10-Q

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging Growth Company

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


☐	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.

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

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)

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)

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)

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)

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)

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)

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.

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

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.

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.

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

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

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.

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

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

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

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

Loans by Vintage Year and Risk Rating


	Term Loans
	Amortized Cost Basis by Origination Year (1)
	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.


	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.

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.


	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.

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	$	—

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.

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.

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.

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.

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.

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.

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	%

Note 11 — Fair Value Measurements

Fair Value Measurements

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

•

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

•

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

•

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

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

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

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

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

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

Loans held for sale - Loans held for sale includes the guaranteed portion of SBA 7(a) loans carried at the lower of cost or fair value. Management obtains quotes, bids or pricing indication sheets on all or part of the loans directly from the purchasing financial institutions. Premiums received or to be received on the quotes, bids or pricing indication sheets are indicative of the fact that cost is lower than fair value. At September 30, 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.

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

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.

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.

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.

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.

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.

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.

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.

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.

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

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.

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.

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

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.

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.

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

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.

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	%

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.

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

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.

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.

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

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	%

(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.

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.

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.

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.

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

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.

Part II — Other Information

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

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.

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.

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.