 

 

$

1,360

 

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 three and nine months ended September 30, 2022 and 2021.

 

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,

 

 

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

 

 

 

 

(in thousands)

 

Interest rate products

 

Other income

 

$

35

 

 

$

7

 

 

$

148

 

 

$

92

 

Total

 

 

 

$

35

 

 

$

7

 

 

$

148

 

 

$

92

 

The Company did not recognize any fee income from its derivative financial instruments for the three and nine months ended September 30, 2022 or 2021.

37


 

The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives as of September 30, 2022 and December 31, 2021. 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, 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

 

$

7,891

 

 

$

 

 

$

7,891

 

 

$

7,724

 

 

$

167

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Offsetting of Derivative Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 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

 

$

7,724

 

 

$

 

 

$

7,724

 

 

$

7,724

 

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Offsetting of Derivative Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Amounts Not Offset in the Consolidated Balance Sheets

 

 

 

Gross Amounts of Recognized Assets

 

 

Gross Amounts Offset in the Consolidated Balance Sheets

 

 

Net Amounts of Assets presented in the Consolidated Balance Sheets

 

 

Financial Instruments

 

 

Cash Collateral Received

 

 

Net Amount

 

 

 

(in thousands)

 

Derivatives

 

$

1,379

 

 

$

 

 

$

1,379

 

 

$

1,360

 

 

$

19

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Offsetting of Derivative Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Amounts Not Offset in the Consolidated Balance Sheets

 

 

 

Gross Amounts of Recognized Liabilities

 

 

Gross Amounts Offset in the Consolidated Balance Sheets

 

 

Net Amounts of Liabilities presented in the Consolidated Balance Sheets

 

 

Financial Instruments

 

 

Cash Collateral Provided

 

 

Net Amount

 

 

 

(in thousands)

 

Derivatives

 

$

1,360

 

 

$

 

 

$

1,360

 

 

$

1,360

 

 

$

 

 

$

 

 

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.

38


 

 

As of September 30, 2022 and December 31, 2021, the fair value of derivatives in a net asset position for counterparty transactions, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $7.9 million and $1.4 million, respectively. As of September 30, 2022, the Company had not posted any collateral with its counterparties related to these agreements and is adequately collateralized since its net asset position was $167,000 ($7.9 million of fair value of assets less $7.7 million of fair value of liabilities) as of September 30, 2022. As of December 31, 2021, the Company had posted no collateral related to these agreements and was adequately collateralized since its net asset position was $19,000 ($1.4 million of fair value of assets less $1.4 million of fair value of liabilities).

Note 16 — Subsequent Events

As of the date of issuance of these financial statements, no subsequent events were identified.

39


 

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, 2022. This analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 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, 2022 (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 position 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, 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 Bank; the effect of our rating under the Community Reinvestment Act 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; 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; risks of natural disasters; the current or anticipated impact of military conflict, terrorism or other geopolitical events; 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; 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; 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 2021 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 2021 Annual Report on Form 10-K. We had no significant changes in our accounting policies since the filing of our 2021 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

40


 

accounting policies, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies” in our 2021 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 $27.2 million, or $0.89 per diluted share, for the three months ended September 30, 2022 compared with $26.6 million, or $0.86 per diluted share, for the same period a year ago. The increase in net income was primarily driven by an increase in net interest income of $13.1 million, offset by a $3.6 million decrease in noninterest income due to lower gain on SBA loan sales and an increase in credit loss expense of $7.8 million. The comparative increase in credit loss expense during the third quarter of 2022 was due to a $7.2 million recovery of credit loss expense in the third quarter of 2021.

For the nine months ended September 30, 2022, net income was $72.9 million, or $2.39 per diluted share, compared with $65.3 million, or $2.13 per diluted share, for the same period a year ago. The increase in net income for the nine months ended September 30, 2022 reflected an increase in net interest income of $27.5 million, offset by increases of $9.2 million in credit loss expense, $3.6 million in other noninterest expense and $4.5 million in noninterest income.

Other financial highlights include the following:

Cash and due from banks decreased $333.8 million to $275.2 million as of September 30, 2022 from $609.0 million at December 31, 2021, primarily as excess liquidity was used to fund strong loan production and the redemption of subordinated debentures.
Securities decreased $80.6 million to $830.2 million at September 30, 2022 from $910.8 million at December 31, 2021, attributable to the impact of unrealized losses from rising interest rates.
Loans receivable, before the allowance for credit losses, were $5.80 billion at September 30, 2022 compared with $5.15 billion at December 31, 2021.
Deposits were $6.20 billion at September 30, 2022 compared with $5.79 billion at December 31, 2021.
Subordinated debentures and borrowings decreased $123.2 million to $229.3 million at September 30, 2022 from $352.5 million at December 31, 2021, primarily due to the $100.0 million redemption of the 2027 Notes.

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 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.

41


 

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, 2022

 

 

September 30, 2021

 

 

 

 

 

 

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)

 

$

5,696,587

 

 

$

66,976

 

 

 

4.67

%

 

$

4,684,570

 

 

$

52,961

 

 

 

4.49

%

Securities (2)

 

 

956,989

 

 

 

3,272

 

 

 

1.40

%

 

 

878,866

 

 

 

1,865

 

 

 

0.87

%

FHLB stock

 

 

16,385

 

 

 

245

 

 

 

5.93

%

 

 

16,385

 

 

 

245

 

 

 

5.93

%

Interest-bearing deposits in other banks

 

 

181,401

 

 

 

957

 

 

 

2.09

%

 

 

872,783

 

 

 

329

 

 

 

0.15

%

Total interest-earning assets

 

 

6,851,362

 

 

 

71,450

 

 

 

4.15

%

 

 

6,452,604

 

 

 

55,400

 

 

 

3.41

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

 

66,865

 

 

 

 

 

 

 

 

 

64,454

 

 

 

 

 

 

 

Allowance for credit losses

 

 

(73,338

)

 

 

 

 

 

 

 

 

(83,252

)

 

 

 

 

 

 

Other assets

 

 

250,500

 

 

 

 

 

 

 

 

 

223,261

 

 

 

 

 

 

 

Total assets

 

$

7,095,389

 

 

 

 

 

 

 

 

$

6,657,067

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand: interest-bearing

 

$

121,269

 

 

$

32

 

 

 

0.10

%

 

$

115,233

 

 

$

15

 

 

 

0.05

%

Money market and savings

 

 

2,079,490

 

 

 

3,807

 

 

 

0.73

%

 

 

2,033,876

 

 

 

1,207

 

 

 

0.24

%

Time deposits

 

 

1,120,149

 

 

 

2,728

 

 

 

0.97

%

 

 

1,061,359

 

 

 

1,244

 

 

 

0.46

%

Total interest-bearing deposits

 

 

3,320,908

 

 

 

6,567

 

 

 

0.78

%

 

 

3,210,468

 

 

 

2,466

 

 

 

0.30

%

Borrowings

 

 

123,370

 

 

 

387

 

 

 

1.24

%

 

 

143,750

 

 

 

409

 

 

 

1.13

%

Subordinated debentures

 

 

129,176

 

 

 

1,410

 

 

 

4.37

%

 

 

163,340

 

 

 

2,545

 

 

 

6.23

%

Total interest-bearing liabilities

 

 

3,573,454

 

 

 

8,364

 

 

 

0.93

%

 

 

3,517,558

 

 

 

5,420

 

 

 

0.61

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing liabilities and equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits: noninterest-bearing

 

 

2,717,810

 

 

 

 

 

 

 

 

 

2,444,759

 

 

 

 

 

 

 

Other liabilities

 

 

112,336

 

 

 

 

 

 

 

 

 

79,348

 

 

 

 

 

 

 

Stockholders’ equity

 

 

691,789

 

 

 

 

 

 

 

 

 

615,402

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

7,095,389

 

 

 

 

 

 

 

 

$

6,657,067

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

 

$

63,086

 

 

 

 

 

 

 

 

$

49,980

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of deposits (3)

 

 

 

 

 

 

 

 

0.43

%

 

 

 

 

 

 

 

 

0.17

%

Net interest spread (taxable equivalent basis) (4)

 

 

 

 

 

 

 

 

3.22

%

 

 

 

 

 

 

 

 

2.80

%

Net interest margin (taxable equivalent basis) (5)

 

 

 

 

 

 

 

 

3.66

%

 

 

 

 

 

 

 

 

3.07

%

 

(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)
Amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate.
(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.

42


 

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, 2022 vs September 30, 2021

 

 

 

Increases (Decreases) Due to Change In

 

 

 

Volume

 

 

Rate

 

 

Total

 

 

 

(in thousands)

 

Interest and dividend income:

 

 

 

 

 

 

 

 

 

Loans receivable (1)

 

$

11,412

 

 

$

2,603

 

 

$

14,015

 

Securities (2)

 

 

166

 

 

 

1,241

 

 

 

1,407

 

FHLB stock

 

 

 

 

 

 

 

 

 

Interest-bearing deposits in other banks

 

 

(261

)

 

 

889

 

 

 

628

 

Total interest and dividend income

 

 

11,317

 

 

 

4,733

 

 

 

16,050

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

Demand: interest-bearing

 

$

1

 

 

$

16

 

 

$

17

 

Money market and savings

 

 

28

 

 

 

2,572

 

 

 

2,600

 

Time deposits

 

 

69

 

 

 

1,415

 

 

 

1,484

 

Borrowings

 

 

(54

)

 

 

32

 

 

 

(22

)

Subordinated debentures

 

 

(528

)

 

 

(607

)

 

 

(1,135

)

Total interest expense

 

 

(484

)

 

 

3,428

 

 

 

2,944

 

Change in net interest income

 

$

11,801

 

 

$

1,305

 

 

$

13,106

 

 

(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)
Amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate.

 

For the three months ended September 30, 2022 and 2021, net interest income was $63.1 million and $50.0 million, respectively. The net interest spread and net interest margin, on a taxable equivalent basis, for the quarter ended September 30, 2022, were 3.22 percent and 3.66 percent, respectively, compared with 2.80 percent and 3.07 percent, respectively, for the same period in 2021. Interest and dividend income increased $16.1 million, or 29.0 percent, to $71.5 million for the three months ended September 30, 2022 from $55.4 million for the same period in 2021 due to higher average interest-earning asset balances and yields. Interest expense increased $2.9 million, or 54.3 percent, to $8.4 million for the three months ended September 30, 2022 from $5.4 million for the same period in 2021 primarily due to higher deposit rates due to the rising interest rate environment offset by lower subordinated debenture costs.

 

The average balance of interest earning assets increased $398.8 million, or 6.2 percent, to $6.85 billion for the three months ended September 30, 2022 from $6.45 billion for the three months ended September 30, 2021. The average balance of loans increased $1.01 billion, or 21.6 percent, to $5.70 billion for the three months ended September 30, 2022 from $4.68 billion for the three months ended September 30, 2021 due mainly to strong loan production. The average balance of securities increased $78.1 million, or 8.9 percent, to $957.0 million for the three months ended September 30, 2022 from $878.9 million for the three months ended September 30, 2021. Interest-bearing deposits at other banks decreased $691.4 million to $181.4 million for the three months ended September 30, 2021, as excess funds were used to fund loan and securities growth.

 

The average yield on interest-earning assets, on a taxable equivalent basis, increased 74 basis points to 4.15 percent for the three months ended September 30, 2022 from 3.41 percent for the three months ended September 30, 2021, mainly due to the higher interest rate environment. The average yield on loans increased to 4.67 percent for the three months ended September 30, 2022 from 4.49 percent for the three months ended September 30, 2021, driven mainly by the higher interest rate environment. The average yield on securities, on a taxable equivalent basis, increased to 1.40 percent for the three months ended September 30, 2022 from 0.87 percent for the three months ended September 30, 2021 reflecting the rising market interest rate environment. The average yield on interest-bearing deposits in other banks increased 194 basis points to 2.09 percent for the three months ended September 30, 2022 from 0.15 percent for the three months ended September 30, 2021 mainly due to higher market rates.

 

The average balance of interest-bearing liabilities increased $55.9 million, or 1.6 percent, to $3.57 billion for the three months ended September 30, 2022 compared to $3.52 billion for the three months ended September 30, 2021. The average balance

43


 

of time deposits, and money market and savings accounts increased $58.8 million and $45.6 million, respectively, offset by decreases in the average balance of borrowings and subordinated debentures of $20.4 million and $34.2 million, respectively.

 

The average cost of interest-bearing liabilities was 0.93 percent and 0.61 percent for the three months ended September 30, 2022 and 2021, respectively. The average cost of subordinated debentures decreased 186 basis points to 4.37 percent for the three months ended September 30, 2022 compared to 6.23 percent for the three months ended September 30, 2021 due to the lower interest cost of the 2021 Notes and the redemption of the 2027 Notes. The average cost of borrowings increased 11 basis points to 1.24 percent for the three months ended September 30, 2022 compared to 1.13 percent for the three months ended September 30, 2021. The average cost of interest-bearing deposits increased 48 basis points to 0.78 percent for the three months ended September 30, 2022 compared to 0.30 percent for the three months ended September 30, 2021.

44


 

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, 2022

 

 

September 30, 2021

 

 

 

 

 

 

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)

 

$

5,501,957

 

 

$

180,755

 

 

 

4.39

%

 

$

4,759,980

 

 

$

156,361

 

 

 

4.39

%

Securities (2)

 

 

944,359

 

 

 

8,718

 

 

 

1.89

%

 

 

822,282

 

 

 

4,409

 

 

 

0.73

%

FHLB stock

 

 

16,385

 

 

 

735

 

 

 

6.00

%

 

 

16,385

 

 

 

693

 

 

 

5.66

%

Interest-bearing deposits in other banks

 

 

269,772

 

 

 

1,366

 

 

 

0.68

%

 

 

644,521

 

 

 

601

 

 

 

0.12

%

Total interest-earning assets

 

 

6,732,473

 

 

 

191,574

 

 

 

3.81

%

 

 

6,243,168

 

 

 

162,064

 

 

 

3.47

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

 

65,911

 

 

 

 

 

 

 

 

 

60,923

 

 

 

 

 

 

 

Allowance for credit losses

 

 

(73,471

)

 

 

 

 

 

 

 

 

(86,970

)

 

 

 

 

 

 

Other assets

 

 

245,259

 

 

 

 

 

 

 

 

 

225,687

 

 

 

 

 

 

 

Total assets

 

$

6,970,172

 

 

 

 

 

 

 

 

$

6,442,808

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand: interest-bearing

 

$

122,964

 

 

$

68

 

 

 

0.07

%

 

$

110,200

 

 

$

44

 

 

 

0.05

%

Money market and savings

 

 

2,108,232

 

 

 

6,566

 

 

 

0.42

%

 

 

2,011,242

 

 

 

3,984

 

 

 

0.26

%

Time deposits

 

 

984,517

 

 

 

4,404

 

 

 

0.60

%

 

 

1,144,942

 

 

 

5,391

 

 

 

0.63

%

Total interest-bearing deposits

 

 

3,215,713

 

 

 

11,038

 

 

 

0.46

%

 

 

3,266,384

 

 

 

9,419

 

 

 

0.39

%

Borrowings

 

 

131,364

 

 

 

1,113

 

 

 

1.13

%

 

 

147,924

 

 

 

1,332

 

 

 

1.20

%

Subordinated debentures

 

 

156,817

 

 

 

6,337

 

 

 

5.39

%

 

 

134,012

 

 

 

5,759

 

 

 

5.73

%

Total interest-bearing liabilities

 

 

3,503,894

 

 

 

18,488

 

 

 

0.70

%

 

 

3,548,320

 

 

 

16,510

 

 

 

0.62

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing liabilities and equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits: noninterest-bearing

 

 

2,689,807

 

 

 

 

 

 

 

 

 

2,221,373

 

 

 

 

 

 

 

Other liabilities

 

 

101,685

 

 

 

 

 

 

 

 

 

75,720

 

 

 

 

 

 

 

Stockholders’ equity

 

 

674,786

 

 

 

 

 

 

 

 

 

597,395

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

6,970,172

 

 

 

 

 

 

 

 

$

6,442,808

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

 

$

173,086

 

 

 

 

 

 

 

 

$

145,554

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of deposits (3)

 

 

 

 

 

 

 

 

0.25

%

 

 

 

 

 

 

 

 

0.23

%

Net interest spread (taxable equivalent basis) (4)

 

 

 

 

 

 

 

 

3.10

%

 

 

 

 

 

 

 

 

2.85

%

Net interest margin (taxable equivalent basis) (5)

 

 

 

 

 

 

 

 

3.44

%

 

 

 

 

 

 

 

 

3.12

%

 

(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)
Amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate.
(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.

45


 

The following table shows changes in interest income (on a tax-equivalent basis), interest expense and the amounts attributable to variation 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 rate categories in proportion to the relationship of the absolute dollar amount attributable solely to the change in volume and rate.

 

 

 

Nine Months Ended

 

 

 

September 30, 2022 vs September 30, 2021

 

 

 

Increases (Decreases) Due to Change In

 

 

 

Volume

 

 

Rate

 

 

Total

 

 

 

(in thousands)

 

Interest and dividend income:

 

 

 

 

 

 

 

 

 

Loans receivable (1)

 

$

24,272

 

 

$

122

 

 

$

24,394

 

Securities (2)

 

 

655

 

 

 

3,654

 

 

 

4,309

 

FHLB stock

 

 

 

 

 

42

 

 

 

42

 

Interest-bearing deposits in other banks

 

 

(349

)

 

 

1,114

 

 

 

765

 

Total interest and dividend income

 

 

24,578

 

 

 

4,932

 

 

 

29,510

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

Demand: interest-bearing

 

$

5

 

 

$

19

 

 

$

24

 

Money market and savings

 

 

194

 

 

 

2,388

 

 

 

2,582

 

Time deposits

 

 

(755

)

 

 

(232

)

 

 

(987

)

Borrowings

 

 

(154

)

 

 

(65

)

 

 

(219

)

Subordinated debentures

 

 

974

 

 

 

(396

)

 

 

578

 

Total interest expense

 

 

264

 

 

 

1,714

 

 

 

1,978

 

Change in net interest income

 

$

24,314

 

 

$

3,218

 

 

$

27,532

 

 

(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)
Amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate.

 

For the nine months ended September 30, 2022 and 2021, net interest income was $173.1 million and $145.6 million, respectively. The $27.5 million increase was primarily driven by a $29.5 million, or 18.2 percent, year over year increase in interest income due to higher yields and average balances of interest earning assets. Interest expense increased $2.0 million, or 12.0 percent, to $18.5 million for the nine months ended September 30, 2022 from $16.5 million for the same period in 2021. Higher rates on interest bearing deposits drove a $1.6 million increase in interest expense on deposits. Additionally, interest expense on subordinated debentures increased by $0.6 million due to the issuance of the 2021 Notes and the pre-tax charge of $1.1 million incurred in connection with the redemption of the 2027 Notes during the first quarter of 2022. Offsetting the increases in interest expense on deposits and subordinated debentures was a decrease of $0.2 million in interest expense on borrowings primarily due to lower average balances.

 

The average balance of interest earning assets increased $489.3 million, or 7.8 percent, to $6.73 billion for the nine months ended September 30, 2022 from $6.24 billion for the nine months ended September 30, 2021. The average balance of loans increased $742.0 million, or 15.6 percent, to $5.50 billion for the nine months ended September 30, 2022 from $4.76 billion for the nine months ended September 30, 2021 due mainly to strong loan production. The average balance of securities increased $122.1 million, or 14.8 percent, to $944.4 million for the nine months ended September 30, 2022 from $822.3 million for the nine months ended September 30, 2021. Interest-bearing deposits at other banks decreased $374.7 million to $269.8 million for the nine months ended September 30, 2021, as excess liquidity was used to fund loan growth and additional securities purchases.

 

The average yield on interest-earning assets, on a taxable equivalent basis, increased 34 basis points to 3.81 percent for the nine months ended September 30, 2022 from 3.47 percent for the nine months ended September 30, 2021, mainly due to higher average loan and securities balances and the rising interest rate environment. The average yield on loans was 4.39 percent for both the nine months ended September 30, 2022 and September 30, 2021. The average yield on securities, on a taxable equivalent basis, increased to 1.89 percent for the nine months ended September 30, 2022 from 0.73 percent for the nine months ended September 30, 2021 reflecting the rising market interest rates environment. The average yield on interest-bearing deposits with other banks increased 56 basis points to 0.68 percent for the nine months ended September 30, 2022 from 0.12 percent for the nine months ended September 30, 2021 reflecting the rising market interest rates environment.

 

The average balance of interest-bearing liabilities decreased $44.4 million, or 1.3 percent, to $3.50 billion for the nine months ended September 30, 2022 compared to $3.55 billion for the nine months ended September 30, 2021. The average balance

46


 

of time deposits and borrowings decreased $160.4 million and $16.6 million, respectively, offset by increases in the average balances of $97.0 million in money market and savings accounts and $22.8 million in subordinated debentures due to the 2021 Notes issued in August 2021.

 

The average cost of interest-bearing liabilities was 0.70 percent and 0.62 percent for the nine months ended September 30, 2022 and 2021, respectively. The average cost of subordinated debentures decreased 34 basis points to 5.39 percent for the nine months ended September 30, 2022 compared to 5.73 percent for the nine months ended September 30, 2021. The lower interest cost of the 2021 Notes and the redemption of the 2027 Notes, offset by a pre-tax charge of $1.1 million incurred in connection with the redemption of the 2027 Notes was the reason for the decrease. The average cost of borrowings decreased 7 basis points to 1.13 percent for the nine months ended September 30, 2022 compared to 1.20 percent for the nine months ended September 30, 2021. The average cost of interest-bearing deposits increased 7 basis points to 0.46 percent for the nine months ended September 30, 2022 compared to 0.39 percent for the nine months ended September 30, 2021.

 

Credit Loss Expense

For the third quarter of 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. For the same period in 2021, the Company recorded a $7.2 million recovery of credit loss expense, comprised of a $7.6 million negative provision for loan losses, a recovery of $0.5 million from an SBA guarantee repair loss allowance, a $0.4 million reduction in the allowance for losses on accrued interest receivable for loans current or previously modified under the CARES Act, offset partially by a $1.2 million provision for off-balance sheet items. The increase in credit loss expense for the three months ended September 30, 2022 as compared to the same period in 2021 resulted from strong loan growth, offset by a net reduction in specific qualitative factors allocated to criticized hospitality loans impacted by the pandemic.

For the nine months ended September 30, 2022, the Company recorded $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. For the same period in 2021, credit loss expense recovery was $8.5 million, comprised of a $10.8 million recovery for loan losses and a $1.4 million reduction in the allowance for accrued interest receivable for current or previously modified loans, offset partially by a $1.6 million provision for an SBA guarantee repair loss and a $2.1 million provision for off-balance sheet. The credit loss expense for the nine months ended September 30, 2022 as compared to the same period in 2021 resulted from strong loan growth, offset by a net reduction in specific qualitative factors allocated to criticized hospitality loans impacted by the pandemic.

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)

 

 

 

2022

 

 

2021

 

 

Amount

 

 

Percent

 

 

 

(in thousands)

 

 

 

 

Service charges on deposit accounts

 

$

2,996

 

 

$

3,437

 

 

$

(441

)

 

 

(12.83

)%

Trade finance and other service charges and fees

 

 

1,132

 

 

 

1,188

 

 

 

(56

)

 

 

(4.71

)%

Servicing income

 

 

635

 

 

 

768

 

 

 

(133

)

 

 

(17.32

)%

Bank-owned life insurance income

 

 

245

 

 

 

251

 

 

 

(6

)

 

 

(2.39

)%

All other operating income

 

 

1,656

 

 

 

978

 

 

 

678

 

 

 

69.33

%

Service charges, fees & other

 

 

6,664

 

 

 

6,622

 

 

 

42

 

 

 

0.63

%

Gain on sale of SBA loans

 

 

2,250

 

 

 

5,503

 

 

 

(3,253

)

 

 

(59.11

)%

Gain on sale of PPP loans

 

 

 

 

 

339

 

 

 

(339

)

 

 

(100.00

)%

Gain on sale of bank premises

 

 

 

 

 

45

 

 

 

(45

)

 

 

(100.00

)%

Total noninterest income

 

$

8,914

 

 

$

12,509

 

 

$

(3,595

)

 

 

(28.74

)%

 

For the three months ended September 30, 2022, noninterest income was $8.9 million, a decrease of $3.6 million, or 28.7 percent, compared with $12.5 million for the same period in 2021. The decrease was mainly attributable to a $3.6 million decrease in the gain on loan sales resulting from lower volume and net trade premiums.

47


 

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

 

 

 

Nine Months Ended September 30,

 

 

Increase
(Decrease)

 

 

Increase
(Decrease)

 

 

 

2022

 

 

2021

 

 

Amount

 

 

Percent

 

 

 

(in thousands)

 

 

 

 

Service charges on deposit accounts

 

$

8,745

 

 

$

8,036

 

 

$

709

 

 

 

8.82

%

Trade finance and other service charges and fees

 

 

3,690

 

 

 

3,468

 

 

 

222

 

 

 

6.40

%

Servicing income

 

 

2,032

 

 

 

2,154

 

 

 

(122

)

 

 

(5.66

)%

Bank-owned life insurance income

 

 

735

 

 

 

759

 

 

 

(24

)

 

 

(3.16

)%

All other operating income

 

 

3,996

 

 

 

2,840

 

 

 

1,156

 

 

 

40.70

%

Service charges, fees & other

 

 

19,198

 

 

 

17,257

 

 

 

1,941

 

 

 

11.25

%

Gain on sale of SBA loans

 

 

7,545

 

 

 

10,478

 

 

 

(2,933

)

 

 

(27.99

)%

Gain on sale of PPP loans

 

 

 

 

 

2,997

 

 

 

(2,997

)

 

 

(100.00

)%

Net gain on sales of securities

 

 

 

 

 

99

 

 

 

(99

)

 

 

(100.00

)%

Gain on sale of bank premises

 

 

 

 

 

45

 

 

 

(45

)

 

 

(100.00

)%

Legal settlement

 

 

 

 

 

325

 

 

 

(325

)

 

 

(100.00

)%

Total noninterest income

 

$

26,743

 

 

$

31,201

 

 

$

(4,458

)

 

 

(14.29

)%

 

For the nine months ended September 30, 2022, noninterest income was $26.7 million, a decrease of $4.5 million, or 14.3 percent, compared with $31.2 million for the same period in 2021. The decrease was mainly attributable to a $6.0 million decrease in the gain on loan sales, partially offset by a $1.2 million increase in all other operating expenses and $0.7 million in service charges.

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)

 

 

 

2022

 

 

2021

 

 

Amount

 

 

Percent

 

 

 

(in thousands)

 

 

 

 

Salaries and employee benefits

 

$

19,365

 

 

$

18,795

 

 

$

570

 

 

 

3.03

%

Occupancy and equipment

 

 

4,736

 

 

 

5,037

 

 

 

(301

)

 

 

(5.98

)%

Data processing

 

 

3,352

 

 

 

2,934

 

 

 

418

 

 

 

14.25

%

Professional fees

 

 

1,249

 

 

 

1,263

 

 

 

(14

)

 

 

(1.11

)%

Supplies and communications

 

 

710

 

 

 

741

 

 

 

(31

)

 

 

(4.18

)%

Advertising and promotion

 

 

1,186

 

 

 

953

 

 

 

233

 

 

 

24.45

%

All other operating expenses

 

 

2,698

 

 

 

2,906

 

 

 

(208

)

 

 

(7.16

)%

Subtotal

 

 

33,296

 

 

 

32,629

 

 

 

667

 

 

 

2.04

%

Other real estate owned expense (income)

 

 

2

 

 

 

23

 

 

 

(21

)

 

 

(91.30

)%

Repossessed personal property expense (income)

 

 

(23

)

 

 

(150

)

 

 

127

 

 

 

(84.67

)%

Total noninterest expense

 

$

33,275

 

 

$

32,502

 

 

$

773

 

 

 

2.38

%

 

48


 

 

For the three months ended September 30, 2022, noninterest expense was $33.3 million, an increase of $0.8 million, or 2.4 percent, compared with $32.5 million for the same period in 2021. Salaries and employee benefits increased $0.6 million primarily as a result of an increase in salary, bonus and incentive expenses. Data processing increased $0.4 million due to additional software licenses. Occupancy and equipment decreased due to lower rent/lease expense and depreciation.

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

 

 

 

Nine Months Ended September 30,

 

 

Increase
(Decrease)

 

 

Increase
(Decrease)

 

 

 

2022

 

 

2021

 

 

Amount

 

 

Percent

 

 

 

(in thousands)

 

 

 

 

Salaries and employee benefits

 

$

55,861

 

 

$

53,917

 

 

$

1,944

 

 

 

3.61

%

Occupancy and equipment

 

 

13,979

 

 

 

14,235

 

 

 

(256

)

 

 

(1.80

)%

Data processing

 

 

9,702

 

 

 

8,775

 

 

 

927

 

 

 

10.56

%

Professional fees

 

 

3,909

 

 

 

4,123

 

 

 

(214

)

 

 

(5.19

)%

Supplies and communications

 

 

1,956

 

 

 

2,231

 

 

 

(275

)

 

 

(12.33

)%

Advertising and promotion

 

 

2,664

 

 

 

1,685

 

 

 

979

 

 

 

58.10

%

All other operating expenses

 

 

8,346

 

 

 

7,889

 

 

 

457

 

 

 

5.79

%

Subtotal

 

 

96,417

 

 

 

92,855

 

 

 

3,562

 

 

 

3.84

%

Other real estate owned expense (income)

 

 

64

 

 

 

197

 

 

 

(133

)

 

 

(67.51

)%

Repossessed personal property expense (income)

 

 

(40

)

 

 

(234

)

 

 

194

 

 

 

(82.91

)%

Total noninterest expense

 

$

96,441

 

 

$

92,818

 

 

$

3,623

 

 

 

3.90

%

 

For the nine months ended September 30, 2022, noninterest expense was $96.4 million, an increase of $3.6 million, or 3.9 percent, compared with $92.8 million for the same period in 2021. Salaries and employee benefits increased $1.9 million primarily as a result of an increase in salary, bonus and incentive expenses. A $1.0 million increase in advertising and promotion expense was primarily related to branding and promotional campaigns. Data processing increased $0.9 million due to additional software licenses and other vendor processing fees.

Income Tax Expense

Income tax expense was $11.0 million and $10.7 million representing an effective income tax rate of 28.8 percent and 28.6 percent for the three months ended September 30, 2022 and 2021, respectively. The increase in the effective tax rate for the three months ended September 30, 2022, compared to the same period in 2021 was principally due to an increase in incremental tax charges resulting from increases related to the Company’s share-based compensation and higher pre-tax income.

 

Income tax expense was $29.7 million and $27.0 million representing an effective income tax rate of 28.9 percent and 29.3 percent for the nine months ended September 30, 2022 and 2021, respectively. The decrease in the effective tax rate for the nine months ended September 30, 2022, compared to the same period in 2021 was principally due to an increase in tax benefits resulting from increasing tax-exempt interest, offset by higher pre-tax income.

Financial Condition

Securities

As of September 30, 2022, 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, to a lesser extent, 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 percent of stockholders’ equity as of September 30, 2022 or December 31, 2021.

49


 

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, 2022:

 

 

 

 

 

 

 

 

 

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

 

$

4,990

 

 

 

2.97

%

 

$

29,886

 

 

 

2.01

%

 

$

 

 

 

0.00

%

 

$

 

 

 

0.00

%

 

$

34,876

 

 

 

2.14

%

U.S. government agency and sponsored agency obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

 

4

 

 

 

2.78

%

 

 

7,696

 

 

 

2.41

%

 

 

6,092

 

 

 

2.95

%

 

 

601,543

 

 

 

1.46

%

 

 

615,335

 

 

 

1.49

%

Collateralized mortgage obligations

 

 

 

 

 

1.19

%

 

 

 

 

 

0.00

%

 

 

1,166

 

 

 

1.75

%

 

 

97,706

 

 

 

1.66

%

 

 

98,872

 

 

 

1.66

%

Debt securities

 

 

9,990

 

 

 

0.49

%

 

 

129,914

 

 

 

1.14

%

 

 

 

 

 

0.00

%

 

 

 

 

 

0.00

%

 

 

139,904

 

 

 

1.10

%

Total U.S. government agency and sponsored agency obligations

 

 

9,994

 

 

 

0.49

%

 

 

137,610

 

 

 

1.21

%

 

 

7,258

 

 

 

2.76

%

 

 

699,249

 

 

 

1.49

%

 

 

854,111

 

 

 

1.44

%

Municipal bonds-tax exempt

 

 

 

 

 

0.00

%

 

 

 

 

 

0.00

%

 

 

7,347

 

 

 

1.41

%

 

 

71,049

 

 

 

1.33

%

 

 

78,396

 

 

 

1.33

%

Total securities available for sale

 

$

14,984

 

 

 

1.32

%

 

$

167,496

 

 

 

1.36

%

 

$

14,605

 

 

 

2.08

%

 

$

770,298

 

 

 

1.47

%

 

$

967,383

 

 

 

1.46

%

 

Loans Receivable

As of September 30, 2022 and December 31, 2021, loans receivable (excluding loans held for sale), net of deferred loan fees and costs, discounts and allowance for credit losses, were $5.73 billion and $5.08 billion, respectively. The increase primarily reflected $1.64 billion in new loan production, offset by $668.3 million in loan sales and payoffs, and amortization and other reductions of $326.8 million. Loan production primarily consisted of commercial real estate of $637.2 million, commercial and industrial loans of $282.6 million and residential mortgages of $313.2 million.

 

The table below shows the maturity distribution of outstanding loans, before the allowance for credit losses as of September 30, 2022. 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 Five
Years

 

 

After Five
Years but
Within
Fifteen
Years

 

 

After
Fifteen
Years

 

 

Total

 

 

 

(in thousands)

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial property

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 

$

115,088

 

 

$

559,300

 

 

$

369,899

 

 

$

 

 

$

1,044,287

 

Hospitality

 

 

162,484

 

 

 

363,002

 

 

 

136,952

 

 

 

 

 

 

662,438

 

Other

 

 

196,355

 

 

 

1,242,906

 

 

 

484,274

 

 

 

121,343

 

 

 

2,044,878

 

Total commercial property loans

 

 

473,927

 

 

 

2,165,208

 

 

 

991,125

 

 

 

121,343

 

 

 

3,751,603

 

Construction

 

 

55,940

 

 

 

46,402

 

 

 

 

 

 

 

 

 

102,342

 

Residential

 

 

5,527

 

 

 

72

 

 

 

5,434

 

 

 

638,556

 

 

 

649,589

 

Total real estate loans

 

 

535,394

 

 

 

2,211,682

 

 

 

996,559

 

 

 

759,899

 

 

 

4,503,534

 

Commercial and industrial loans

 

 

353,258

 

 

 

314,812

 

 

 

63,963

 

 

 

 

 

 

732,033

 

Equipment financing agreements

 

 

20,217

 

 

 

495,169

 

 

 

50,038

 

 

 

 

 

 

565,424

 

Loans receivable

 

$

908,869

 

 

$

3,021,663

 

 

$

1,110,560

 

 

$

759,899

 

 

$

5,800,991

 

Loans with predetermined interest rates

 

$

378,669

 

 

$

2,175,749

 

 

$

251,351

 

 

$

239,028

 

 

$

3,044,797

 

Loans with variable interest rates

 

 

530,200

 

 

 

845,914

 

 

 

859,209

 

 

 

520,871

 

 

 

2,756,194

 

 

50


 

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, 2022.

 

 

 

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

 

$

146,310

 

 

$

341,820

 

 

$

58,521

 

 

$

 

 

$

546,651

 

Hospitality

 

 

93,141

 

 

 

122,849

 

 

 

6,832

 

 

 

 

 

 

222,822

 

Other

 

 

368,822

 

 

 

558,603

 

 

 

120,532

 

 

 

8,839

 

 

 

1,056,796

 

Total commercial property loans

 

 

608,273

 

 

 

1,023,272

 

 

 

185,885

 

 

 

8,839

 

 

 

1,826,269

 

Construction

 

 

28,036

 

 

 

 

 

 

 

 

 

 

 

 

28,036

 

Residential

 

 

 

 

 

62

 

 

 

2,825

 

 

 

230,189

 

 

 

233,076

 

Total real estate loans

 

 

636,309

 

 

 

1,023,334

 

 

 

188,710

 

 

 

239,028

 

 

 

2,087,381

 

Commercial and industrial loans

 

 

11,030

 

 

 

9,907

 

 

 

12,602

 

 

 

 

 

 

33,539

 

Equipment financing agreements

 

 

176,247

 

 

 

318,922

 

 

 

50,039

 

 

 

 

 

 

545,208

 

Loans receivable

 

$

823,586

 

 

$

1,352,163

 

 

$

251,351

 

 

$

239,028

 

 

$

2,666,128

 

 

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, 2022.

 

 

 

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

 

$

47,614

 

 

$

23,555

 

 

$

311,378

 

 

$

 

 

$

382,547

 

Hospitality

 

 

136,243

 

 

 

10,770

 

 

 

130,120

 

 

 

 

 

 

277,133

 

Other

 

 

135,062

 

 

 

180,419

 

 

 

363,742

 

 

 

112,504

 

 

 

791,727

 

Total commercial property loans

 

 

318,919

 

 

 

214,744

 

 

 

805,240

 

 

 

112,504

 

 

 

1,451,407

 

Construction

 

 

18,366

 

 

 

 

 

 

 

 

 

 

 

 

18,366

 

Residential

 

 

10

 

 

 

 

 

 

2,609

 

 

 

408,367

 

 

 

410,986

 

Total real estate loans

 

 

337,295

 

 

 

214,744

 

 

 

807,849

 

 

 

520,871

 

 

 

1,880,759

 

Commercial and industrial loans

 

 

89,102

 

 

 

204,773

 

 

 

51,360

 

 

 

 

 

 

345,235

 

Loans receivable

 

$

426,397

 

 

$

419,517

 

 

$

859,209

 

 

$

520,871

 

 

$

2,225,994

 

Industry

As of September 30, 2022, the loan portfolio included the following concentrations of loans to one type of industry that were greater than 10.0 percent of loans receivable outstanding:

 

 

 

 

 

 

Percentage of

 

 

 

Balance as of

 

 

Loans Receivable

 

 

 

September 30, 2022

 

 

Outstanding

 

 

 

(in thousands)

 

Lessor of nonresidential buildings

 

$

1,787,374

 

 

 

30.8

%

Hospitality

 

 

714,663

 

 

 

12.3

%

 

Loan Quality Indicators

 

Loans 30 to 89 days past due and still accruing were 0.07 percent of loans at September 30, 2022, compared with 0.11 percent at December 31, 2021.

 

51


 

At September 30, 2022 and December 31, 2021, there were no loans 90 days or more past due and still accruing.

 

Special mention loans were $123.0 million at September 30, 2022 compared with $95.3 million at December 31, 2021. The increase includes a $41.1 million current loan relationship due to turnover in executive management and delays in receipt of acceptable business borrowing certificates under an asset-based lending facility. The loan relationship is comprised of a $25.0 million asset-based line of credit (of which $18.0 million was outstanding at September 30, 2022), a $13.5 million commercial real estate loan and a $9.6 million commercial term loan. We are actively working with the borrower’s new management and its parent company to ensure satisfactory performance under the loan agreements. Reductions to special mention loans during the nine months ended September 30, 2022 included net upgrades to pass of $5.0 million and payoffs and paydowns of $8.4 million.

 

Classified loans were $47.7 million at September 30, 2022 compared with $60.6 million at December 31, 2021. The change reflects additions of $7.5 million and reductions (comprising upgrades, payments, payoffs, sales, and charge-offs) of $20.4 million.

 

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

 

 

 

Special Mention

 

 

Classified

 

 

 

(in thousands)

 

September 30, 2022

 

 

 

 

 

 

Balance at January 1, 2022

 

$

95,294

 

 

$

60,633

 

Additions

 

 

122,997

 

 

 

7,471

 

Reductions

 

 

(95,339

)

 

 

(20,365

)

Balance at September 30, 2022

 

$

122,952

 

 

$

47,739

 

 

 

 

 

 

 

 

December 31, 2021

 

 

 

 

 

 

Balance at January 1, 2021

 

$

76,978

 

 

$

140,169

 

Additions

 

 

146,226

 

 

 

60,083

 

Reductions

 

 

(127,910

)

 

 

(139,619

)

Balance at December 31, 2021

 

$

95,294

 

 

$

60,633

 

 

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 for sale.

Except for nonaccrual loans, management is not aware of any other loans as of September 30, 2022 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 $11.6 million at September 30, 2022, or 0.20 percent of loans, compared with $13.4 million at December 31, 2021, or 0.26 percent of the portfolio. The change reflects reductions (comprising upgrades, payments, payoffs, sales, and charge-offs) of $11.5 million and additions of $9.7 million.

Nonperforming assets were $12.4 million at September 30, 2022, or 0.17 percent of total assets, compared with $14.0 million, or 0.20 percent, at December 31, 2021.

52


 

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 $11.6 million and $13.4 million as of September 30, 2022 and December 31, 2021, respectively, representing a decrease of $1.8 million, or 13.5 percent. Specific allowances associated with individually evaluated loans decreased $0.5 million to $2.2 million as of September 30, 2022 compared with $2.8 million as of December 31, 2021.

 

For the three months ended September 30, 2022, no loans were restructured and subsequently classified as TDRs. For the nine months ended September 30, 2022, we restructured monthly payments for one loan, with a net carrying value of $92,000 at the time of modification, which was subsequently classified as a TDR. For the year ended December 31, 2021, no loans were restructured and subsequently classified as TDRs. Temporary payment structure modifications can include extending the maturity date, reducing the amount of principal and/or interest due monthly, and/or allowing for interest only monthly payments for six months or less.

As of September 30, 2022 and December 31, 2021, TDRs on accrual status were $1.1 million and $0, respectively. As of September 30, 2022 and December 31, 2021, restructured loans on nonaccrual status were $0.5 million and $2.9 million, respectively, and the allowance for credit losses relating to these loans, respectively, was immaterial.

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, 2022 and December 31, 2021 reflected losses expected over the remaining contractual life of the assets based on historical, current, and forward-looking information. The contractual term does not consider extensions, renewals or modifications unless the Company has identified an expected troubled debt restructuring.

 

Management selected three loss methodologies for the collective allowance estimation. At September 30, 2022, 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 imbedded 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, 2022 and December 31, 2021, the Company relied on the economic projections from Moody’s Analytics Economic Scenarios and Forecasts and the Federal Open Market Committee 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, 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 $71.6 million at September 30, 2022 compared with $72.6 million at December 31, 2021. The allowance attributed to individually evaluated loans was $2.2 million at September 30, 2022 compared with $2.8 million at December 31, 2021. The allowance attributed to collectively evaluated loans was $69.3 million at September 30, 2022 compared

53


 

with $69.8 million at December 31, 2021, and considered the impact of changes in macroeconomic assumptions, including a deteriorating unemployment rate and rising interest rates for the subsequent four quarters.

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, 2022

 

 

December 31, 2021

 

 

 

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

 

$

7,758

 

 

 

10.8

%

 

$

1,044,287

 

 

 

18.0

%

 

$

6,579

 

 

 

9.1

%

 

$

970,134

 

 

 

18.8

%

Hospitality

 

 

15,417

 

 

 

21.5

%

 

 

662,438

 

 

 

11.4

%

 

 

22,670

 

 

 

31.2

%

 

 

717,692

 

 

 

13.9

%

Other

 

 

15,450

 

 

 

21.7

%

 

 

2,044,878

 

 

 

35.3

%

 

 

15,065

 

 

 

20.8

%

 

 

1,919,033

 

 

 

37.3

%

Total commercial property loans

 

 

38,625

 

 

 

54.0

%

 

 

3,751,603

 

 

 

64.7

%

 

 

44,314

 

 

 

61.1

%

 

 

3,606,859

 

 

 

70.0

%

Construction

 

 

4,034

 

 

 

5.6

%

 

 

102,342

 

 

 

1.8

%

 

 

4,078

 

 

 

5.6

%

 

 

95,006

 

 

 

1.8

%

Residential

 

 

2,865

 

 

 

4.0

%

 

 

649,589

 

 

 

11.2

%

 

 

498

 

 

 

0.7

%

 

 

400,546

 

 

 

7.8

%

Total real estate loans

 

 

45,524

 

 

 

63.6

%

 

 

4,503,534

 

 

 

77.7

%

 

 

48,890

 

 

 

67.4

%

 

 

4,102,411

 

 

 

79.6

%

Commercial and industrial loans

 

 

14,876

 

 

 

20.8

%

 

 

732,033

 

 

 

12.6

%

 

 

12,418

 

 

 

17.1

%

 

 

561,831

 

 

 

10.9

%

Equipment financing agreements

 

 

11,184

 

 

 

15.6

%

 

 

565,424

 

 

 

9.7

%

 

 

11,249

 

 

 

15.5

%

 

 

487,299

 

 

 

9.5

%

Total

 

$

71,584

 

 

 

100.0

%

 

$

5,800,991

 

 

 

100.0

%

 

$

72,557

 

 

 

100.0

%

 

$

5,151,541

 

 

 

100.0

%

 

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

 

 

 

As of

 

 

 

September 30, 2022

 

 

December 31, 2021

 

 

 

(dollars in thousands)

 

Ratios:

 

 

 

 

 

 

Allowance for credit losses to loans receivable

 

 

1.23

%

 

 

1.41

%

Nonaccrual loans to loans

 

 

0.20

%

 

 

0.26

%

Allowance for credit losses to nonaccrual loans

 

 

617.58

%

 

 

543.09

%

 

 

 

 

 

 

 

Balance:

 

 

 

 

 

 

Nonaccrual loans at end of period

 

$

11,591

 

 

$

13,360

 

Nonperforming loans at end of period

 

$

11,591

 

 

$

13,360

 

As of September 30, 2022 and December 31, 2021, the allowance for credit losses related to off-balance sheet items, primarily unfunded loan commitments, was $3.2 million and $2.6 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, 2022.

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, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate loans

 

$

3,845,616

 

 

$

984

 

 

 

0.10

%

 

$

3,825,584

 

 

$

1,256

 

 

 

0.04

%

Residential loans

 

 

583,190

 

 

 

(1

)

 

 

(0.00

)%

 

 

488,420

 

 

 

(2

)

 

 

(0.00

)%

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

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate loans

 

$

3,417,832

 

 

$

98

 

 

 

0.01

%

 

$

3,396,827

 

 

$

92

 

 

 

0.00

%

Residential loans

 

 

349,143

 

 

 

(1,260

)

 

 

(1.44

)%

 

 

335,663

 

 

 

(198

)

 

 

(0.08

)%

Commercial and industrial loans

 

 

478,861

 

 

 

(144

)

 

 

(0.12

)%

 

 

604,355

 

 

 

(52

)

 

 

(0.01

)%

Equipment financing agreements

 

 

438,734

 

 

 

441

 

 

 

0.40

%

 

 

423,135

 

 

 

3,199

 

 

 

1.01

%

Total

 

$

4,684,570

 

 

$

(865

)

 

 

(0.07

)%

 

$

4,759,980

 

 

$

3,041

 

 

 

0.09

%

 

54


 

(1)
Annualized

 

For the three months ended September 30, 2022, gross charge-offs were $2.1 million, an increase of $1.1 million, from $1.0 million for the same period in 2021 and gross recoveries were $1.0 million, a decrease of $0.9 million, from $1.8 million for the three months ended September 30, 2021. Net loan charge-offs were $1.1 million, or 0.08 percent of average loans, compared with net loan recoveries of $0.9 million, or 0.07 percent of average loans, for the three months ended September 30, 2022 and 2021, respectively.

 

For the nine months ended September 30, 2022, gross charge-offs were $3.5 million, a decrease of $2.4 million, from $5.9 million for the same period in 2021 and gross recoveries were $2.4 million, an increase of $0.5 million, from $2.9 million for the nine months ended September 30, 2021. Net loan charge-offs were $1.1 million, or 0.03 percent of average loans, compared with net loan charge-offs of $3.0 million, or 0.09 percent of average loans, for the nine months ended September 30, 2022 and 2021, respectively.

 

Deposits

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

 

 

 

September 30, 2022

 

 

December 31, 2021

 

 

 

Balance

 

 

Percent

 

 

Balance

 

 

Percent

 

 

 

(dollars in thousands)

 

Demand – noninterest-bearing

 

$

2,771,498

 

 

 

44.7

%

 

$

2,574,517

 

 

 

44.5

%

Interest-bearing:

 

 

 

 

 

 

 

 

 

 

 

 

Demand

 

 

125,408

 

 

 

2.0

%

 

 

125,183

 

 

 

2.2

%

Money market and savings

 

 

2,056,793

 

 

 

33.2

%

 

 

2,099,381

 

 

 

36.3

%

Uninsured time deposits of more than $250,000:

 

 

 

 

 

 

 

 

 

 

 

 

Three months or less

 

 

36,268

 

 

 

0.6

%

 

 

69,464

 

 

 

1.2

%

Over three months through six months

 

 

73,576

 

 

 

1.2

%

 

 

73,808

 

 

 

1.3

%

Over six months through twelve months

 

 

128,953

 

 

 

2.1

%

 

 

29,706

 

 

 

0.5

%

Over twelve months

 

 

19,266

 

 

 

0.3

%

 

 

549

 

 

 

0.0

%

Other time deposits

 

 

989,614

 

 

 

16.0

%

 

 

813,661

 

 

 

14.1

%

Total deposits

 

$

6,201,376

 

 

 

100.0

%

 

$

5,786,269

 

 

 

100.0

%

Total deposits were $6.20 billion and $5.79 billion as of September 30, 2022 and December 31, 2021, respectively, representing an increase of $415.1 million, or 7.2 percent.

The increase in deposits was primarily driven by increases in noninterest-bearing demand deposits and time deposits. At September 30, 2022, the loan-to-deposit ratio was 93.5 percent compared with 89.0 percent at December 31, 2021. The increase in noninterest-bearing deposits reflects growth from new and existing customer relationships while additional marketing efforts increased time deposits.

 

As of September 30, 2022, the aggregate amount of uninsured deposits (deposits in amounts greater than $250,000, which is the maximum amount for federal deposit insurance) was $2.87 billion, of which $2.61 billion were demand, money market and savings deposits and $258.1 million were time deposits. As of December 31, 2021, the aggregate amount of uninsured deposits was $2.63 billion, consisting of $2.46 billion in demand, money market and savings deposits and $173.5 million in time deposits.

 

Borrowings and Subordinated Debentures

Borrowings mostly take the form of advances from the FHLB. At September 30, 2022 and December 31, 2021, total advances from the FHLB were $100.0 million and $137.5 million, respectively. The Bank had no overnight advances from the FHLB at September 30, 2022 or December 31, 2021.

 

The weighted-average interest rate of all FHLB advances at September 30, 2022 and December 31, 2021 was 0.87 percent and 1.05 percent, respectively.

 

The FHLB maximum amount outstanding at any month end during the year to date periods ended September 30, 2022 and December 31, 2021 were $215.0 million and $162.5 million, respectively.

55


 

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

 

 

 

September 30, 2022

 

 

December 31, 2021

 

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

 

$

37,500

 

 

 

0.40

%

 

$

50,000

 

 

 

0.97

%

Advances due over 24 months through 36 months

 

 

12,500

 

 

 

1.90

%

 

 

37,500

 

 

 

0.40

%

Outstanding advances over 12 months

 

$

50,000

 

 

 

0.78

%

 

$

87,500

 

 

 

0.73

%

 

Subordinated debentures were $129.3 million as of September 30, 2022 and $215.0 million as of December 31, 2021. The $86.0 million decrease in subordinated debentures was primarily due to the $100.0 million redemption of the 2027 Notes on March 30, 2022. Subordinated debentures are comprised of fixed-to-floating subordinated notes of $108.1 million and $194.2 million as of September 30, 2022 and December 31, 2021, respectively, and junior subordinated deferrable interest debentures of $21.1 million and $20.8 million as of September 30, 2022 and December 31, 2021, respectively. See “Note 8 – Borrowings and Subordinated Debentures” to the consolidated financial statements for more details.

 

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, 2022. 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

 

Change in

 

1- to 12-Month Horizon

 

 

13- to 24-Month Horizon

 

Interest

 

Dollar

 

 

Percentage

 

 

Dollar

 

 

Percentage

 

Rate

 

Change

 

 

Change

 

 

Change

 

 

Change

 

 

 

(dollars in thousands)

 

300%

 

$

23,209

 

 

 

8.54

%

 

$

33,155

 

 

 

11.62

%

200%

 

$

15,254

 

 

 

5.61

%

 

$

21,434

 

 

 

7.51

%

100%

 

$

8,505

 

 

 

3.13

%

 

$

12,852

 

 

 

4.50

%

(100%)

 

$

(11,243

)

 

 

(4.14

%)

 

$

(19,146

)

 

 

(6.71

%)

(200%)

 

$

(28,189

)

 

 

(10.38

%)

 

$

(48,641

)

 

 

(17.05

%)

 

Change in

 

 

 

 

 

Economic Value of Equity (EVE)

 

Interest

 

 

 

 

 

Dollar

 

 

Percentage

 

Rate

 

 

 

 

 

Change

 

 

Change

 

 

 

 

 

 

 

(dollars in thousands)

 

300%

 

 

 

 

 

$

52,228

 

 

 

5.20

%

200%

 

 

 

 

 

$

41,172

 

 

 

4.10

%

100%

 

 

 

 

 

$

32,046

 

 

 

3.19

%

(100%)

 

 

 

 

 

$

(53,407

)

 

 

(5.32

%)

(200%)

 

 

 

 

 

$

(147,575

)

 

 

(14.70

%)

 

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.

56


 

 

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

 

 

Conditional prepayment rates*:

 

 

 

 

 

 

Loans receivable

 

 

 

 

16

%

 

Securities

 

 

 

 

8

%

 

Deposit rate betas*:

 

 

 

 

 

 

NOW, savings, money market demand

 

 

 

 

47

%

 

Time deposits, retail and wholesale

 

 

 

 

78

%

 

 

 

 

 

 

 

 

* 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 to $0.12 per share for the second quarter of 2021 from $0.10 per share for the first 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 to $0.20 per share for the fourth quarter of 2021, to $0.22 per share for the first and second quarters of 2022 and to $0.25 per share for the third quarter of 2022. The Board will continue to re-evaluate the level of quarterly dividends in subsequent quarters.

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, 2022, the Bank has the ability to pay dividends of approximately $63.5 million, after giving effect to the $0.25 dividend declared for the fourth quarter of 2022, without the prior approval of the Commissioner of the DFPI.

At September 30, 2022, the Bank’s total risk-based capital ratio of 13.76 percent, Tier 1 risk-based capital ratio of 12.73 percent, common equity Tier 1 capital ratio of 12.73 percent and Tier 1 leverage capital ratio of 11.02 percent, 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 percent, Tier 1 risk-based capital ratio equal to or greater than 8.00 percent, common equity Tier 1 capital ratios equal to or greater than 6.50 percent, and Tier 1 leverage capital ratio equal to or greater than 5.00 percent.

At September 30, 2022, the Company's total risk-based capital ratio was 14.38 percent, Tier 1 risk-based capital ratio was 11.55 percent, common equity Tier 1 capital ratio was 11.21 percent and Tier 1 leverage capital ratio was 9.99 percent.

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 2021 Annual Report on Form 10-K.

57


 

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 2021 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 2021 Annual Report on Form 10-K.

Contractual Obligations

There have been no material changes to the contractual obligations described in our 2021 Annual Report on Form 10-K.

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.

The amendments are effective for all entities from the beginning of an interim period that includes the issuance date of ASU 2020-04. An entity may elect to apply the amendments prospectively through December 31, 2022.

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

FASB ASU 2022-02, Troubled Debt Restructurings 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 standard becomes effective for the Company for the interim and annual periods beginning on January 1, 2023. Early adoption is permitted.

The Company is in the process of evaluating the standard and its effect on the Company’s financial condition, results of operations, cash flows, and financial statement disclosures.

58


 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

Item 4. Controls and Procedures

Evaluation of Disclosure 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, 2022.

 

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, 2022 that materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

59


 

Part II — Other Information

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

 

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, 2021.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On January 24, 2019, the Company announced a stock repurchase program that authorized the repurchase of up to 5 percent of its outstanding shares or approximately 1.5 million shares of common stock. As of September 30, 2022, 659,972 shares remained available for future purchases under that stock repurchase program. The Company acquired 26,441 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, 2022. 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.

The following table represents information with respect to repurchases of common stock made by the Company during the three months ended September 30, 2022:

 

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, 2022 - July 31, 2022

 

$

 

 

 

 

 

 

659,972

 

August 1, 2022 - August 31, 2022

 

$

 

 

 

 

 

 

659,972

 

September 1, 2022 - September 30, 2022

 

$

 

 

 

 

 

 

659,972

 

Total

 

$

 

 

 

 

 

 

659,972

 

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

60


 

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, 2022, 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.

61


 

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.

 

 

 

 

 

Hanmi Financial Corporation

 

 

 

 

 

 

 

Date:

 

November 9, 2022

 

By:

 

/s/ Bonita I. Lee

 

 

 

 

 

 

Bonita I. Lee

 

 

 

 

 

 

President and Chief Executive Officer (Principal Executive Officer)

 

Date:

 

November 9, 2022

 

By:

 

/s/ Romolo C. Santarosa

 

 

 

 

 

 

Romolo C. Santarosa

 

 

 

 

 

 

Senior Executive Vice President and Chief Financial Officer (Principal Financial Officer)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

62