hafc-10q_20200630.htm

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 June 30, 2020

☐	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.)

3660 Wilshire Boulevard, Penthouse Suite A
Los Angeles, California		90010
(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 August 3, 2020, there were 30,656,746 outstanding shares of the Registrant’s Common Stock.

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

Three Months Ended June 30, 2020

Table of Contents


	Part I – Financial Information

Item 1.	Financial Statements	3

	Consolidated Balance Sheets at June 30, 2020 (unaudited) and December 31, 2019	3

	Consolidated Statements of Income (Unaudited)	4

	Consolidated Statements of Comprehensive Income (Loss) (Unaudited)	5

	Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)	6

	Consolidated Statements of Cash Flows (Unaudited)	8

	Notes to Consolidated Financial Statements (Unaudited)	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	42

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	66

Item 4.	Controls and Procedures	66

	Part II – Other Information

Item 1.	Legal Proceedings	67

Item 1A.	Risk Factors	67

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	68

Item 3.	Defaults Upon Senior Securities	68

Item 4.	Mine Safety Disclosures	68

Item 5.	Other Information	68

Item 6.	Exhibits	69

Signatures		70

Part I — Financial Information

Item 1. Financial Statements

Hanmi Financial Corporation and Subsidiaries

Consolidated Balance Sheets (Unaudited)

(in thousands, except share data)

	June 30,			December 31,
	2020			2019

Assets
Cash and due from banks	$	546,048		$	121,678
Securities available for sale, at fair value (amortized cost of $655,500, as of June 30, 2020 and $629,725 as of December 31, 2019)		655,971			634,477
Loans held for sale, at the lower of cost or fair value		17,942			6,020
Loans receivable, net of allowance for credit losses of $86,330 as of June 30, 2020 and $61,408 as of December 31, 2019		4,739,312			4,548,739
Accrued interest receivable		21,372			11,742
Premises and equipment, net		26,412			26,070
Customers' liability on acceptances		—			66
Servicing assets		6,187			6,956
Goodwill and other intangible assets, net		11,742			11,873
Federal Home Loan Bank ("FHLB") stock, at cost		16,385			16,385
Income tax assets		43,286			36,787
Bank-owned life insurance		53,334			52,782
Prepaid expenses and other assets		80,172			64,610
Total assets	$	6,218,163		$	5,538,184

Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing	$	1,865,213		$	1,391,624
Interest-bearing		3,344,568			3,307,338
Total deposits		5,209,781			4,698,962
Accrued interest payable		8,655			11,215
Bank's liability on acceptances		—			66
Borrowings		251,808			90,000
Subordinated debentures ($126,800 face amount less unamortized discount and debt issuance costs of $8,130) as of June 30, 2020 and ($126,800 face amount less unamortized discount and debt issuance costs of $8,423) as of December 31, 2019		118,670			118,377
Accrued expenses and other liabilities		81,813			56,297
Total liabilities		5,670,727			4,974,917
Stockholders' equity:
Preferred Stock, $0.001 par value; authorized 10,000,000 shares; no shares issued as of June 30, 2020 and December 31, 2019		—			—
Common stock, $0.001 par value; authorized 62,500,000 shares; issued 33,495,913 shares (30,657,629 shares outstanding) as of June 30, 2020 and issued 33,475,402 shares (30,799,624 shares outstanding) as of December 31, 2019		33			33
Additional paid-in capital		577,211			575,816
Accumulated other comprehensive income, net of tax expense of $136 as of June 30, 2020 and $1,370 as of December 31, 2019		335			3,382
Retained earnings		88,859			100,551
Less treasury stock; 2,838,284 shares as of June 30, 2020 and 2,675,778 shares as of December 31, 2019		(119,002	)		(116,515	)
Total stockholders' equity		547,436			563,267
Total liabilities and stockholders' equity	$	6,218,163		$	5,538,184

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 June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Interest and dividend income:
Interest and fees on loans receivable	$	52,230	$	56,872	$	106,878	$	115,206
Interest on securities		3,225		3,770		6,880		7,226
Dividends on FHLB stock		203		283		492		572
Interest on deposits in other banks		78		557		411		892
Total interest and dividend income		55,736		61,482		114,661		123,896
Interest expense:
Interest on deposits		8,889		16,728		21,631		32,410
Interest on borrowings		760		—		1,256		72
Interest on subordinated debentures		1,645		1,764		3,357		3,536
Total interest expense		11,294		18,492		26,244		36,018
Net interest income before credit loss expense		44,442		42,990		88,417		87,878
Credit loss expense		24,594		16,699		40,333		17,816
Net interest income after credit loss expense		19,848		26,291		48,084		70,062
Noninterest income:
Service charges on deposit accounts		2,032		2,486		4,432		4,844
Trade finance and other service charges and fees		961		1,204		1,948		2,328
Gain on sale of Small Business Administration ("SBA") loans		—		1,060		1,154		1,986
Net gain on sales of securities		15,712		570		15,712		1,295
Other operating income		2,226		2,409		3,908		3,530
Total noninterest income		20,931		7,729		27,154		13,983
Noninterest expense:
Salaries and employee benefits		14,701		16,881		32,450		32,619
Occupancy and equipment		4,508		3,468		8,983		7,989
Data processing		2,804		2,140		5,473		4,223
Professional fees		1,545		1,983		3,460		3,632
Supplies and communications		858		649		1,639		1,493
Advertising and promotion		456		945		1,190		1,705
Other operating expenses		2,266		4,078		5,011		7,549
Total noninterest expense		27,138		30,144		58,206		59,210
Income before tax		13,641		3,876		17,032		24,835
Income tax expense		4,466		1,220		5,506		7,507
Net income	$	9,175	$	2,656	$	11,526	$	17,328
Basic earnings per share	$	0.30	$	0.09	$	0.38	$	0.56
Diluted earnings per share	$	0.30	$	0.09	$	0.38	$	0.56
Weighted-average shares outstanding:
Basic		30,426,967		30,685,301		30,447,984		30,688,698
Diluted		30,426,967		30,727,681		30,450,231		30,729,020

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 June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Net income	$	9,175		$	2,656		$	11,526		$	17,328
Other comprehensive income (loss), net of tax:
Unrealized gain on securities:
Unrealized holding gain (loss) arising during period		(493	)		6,548			11,431			13,167
Less: reclassification adjustment for net gain included in net income		(15,712	)		(570	)		(15,712	)		(1,295	)
Income tax expense (benefit) related to items of other comprehensive income		4,673			(1,721	)		1,234			(3,418	)
Other comprehensive income (loss), net of tax		(11,532	)		4,257			(3,047	)		8,454
Comprehensive income (loss)	$	(2,357	)	$	6,913		$	8,479		$	25,782

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 June 30, 2020

(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 April 1, 2019		33,153,888		(2,293,355	)		30,860,533		$	33	$	570,432	$	(1,882	)	$	104,771		$	(109,062	)	$	564,292
Stock options exercised		1,250		—			1,250			—		13		—			—			—			13
Restricted stock awards, net of forfeitures		116,694		—			116,694			—		—		—			—			—			—
Share-based compensation expense		—		—			—			—		660		—			—			—			660
Restricted stock surrendered due to employee tax liability		—		(3,314	)		(3,314	)		—		—		—			—			(14	)		(14	)
Cash dividends declared (common stock, $0.24/share)		—		—			—			—		—		—			(7,406	)		—			(7,406	)
Net income		—		—			—			—		—		—			2,656			—			2,656
Change in unrealized gain (loss) on securities available for sale, net of income taxes		—		—			—			—		—		4,257			—			—			4,257
Balance at June 30, 2019		33,271,832		(2,296,669	)		30,975,163		$	33	$	571,105	$	2,375		$	100,021		$	(109,076	)	$	564,458

Balance at April 1, 2020		33,448,214		(2,825,473	)		30,622,741		$	33	$	576,585	$	11,867		$	83,355		$	(118,882	)	$	552,958
Restricted stock awards, net of forfeitures		47,699		—			47,699			—		—		—			—			—			—
Share-based compensation expense		—		—			—			—		626		—			—			—			626
Restricted stock surrendered due to employee tax liability		—		(12,811	)		(12,811	)		—		—		—			—			(120	)		(120	)
Cash dividends declared (common stock, $0.12/share)		—		—			—			—		—		—			(3,671	)		—			(3,671	)
Net income		—		—			—			—		—		—			9,175			—			9,175
Change in unrealized gain (loss) on securities available for sale, net of income taxes		—		—			—			—		—		(11,532	)		—			—			(11,532	)
Balance at June 30, 2020		33,495,913		(2,838,284	)		30,657,629		$	33	$	577,211	$	335		$	88,859		$	(119,002	)	$	547,436

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

Hanmi Financial Corporation and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

For the Six Months Ended June 30, 2020

(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, 2019		33,202,369		(2,273,932	)		30,928,437		$	33	$	569,712	$	(6,079	)	$	97,539		$	(108,637	)	$	552,568
Stock options exercised		1,900		—			1,900			—		22		—			—			—			22
Restricted stock awards, net of forfeitures		67,563		—			67,563			—		—		—			—			—			-
Share-based compensation expense		—		—			—			—		1,371		—			—			—			1,371
Restricted stock surrendered due to employee tax liability		—		(22,737	)		(22,737	)		—		—		—			—			(439	)		(439	)
Repurchase of common stock		—		—			—			—		—		—			—			—			-
Cash dividends declared (common stock, $0.48/share)		—		—			—			—		—		—			(14,846	)		—			(14,846	)
Net income		—		—			—			—		—		—			17,328			—			17,328
Change in unrealized gain (loss) on securities available for sale, net of income taxes		—		—			—			—		—		8,454			—			—			8,454
Balance at June 30, 2019		33,271,832		(2,296,669	)		30,975,163		$	33	$	571,105	$	2,375		$	100,021		$	(109,076	)	$	564,458

Balance at January 1, 2020		33,475,402		(2,675,778	)		30,799,624		$	33	$	575,816	$	3,382		$	100,551		$	(116,515	)	$	563,267
Adjustment related to adopting of new accounting standards
ASU 2016-13 (See Notes 1 and 3)		—		—			—			—		—		—			(12,167	)		—			(12,167	)
Adjusted balance at January 1, 2020		33,475,402		(2,675,778	)		30,799,624			33		575,816		3,382			88,385			(116,515	)		551,101
Restricted stock awards, net of forfeitures		20,511		—			20,511			—		—		—			—			—			—
Share-based compensation expense		—		—			—			—		1,395		—			—			—			1,395
Restricted stock surrendered due to employee tax liability		—		(27,106	)		(27,106	)		—		—		—			—			(291	)		(291	)
Repurchase of common stock		—		(135,400	)		(135,400	)		—		—		—			—			(2,196	)		(2,196	)
Cash dividends declared (common stock, $0.36/share)		—		—			—			—		—		—			(11,052	)		—			(11,052	)
Net income		—		—			—			—		—		—			11,526			—			11,526
Change in unrealized gain (loss) on securities available for sale, net of income taxes		—		—			—			—		—		(3,047	)		—			—			(3,047	)
Balance at June 30, 2020		33,495,913		(2,838,284	)		30,657,629		$	33	$	577,211	$	335		$	88,859		$	(119,002	)	$	547,436

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

Hanmi Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

	Six Months Ended June 30,
	2020			2019
Cash flows from operating activities:
Net income	$	11,526		$	17,328
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		5,018			4,694
Share-based compensation expense		1,395			1,371
Credit loss expense		40,333			17,816
Gain on sales of securities		(15,712	)		(1,295	)
Gain on sales of SBA loans		(1,154	)		(1,986	)
Origination of SBA loans held for sale		(30,139	)		(27,523	)
Proceeds from sales of SBA loans		19,366			32,856
Change in bank-owned life insurance		(552	)		(561	)
Change in prepaid expenses and other assets		(34,409	)		(3,267	)
Change in income tax assets		4,930			—
Change in accrued expenses and other liabilities		23,324			(1,501	)
Net cash provided by operating activities		23,926			37,932
Cash flows from investing activities:
Purchases of securities available for sale		(615,454	)		(230,112	)
Proceeds from matured, called and repayment of securities		108,444			63,528
Proceeds from sales of securities available for sale		495,566			113,306
Purchases of premises and equipment		(2,279	)		(515	)
Proceeds from disposition of premises and equipment		51			3,055
Proceeds from sales of other real estate owned ("OREO")		—			22
Change in loans receivable, excluding purchases		(244,973	)		43,689
Net cash provided by (used in) investing activities		(258,645	)		(7,027	)
Cash flows from financing activities:
Change in deposits		510,819			14,833
Change in overnight borrowings		(15,000	)		(55,000	)
Proceeds from borrowings		176,808			—
Proceeds from exercise of stock options		—			22
Cash paid for surrender of vested shares due to employee tax liability		(291	)		(439	)
Repurchase of common stock		(2,196	)		—
Cash dividends paid		(11,052	)		(14,846	)
Net cash provided by (used in) financing activities		659,088			(55,430	)
Net increase (decrease) in cash and due from banks		424,370			(24,525	)
Cash and due from banks at beginning of year		121,678			155,376
Cash and due from banks at end of period	$	546,048		$	130,851

Supplemental disclosures of cash flow information:
Interest expense paid	$	28,804		$	35,959
Income taxes paid	$	99		$	(3,587	)
Non-cash activities:
Transfer of loans receivable to other real estate owned	$	85		$	—
Income tax (expense) benefit related to items of other comprehensive income	$	1,234		$	(3,418	)
Change in unrealized (gain) loss in accumulated other comprehensive income	$	4,281		$	(11,872	)
Change in right-of-use asset obtained in exchange for lease liability	$	17,333		$	43,110

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

Hanmi Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three and Six Months Ended June 30, 2020 and 2019

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 through the operation of 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 June 30, 2020, 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, 2019 (the “2019 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.

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 2019 Annual Report on Form 10-K.

FASB ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, On January 1, 2020, the Company adopted ASU 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842 on leases. In addition, ASU 2016-13 made changes to the accounting for available-for sale debt securities.

The Company adopted ASU 2016-13 using the prospective transition approach for debt securities for which the Company would have recognized other-than-temporary impairment prior to January 1, 2020. However, the Company had no such securities and as a result, there was no effect on the balance sheet related to securities from the adoption of ASU 2016-13. As a result, the amortized cost basis remained the same before and after the effective date of ASU 2016-13.

The adoption of ASU 2016-13 resulted in a $17.4 million increase to the beginning balance of the allowance for credit losses, a $0.3 million decrease to the beginning balance of the allowance for off-balance sheet items, and an after-tax charge of $12.2 million to the beginning balance of retained earnings.

According to ASU 2016-13, the Bank was required to measure its expected credit losses of financial assets on a collective (pool) basis when similar risk characteristic(s) exist. The Bank segmented the loans primarily by loan types, considering that the same type of loans share considerable similar risk characteristics, including the collateral type, loan purpose, contract term, amortization and payment structure.

The Company measured expected credit losses of financial assets on a collective (pool) basis, when the financial assets share similar risk characteristics. Depending on the nature of the pool of financial assets with similar risk characteristics, the Company used a discounted cash flow (“DCF”) method, Probability of Default / Loss Given Default method (“PD/LGD”), or a Weighted Average Remaining Maturity (“WARM”) method to estimate expected credit losses.

The Company’s methodologies for estimating the allowance for credit losses considered available relevant information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts. The methodologies applied historical loss information, adjusted for asset-specific characteristics, economic conditions at the measurement date, and forecasts about future economic conditions expected to exist through the contractual lives of the financial assets that were reasonable and supportable, to the identified pools of financial assets with similar risk characteristics for which the historical loss experience was observed. The Company’s methodologies revert to historical loss information on a straight-line basis over twelve quarters when it can no longer develop reasonable and supportable forecasts.

The Company has disaggregated the portfolios of financial assets into the following material segments of like-kind loans or leases with similar risk characteristics using the following methodologies:

The Company used the discounted cash flow (DCF) method to estimate allowances for credit losses for the commercial property, construction, and residential real estate loan portfolios, the commercial and industrial loan portfolio, and the consumer loan portfolio. For all loan pools utilizing the DCF method, the Company utilized and forecasted the national unemployment rate as the primary loss driver. The Company also utilized and forecasted either the annualized average return rate from the National Council of Real Estate Investment Fiduciaries (NCREIF) Property Index for commercial real estate loans or the one-year percentage change in the S&P/Case-Shiller U.S National Home Price Index (NHPI) for residential real estate loans as a second loss driver depending on the nature of the underlying loan pool and how well that loss driver correlates to expected future losses.

For all DCF models at January 1, 2020, 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. The Company leveraged economic projections from the quarterly Federal Open Market Committee (FOMC) and the Federal Reserve Economic Database (FRED) to inform its loss driver forecasts over the four-quarter forecast period. For each of these loan segments, the Company applied an expected loss ratio based on the discounted cash flows adjusted as appropriate for qualitative factors. Qualitative loss factors are based on the Company's judgment of company, market, industry or business specific data, changes in the underlying loan composition of specific portfolios, trends relating to credit quality, delinquency, nonperforming and adversely rated loans, and reasonable and supportable forecasts of economic conditions.

The Company used the Probability of Default/Loss Given Default (PD/LGD) method for the SBA portfolio to accommodate the unique nature of these loans. Although the PD/LGD methodology is an element of the DCF model, the stand-alone PD/LGD methodology minimizes complications related to the characteristics of SBA loans. A uniqueness of the SBA portfolio is that the U.S. Small Business Administration policy requires servicers to undertake all reasonable collection efforts before charging-off the loan. As a result, the recovery rate for SBA loans tend to be more volatile and not intuitively correlated to economic factors.

The Company used a Weighted Average Remaining Maturity (WARM) method to estimate expected credit losses for equipment financing agreements or the equipment lease receivables portfolio. The Company applied an expected loss ratio based on internal historical losses adjusted as appropriate for qualitative factors. The Company's evaluation of market, industry or business specific data, changes in the underlying portfolio composition, trends relating to credit quality, delinquency, nonperforming and adversely rated leases, and reasonable and supportable forecasts of economic conditions informed the estimate of qualitative factors.

As allowed by ASU 2016-13, the Company elected to maintain pools of loans accounted for under ASC 310-30. In accordance with the standard, management did not reassess whether modifications to individual acquired financial assets accounted for in pools were troubled debt restructurings as of the date of adoption.

The Company estimated the allowance for credit losses on loans based on the underlying assets’ amortized cost basis, which was the amount at which the financing receivable is originated or acquired, adjusted for applicable accretion or amortization of premium, discount, and net deferred fees or costs, collection of cash, and charge-offs. In the event that collection of principal becomes uncertain, the Company has policies in place to reverse accrued interest in a timely manner. Therefore, the Company has made a policy election to exclude accrued interest from the measurement of allowance for credit losses.

Expected credit losses are reflected in the allowance for credit losses through a charge to credit loss expense. When the Company deems all or a portion of a financial asset to be uncollectible, the appropriate amount is written off and the allowance for credit losses is reduced by the same amount. The Company applies judgment to determine when a financial asset is deemed uncollectible; however, generally speaking, an asset will be considered uncollectible no later than when all efforts at collection have been exhausted. Subsequent recoveries, if any, are credited to the allowance for credit losses when received.

The following table illustrates the allowance for credit losses and the related impact under ASU 2016-13 to the Company as of January 1, 2020.

	As Reported Under ASU 2016-13		Pre-ASU 2016-13 Adoption		Impact of ASU 2016-13 Adoption
Real estate loans:
Commercial property
Retail	$	6,785	$	4,911	$	1,873
Hospitality		12,387		6,686		5,702
Other		13,415		8,060		5,355
Total commercial property loans		32,587		19,657		12,930
Construction loans		15,590		15,003		587
Residential property loans		2,150		1,695		455
Total real estate loans		50,327		36,355		13,972
Commercial and industrial loans:
Commercial term loans		12,175		14,077		(1,903	)
Commercial lines of credit		1,358		1,887		(529	)
International loans		176		242		(65	)
Total commercial loans		13,709		16,206		(2,497	)
Leases receivable		14,669		8,767		5,902
Consumer loans		135		80		55
Allowance for credit losses on loans receivable	$	78,841	$	61,408	$	17,433

Allowance for credit losses on off-balance sheet items	$	2,062	$	2,398	$	(336	)

The Company used the methodologies described above in the implementation of CECL at January 1, 2020 and through March 31, 2020. The Company, however, adjusted the methodologies for the commercial property, construction, and residential real estate portfolios during the three months ended June 30, 2020 to reflect better the forecast of potential losses arising from the more unstable economic environment due to the COVID-19 pandemic. See Note 3 - Loans for a more detailed description of the changes in the allowance for credit losses methodologies.

FASB ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, Effective January 1, 2020, the Company adopted this standard, which simplifies the subsequent measurement of goodwill impairment by eliminating the requirement to calculate the implied fair value of goodwill (i.e., the current Step 2 of the goodwill impairment test) to measure a goodwill impairment charge. Under this ASU, the impairment test is simply the comparison of the fair value of a reporting unit with its carrying amount (the current Step 1), with the impairment charge being the deficit in fair value but not exceeding the total amount of goodwill allocated to that reporting unit. The simplified one-step impairment test applies to all reporting units (including those with zero or negative carrying amounts). An entity was to apply the amendments in this ASU on a prospective basis and was required to disclose the nature of and reason for the change in accounting principle upon transition. The Company’s goodwill arose from the purchase of an equipment leasing portfolio in 2016. The equipment leasing portfolio has grown since acquisition, and the Company has concluded no impairment has occurred.

The outbreak of the novel coronavirus, also known as COVID-19 has resulted in orders for individuals to shelter-in place and restricted business activities. As a result, the operations and business results of the Company could be materially adversely affected. The extent to which the COVID-19 crisis may impact business activity or investment results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus and the actions required to contain the coronavirus or treat its impact, among others. 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.

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)
June 30, 2020
U.S. Treasury securities	$	44,982	$	280	$	—		$	45,262
U.S. government agency and sponsored agency obligations:
Mortgage-backed securities		413,278		422		(437	)		413,263
Collateralized mortgage obligations		120,080		390		(176	)		120,294
Debt securities		77,160		9		(17	)		77,152
Total U.S. government agency and sponsored agency obligations		610,518		821		(630	)		610,709
Total securities available for sale	$	655,500	$	1,101	$	(630	)	$	655,971

December 31, 2019
U.S. Treasury securities	$	34,947	$	259	$	—			35,206
U.S. government agency and sponsored agency obligations:
Mortgage-backed securities		406,813		4,334		(347	)	$	410,800
Collateralized mortgage obligations		164,232		792		(432	)		164,592
Debt securities		23,733		168		(22	)		23,879
Total U.S. government agency and sponsored agency obligations		594,778		5,294		(801	)		599,271
Total securities available for sale	$	629,725	$	5,553	$	(801	)	$	634,477

The amortized cost and estimated fair value of securities as of June 30, 2020, 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.

	Available for Sale
	Amortized		Estimated
	Cost		Fair Value
	(in thousands)
Within one year	$	45,358	$	45,379
Over one year through five years		121,596		122,202
Over five years through ten years		48,702		48,812
Over ten years		439,844		439,578
Total	$	655,500	$	655,971

CECL (ASU 2016-13) requires the Company to assess its available-for-sales securities portfolio for impairment on an at least quarterly basis. The Company performed an impairment assessment of the Bank’s investment in debt securities in accordance with this standard. This assessment took into account the credit quality of these debt securities and determined that since all were U.S. Treasury obligations, U.S. government agency securities, and U.S. government sponsored agency securities, they all have the backing of the U.S. government, and thus no credit impairment is expected.

Gross unrealized losses on securities available for sale, the estimated fair value of the related securities and the number of securities aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows as of June 30, 2020 and December 31, 2019:

	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)
June 30, 2020
U.S. Treasury securities	$	—		$	29,988		4	$	—		$	—		—	$	—		$	29,988		4
U.S. government agency and sponsored agency obligations:
Mortgage-backed securities		(437	)		192,403		23		—			—		—		(437	)		192,403		23
Collateralized mortgage obligations		(176	)		46,693		12		—			—		—		(176	)		46,693		12
Debt securities		(17	)		32,483		5		—			—		—		(17	)		32,483		5
Total U.S. government agency and sponsored agency obligations		(630	)		271,579		40		—			—		—		(630	)		271,579		40
Total	$	(630	)	$	301,567		44	$	—		$	—		—	$	(630	)	$	301,567		44

December 31, 2019
U.S. government agency and sponsored agency obligations:
Mortgage-backed securities	$	(186	)	$	51,261		17	$	(161	)	$	18,757		14	$	(347	)	$	70,018		31
Collateralized mortgage obligations		(112	)		41,419		14		(320	)		39,936		36		(432	)		81,355		50
Debt securities		(20	)		8,235		2		(3	)		2,997		1		(22	)		11,233		3
Total U.S. government agency and sponsored agency obligations		(318	)		100,916		33		(483	)		61,690		51		(801	)		162,606		84
Total	$	(318	)	$	100,916		33	$	(483	)	$	61,690		51	$	(801	)	$	162,606		84

The unrealized losses in the U.S. government agency and sponsored agency obligations, were caused by fluctuations in interest rates. These securities are not deemed to have credit risk due to their long history with no credit losses, and the explicit guarantee of the U.S. government of timely payment of principal and interest to investors. The Company does not intend to sell the securities and it is not more likely than not that it will be required to sell them before recovery of their amortized cost.

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

	Three Months Ended June 30,					Six Months Ended June 30,
	2020		2019			2020		2019
	(in thousands)
Gross realized gains on sales of securities	$	15,712	$	634		$	15,712	$	1,359
Gross realized losses on sales of securities		—		(64	)		—		(64	)
Net realized gains on sales of securities	$	15,712	$	570		$	15,712	$	1,295
Proceeds from sales of securities	$	495,566		44,119		$	495,566		113,306

During the three months ended June 30, 2020 and 2019, there was a $15.7 million and $570,000 net gain in earnings resulting from the sale of securities, respectively. A net unrealized gain of $15.3 million and $792,000 related to these securities had previously been recorded in accumulated other comprehensive income as of the beginning of the period in 2020 and 2019, respectively.

During the six months ended June 30, 2020, there were $15.7 million securities sales transactions in net gains in earnings resulting from $15.3 million previously recorded for unrealized gains in accumulated other comprehensive income. During the six months ended June 30, 2019, there were $1.3 million in net gains in earnings resulting from the sale of securities which had $586,000 in previously recorded unrealized gains in accumulated other comprehensive income.

Securities available for sale with market values of $50.0 million and $30.2 million as of June 30, 2020 and 2019, respectively, were pledged to secure public deposits and for other purposes as required or permitted by law.

Note 3 — Loans

Loans Receivable

Loans consisted of the following as of the dates indicated:

	June 30, 2020			December 31, 2019
	(in thousands)
Real estate loans:
Commercial property
Retail	$	808,157		$	869,302
Hospitality		882,812			922,288
Other ⁽¹⁾		1,504,916			1,358,432
Total commercial property loans		3,195,885			3,150,022
Construction		70,357			76,455
Residential property		354,064			402,028
Total real estate loans		3,620,306			3,628,505
Commercial and industrial loans		730,399			484,093
Leases receivable		462,811			483,879
Consumer loans ⁽²⁾		12,126			13,670
Loans receivable		4,825,642			4,610,147
Allowance for credit losses		(86,330	)		(61,408	)
Loans receivable, net	$	4,739,312		$	4,548,739

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

⁽²⁾	Consumer loans include home equity lines of credit of $7.6 million and $8.2 million as of June 30, 2020 and December 31, 2019, respectively.

The CARES Act (the Coronavirus Aid, Relief, and Economic Security Act) was passed by Congress and signed into law by President Trump on March 27, 2020. Among other benefits, the CARES Act allows financial institutions to assist customers in dealing with financial hardship by (a) providing federal funding so that financial institutions can originate SBA loans to borrowers at a low interest rate under the Paycheck Protection Program (PPP loans) with eventual debt forgiveness should the borrower continue to meet certain criteria after the COVID-19 crisis has abated; and (b) allowing financial institutions to temporarily modify loan terms by deferring loan payments, loan fees, etc. on a short-term basis without considering them Troubled Debt Restructures.

At June 30, 2020, there were $301.8 million of PPP loans included in commercial and industrial loans in the table above. In addition, at June 30, 2020, there were $1.4 billion of loans modified under Section 4013 of the CARES Act.

Accrued interest on loans was $20.3 million and $10.0 million at June 30, 2020 and December 31, 2019, respectively. At June 30, 2020 and December 31, 2019, loans of $2.4 billion and $1.4 billion, respectively, were pledged to secure advances from the FHLB.

Loans Held for Sale

The following is the activity for SBA loans held for sale for the three months ended June 30, 2020 and 2019:

	Real Estate			Commercial and Industrial			Total
	(in thousands)
June 30, 2020
Balance at beginning of period	$	—		$	—		$	—
Originations and transfers		12,661			5,281			17,942
Balance at end of period	$	12,661		$	5,281		$	17,942

June 30, 2019
Balance at beginning of period	$	6,500		$	640		$	7,140
Originations		6,650			7,650			14,300
Sales		(10,474	)		(4,937	)		(15,411	)
Balance at end of period	$	2,676		$	3,353		$	6,029

The following is the activity for SBA loans held for sale for the six months ended June 30, 2020 and 2019:

	Real Estate			Commercial and Industrial			Total
	(in thousands)
June 30, 2020
Balance at beginning of period	$	2,943		$	3,077		$	6,020
Originations and transfers		19,155			10,984			30,139
Sales		(9,432	)		(8,780	)		(18,212	)
Principal payoffs and amortization		(5	)		—			(5	)
Balance at end of period	$	12,661		$	5,281		$	17,942

June 30, 2019
Balance at beginning of period	$	5,194		$	4,196		$	9,390
Originations		15,713			11,810			27,523
Sales		(18,229	)		(12,641	)		(30,870	)
Principal payoffs and amortization		(2	)		(12	)		(14	)
Balance at end of period	$	2,676		$	3,353		$	6,029

Allowance for Credit Losses

The Company’s estimate of the allowance for credit losses at June 30, 2020 reflects losses expected over the remaining contractual life of the assets. The contractual term does not consider extensions, renewals or modifications unless the Company has identified an expected troubled debt restructuring.

At June 30, 2020, the Company used the discounted cash flow (DCF) method to estimate allowances for credit losses for the commercial and industrial loan portfolio and the consumer loan portfolio. For all loan pools utilizing the DCF method, the Company utilizes and forecasts the national unemployment rate as the primary loss driver. In addition, 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. As of and for the quarter ended June 30, 2020, the Company leveraged the economic projections from Moody’s Analytics Economic Scenarios and Forecasts to inform its loss driver forecasts over the four-quarter forecast period. For each of these loan segments, the Company applied an annualized historical Probability of Default/Loss Given Default (PD/LGD) using all available historical periods. The reason for the change from relying on the FRED economic data to Moody’s data was because Moody’s data is updated more frequently and timely than FOMC or FRED, and thus provides a better forecast for PD/LGD models. Since reasonable and supportable forecasts of economic conditions are imbedded directly to DCF model, qualitative adjustments are reduced but considered. Qualitative adjustments were based on the Company's judgment of company, market, industry or business specific data, changes in the underlying loan composition of specific portfolios.

COVID-19 on these portfolios, as well as the government assistance programs based on the maturities. As a result, at June 30, 2020, the Company utilized the Probability of Default/Loss Given Default (PD/LGD) method for the SBA and commercial property, construction, and residential real estate portfolios. The Company previously applied the DCF method to the real estate secured portfolios in the implementation of CECL at January 1, 2020 and through March 31, 2020 and determined that the change from DCF to PD/LGD was not material. See Note 1 – Organization and Basis of Presentation for a further description of the methodologies applied at the inception of CECL and during the three months ended March 31, 2020. The Company used historical periods that included an economic downturn to derive historical losses for better alignment in the estimation of expected losses. The Company leveraged Frye-Jacobs modeled LGD rates for loan segments with no historical losses. In addition, for those loans granted a loan modification due to COVID-19, the Company used historical periods under PD/LGD as of March 31, 2020 to reflect the moratorium on TDRs under Section 4013 of the CARES Act. The PD/LGD method incorporates a forecast into loss estimates using a qualitative adjustment. Qualitative loss factors were based on the Company's judgment of company, market, industry or business specific data, changes in the underlying loan composition of specific portfolios, trends relating to credit quality, delinquency, nonperforming and adversely rated loans, and reasonable and supportable forecasts of economic conditions.

Management believes the allowance for credit losses is appropriate to provide for estimated losses inherent in the loans receivable portfolio. However, the allowance is an estimate that is inherently uncertain and depends on the outcome of future events. Management’s methodologies for determining such estimates consists of measuring expected credit losses of financial assets on a collective (pool) basis when similar risk characteristic(s) exist. The Bank segments the loans primarily by loan types, considering that the same type of loans share considerable similar risk characteristics, including the collateral type, loan purpose, contract term, amortization and payment structure. Our lending is concentrated generally in real estate loans, commercial loans and leases and SBA loans to small and middle market businesses primarily in California, Texas, Illinois and New York. Further, our regulators, in reviewing our loans receivable portfolio may require us to increase our 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 June 30, 2020 and 2019:

	Real Estate			Commercial and Industrial			Leases Receivable			Consumer			Unallocated			Total
	(in thousands)
June 30, 2020
Balance at beginning of period	$	38,983		$	11,588		$	15,780		$	149		$	—			66,500
Less loans charged off		91			438			1,044			—			—			1,573
Recoveries on loans receivable previously charged off		(98	)		(60	)		(114	)		—			—			(272	)
Provision for credit losses		17,226			2,178			1,674			53			—			21,131
Ending balance	$	56,216		$	13,388		$	16,524		$	202		$	—		$	86,330
Individually evaluated for impairment	$	2,807		$	123		$	2,262		$	2		$	—		$	5,194
Collectively evaluated for impairment	$	53,409		$	13,265		$	14,262		$	200		$	—		$	81,136

Loans receivable	$	3,620,306		$	730,399		$	462,811		$	12,126		$	—		$	4,825,642
Individually evaluated for impairment	$	48,302		$	13,771		$	8,456		$	1,280		$	—		$	71,809
Collectively evaluated for impairment	$	3,572,004		$	716,628		$	454,355		$	10,846		$	—		$	4,753,833

June 30, 2019
Balance at beginning of period	$	18,306		$	8,711		$	5,580		$	89		$	210		$	32,896
Less loans charged off		—			562			974			—			—			1,536
Recoveries on loans receivable previously charged off		(1,133	)		(89	)		(105	)		—			—			(1,327	)
Provision for credit losses		14,565			997			1,357			(10	)		(210	)		16,699
Ending balance	$	34,004		$	9,235		$	6,068		$	79		$	—		$	49,386
Individually evaluated for impairment	$	14,724		$	3,072		$	662		$	1		$	—		$	18,459
Collectively evaluated for impairment	$	19,280		$	6,163		$	5,406		$	78		$	—		$	30,927

Loans receivable	$	3,671,463		$	409,502		$	460,519		$	14,318		$	—		$	4,555,802
Individually evaluated for impairment	$	39,885		$	21,706		$	3,233		$	1,351		$	—		$	66,175
Collectively evaluated for impairment	$	3,631,578		$	387,796		$	457,286		$	12,967		$	—		$	4,489,627

The following table details the information on the allowance for credit losses by portfolio segment as of and for the six months ended June 30, 2020 and 2019:

	Real Estate			Commercial and Industrial			Leases Receivable			Consumer			Unallocated			Total
	(in thousands)
June 30, 2020
Balance at beginning of period	$	36,355		$	16,206		$	8,767		$	80		$	—		$	61,408
Adjustment related to adoption of ASU 2016-13		13,972			(2,497	)		5,902			56			—			17,433
Adjusted balance as of January 1, 2020		50,327			13,709			14,669			136			—			78,841
Less loans charged off		14,233			12,589			2,224			—			—			29,046
Recoveries on loans receivable previously charged off		(156	)		(144	)		(188	)		—			—			(488	)
Provision for credit losses		19,966			12,124			3,891			66			—			36,047
Ending balance	$	56,216		$	13,388		$	16,524		$	202		$	—		$	86,330
Individually evaluated for impairment	$	2,807		$	123		$	2,262		$	2		$	—		$	5,194
Collectively evaluated for impairment	$	53,409		$	13,265		$	14,262		$	200		$	—		$	81,136

Loans receivable	$	3,620,306		$	730,399		$	462,811		$	12,126		$	—		$	4,825,642
Individually evaluated for impairment	$	48,302		$	13,771		$	8,456		$	1,280		$	—		$	71,809
Collectively evaluated for impairment	$	3,572,004		$	716,628		$	454,355		$	10,846		$	—		$	4,753,833

June 30, 2019
Balance at beginning of period	$	18,384		$	7,162		$	6,303		$	98		$	27		$	31,974
Less loans charged off		113			695			1,826			—			—			2,634
Recoveries on loans receivable previously charged off		(1,563	)		(471	)		(196	)		—			—			(2,230	)
Provision for credit losses		14,170			2,297			1,395			(19	)		(27	)		17,816
Ending balance	$	34,004		$	9,235		$	6,068		$	79		$	—		$	49,386
Individually evaluated for impairment	$	14,724		$	3,072		$	662		$	1		$	—		$	18,459
Collectively evaluated for impairment	$	19,280		$	6,163		$	5,406		$	78		$	—		$	30,927

Loans receivable	$	3,671,463		$	409,502		$	460,519		$	14,318		$	—		$	4,555,802
Individually evaluated for impairment	$	39,885		$	21,706		$	3,233		$	1,351		$	—		$	66,175
Collectively evaluated for impairment	$	3,631,578		$	387,796		$	457,286		$	12,967		$	—		$	4,489,627

The table below illustrates the allowance for credit losses by portfolio segment as a percentage of the recorded total allowance for credit losses and as a percentage of the aggregate recorded investment of loans receivable.

	June 30, 2020										December 31, 2019
	Allowance					Total					Allowance					Total
	Amount		Percentage			Loans		Percentage			Amount		Percentage			Loans		Percentage
	(in thousands)
Real estate loans:
Commercial property
Retail	$	7,341		8.5	%	$	808,157		16.7	%	$	4,911		8.0	%	$	869,302		18.9	%
Hospitality		11,984		13.9	%		882,812		18.3	%		6,686		10.9	%		922,288		20.0	%
Other		24,920		28.9	%		1,504,916		31.2	%		8,060		13.1	%		1,358,432		29.4	%
Total commercial property loans		44,245		51.3	%		3,195,885		66.2	%		19,657		32.0	%		3,150,022		68.3	%
Construction		9,331		10.8	%		70,357		1.5	%		15,003		24.4	%		76,455		1.7	%
Residential property		2,640		3.1	%		354,064		7.3	%		1,695		2.8	%		402,028		8.7	%
Total real estate loans		56,216		65.2	%		3,620,306		75.0	%		36,355		59.2	%		3,628,505		78.7	%
Commercial and industrial loans		13,387		15.5	%		730,399		15.1	%		16,206		26.4	%		484,093		10.5	%
Leases receivable		16,525		19.1	%		462,811		9.6	%		8,767		14.3	%		483,879		10.5	%
Consumer loans		202		0.2	%		12,126		0.3	%		80		0.1	%		13,670		0.3	%
Total	$	86,330		100.0	%	$	4,825,642		100.0	%	$	61,408		100.0	%	$	4,610,147		100.0	%

The following table represents the amortized cost basis of collateral-dependent loans by class of loans as of June 30, 2020, for which repayment is expected to be obtained through the sale of the underlying collateral and any collateral dependent loans that are still accruing but are considered impaired.

	Amortized Cost
June 30, 2020	(in thousands)
Real estate loans:
Commercial property	$	16,796
Construction		25,854
Residential property		2,761
Total real estate loans		45,411
Commercial and industrial loans		288
Consumer Loans		1,208
Total ⁽¹⁾	$	46,907

⁽¹⁾	All loans are secured by real estate, except for one commercial term loan secured by $264,000 in cash.

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.

The tables below provide a comparison as of June 30, 2020 and December 31, 2019 of the pass/pass-watch, special mention and classified loans, disaggregated by loan segment:

	Pass/Pass- Watch		Special Mention		Classified		Total
	(in thousands)
June 30, 2020
Real estate loans:
Commercial property
Retail	$	800,437	$	1,182	$	6,538	$	808,157
Hospitality		879,131		—		3,681		882,812
Other		1,469,272		6,059		29,585		1,504,916
Total commercial property		3,148,840		7,241		39,804		3,195,885
Construction		44,503		—		25,854		70,357
Residential property		350,520		784		2,760		354,064
Total real estate loans		3,543,863		8,025		68,418		3,620,306
Commercial and industrial loans		702,443		12,423		15,533		730,399
Leases receivable		453,528		—		9,283		462,811
Consumer loans		10,752		686		688		12,126
Total loans receivable	$	4,710,586	$	21,134	$	93,922	$	4,825,642

December 31, 2019
Real estate loans:
Commercial property
Retail	$	859,739	$	2,835	$	6,728	$	869,302
Hospitality		915,834		939		5,515		922,288
Other		1,329,817		7,807		20,809		1,358,432
Total commercial property		3,105,390		11,580		33,052		3,150,022
Construction		36,956		1,613		37,886		76,455
Residential property		398,737		2,512		779		402,028
Total real estate loans		3,541,082		15,705		71,718		3,628,505
Commercial and industrial loans		458,184		10,222		15,687		484,093
Leases receivable		477,977		—		5,902		483,879
Consumer loans		12,247		705		718		13,670
Total loans receivable	$	4,489,491	$	26,632	$	94,025	$	4,610,147

Loans by Vintage Year and Risk Rating

	Term Loans
	Amortized Cost Basis by Origination Year ⁽¹⁾
	2020		2019		2018		2017		2016		Prior		Revolving Loans Amortized Cost Basis		Total
	(in thousands)
June 30, 2020
Commercial property
Risk Rating
Pass / Pass Watch	$	438,577	$	539,598	$	555,748	$	429,415	$	483,511	$	671,096	$	30,895	$	3,148,840
Special Mention		—		2,757		455		2,351		1,271		407		—		7,241
Classified		15,592		1,113		2,965		709		3,992		15,433		—		39,804
Total commercial property		454,169		543,468		559,168		432,475		488,774		686,936		30,895		3,195,885

Construction
Risk Rating
Pass / Pass Watch		18,025		5,633		—		—		20,845		—		—		44,503
Special Mention		—		—		—		—		—		—		—		—
Classified		—		12,808		13,046		—		—		—		—		25,854
Total construction		18,025		18,441		13,046		—		20,845		—		—		70,357

Residential property
Risk Rating
Pass / Pass Watch		274		954		40,468		149,532		100,367		58,925		—		350,520
Special Mention		—		—		—		—		—		784		—		784
Classified		—		—		—		1,890		754		116		—		2,760
Total residential property		274		954		40,468		151,422		101,121		59,825		—		354,064

Total real estate loans
Risk Rating
Pass / Pass Watch		456,876		546,185		596,216		578,947		604,723		730,021		30,895		3,543,863
Special Mention		—		2,757		455		2,351		1,271		1,191		—		8,025
Classified		15,592		13,921		16,011		2,599		4,746		15,549		—		68,418
Total real estate loans		472,468		562,863		612,682		583,897		610,740		746,761		30,895		3,620,306

Commercial and industrial loans:
Risk Rating
Pass / Pass Watch		369,101		124,141		60,742		21,613		5,586		14,952		106,308		702,443
Special Mention		4,281		800		503		78		1,733		1,585		3,443		12,423
Classified		8,969		3,894		568		148		140		1,614		200		15,533
Total commercial and industrial loans		382,351		128,835		61,813		21,839		7,459		18,151		109,951		730,399

Leases receivable:
Risk Rating
Pass / Pass Watch		67,994		203,034		119,213		44,150		18,292		845		—		453,528
Special Mention		—		—		—		—		—		—		—		—
Classified		11		3,554		2,807		1,191		1,299		421		—		9,283
Total leases receivable		68,005		206,588		122,020		45,341		19,591		1,266		—		462,811

Consumer loans:
Risk Rating
Pass / Pass Watch		121		25		15		86		7		2,610		7,888		10,752
Special Mention		—		—		—		—		—		686		—		686
Classified		—		—		661		27		—		—		—		688
Total commercial term loans		121		25		676		113		7		3,296		7,888		12,126

Total loans receivable:
Risk Rating
Pass / Pass Watch		894,092		873,385		776,186		644,796		628,608		748,428		145,091		4,710,586
Special Mention		4,281		3,557		958		2,429		3,004		3,462		3,443		21,134
Classified		24,572		21,369		20,047		3,965		6,185		17,584		200		93,922
Total loans receivable	$	922,945	$	898,311	$	797,191	$	651,190	$	637,797	$	769,474	$	148,734	$	4,825,642

⁽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⁾
	2020		2019		2018		2017		2016		Prior		Revolving Loans Amortized Cost Basis		Total
	(in thousands)
June 30, 2020
Real estate loans:
Commercial property
Payment performance
Performing	$	453,569	$	543,468	$	559,015	$	432,475	$	488,673	$	681,933	$	30,895	$	3,190,028
Nonperforming		600		—		153		—		101		5,003		—		5,857
Total commercial property		454,169		543,468		559,168		432,475		488,774		686,936		30,895		3,195,885

Construction
Payment performance
Performing		18,025		5,633		—		—		20,845		—		—	$	44,503
Nonperforming		—		12,808		13,046		—		—		—		—		25,854
Total construction		18,025		18,441		13,046		—		20,845		—		—		70,357

Residential property
Payment performance
Performing		274		954		40,468		149,532		100,366		59,677		—		351,271
Nonperforming		—		—		—		1,890		755		148		—		2,793
Total residential property		274		954		40,468		151,422		101,121		59,825		—		354,064

Total real estate loans
Payment performance
Performing		471,868		550,055		599,483		582,007		609,884		741,610		30,895		3,585,802
Nonperforming		600		12,808		13,199		1,890		856		5,151		—		34,504
Total real estate loans		472,468		562,863		612,682		583,897		610,740		746,761		30,895		3,620,306

Commercial and industrial loans:
Payment performance
Performing		373,382		124,940		61,377		21,691		7,459		18,015		109,751		716,615
Nonperforming		8,969		3,895		436		148		—		136		200		13,784
Total commercial and industrial loans		382,351		128,835		61,813		21,839		7,459		18,151		109,951		730,399

Leases receivable:
Payment performance
Performing		67,994		203,034		119,213		44,150		18,292		846		—		453,529
Nonperforming		11		3,554		2,807		1,191		1,299		420		—		9,282
Total leases receivable		68,005		206,588		122,020		45,341		19,591		1,266		—		462,811

Consumer loans:
Payment performance
Performing		121		25		15		86		7		3,296		7,888		11,438
Nonperforming		—		—		661		27		—		—		—		688
Total commercial term loans		121		25		676		113		7		3,296		7,888		12,126

Total loans receivable:
Payment performance
Performing		913,365		878,054		780,088		647,934		635,642		763,767		148,534		4,767,384
Nonperforming		9,580		20,257		17,103		3,256		2,155		5,707		200		58,258
Total loans receivable	$	922,945	$	898,311	$	797,191	$	651,190	$	637,797	$	769,474	$	148,734	$	4,825,642

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

The following is an aging analysis of loans, 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)
June 30, 2020
Real estate loans:
Commercial property
Retail	$	—	$	—	$	—	$	—	$	808,157	$	808,157	$	—
Hospitality		—		—		—		—		882,812		882,812		—
Other		—		—		1,645		1,645		1,503,271		1,504,916		—
Total commercial property loans		—		—		1,645		1,645		3,194,240		3,195,885		—
Construction		—		—		—		—		70,357		70,357		—
Residential property		2,682		—		2,645		5,327		348,737		354,064		—
Total real estate loans		2,682		—		4,290		6,972		3,613,334		3,620,306		—
Commercial and industrial loans		212		—		12,632		12,844		717,555		730,399		—
Leases receivable		3,684		5,095		5,113		13,893		448,918		462,811		—
Consumer loans		—		—		27		27		12,099		12,126		—
Total loans receivable	$	6,578	$	5,095	$	22,062	$	33,736	$	4,791,906	$	4,825,642	$	—

December 31, 2019
Real estate loans:
Commercial property
Retail	$	6	$	132	$	111	$	249	$	869,053	$	869,302	$	—
Hospitality		907		—		—		907		921,381		922,288		—
Other		51		—		38		89		1,358,344		1,358,432		—
Total commercial property loans		964		132		149		1,245		3,148,778		3,150,022		—
Construction		—		—		—		—		76,455		76,455		—
Residential property		540		1,627		309		2,477		399,551		402,028		—
Total real estate loans		1,504		1,759		458		3,721		3,624,784		3,628,505		—
Commercial and industrial loans		635		133		143		911		483,183		484,093		—
Leases receivable		5,358		2,138		3,493		10,990		472,889		483,879		—
Consumer loans		—		30		—		30		13,639		13,670		—
Total loans receivable	$	7,497	$	4,060	$	4,094	$	15,652	$	4,594,496	$	4,610,147	$	—

As of June 30, 2020 and December 31, 2019, there were no loans 90 days or more past due and accruing interest.

Individually Evaluated Loans

Prior to the adoption of ASU 2016-13, impaired loans were measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan was collateral dependent, less estimated costs to sell. If the estimated value of the impaired loan was less than the recorded investment in the loan, we charged-off the deficiency against the allowance for loan losses or we established a specific allowance in the allowance for loan losses. Additionally, we excluded from the quarterly migration analysis impaired loans when determining the amount of the allowance for loan losses required for the period.

We review, under ASU 2016-13, all loans on an individual basis when they do not share similar risk characteristics with loan pools.

The following tables provide information on individually evaluated loans receivable as of June 30, 2020 and impaired loans receivable as of December 31, 2019 disaggregated by loan class, as of the dates indicated:

	Recorded Investment		Unpaid Principal Balance		With No Related Allowance Recorded		With an Allowance Recorded		Related Allowance
	(in thousands)
June 30, 2020
Real estate loans:
Commercial property
Retail	$	1,355	$	1,355	$	1,355	$	—	$	—
Other		18,299		19,725		17,679		620		20
Total commercial property loans		19,654		21,080		19,034		620		20
Construction		25,854		27,330		13,046		12,808		2,787
Residential property		2,794		2,770		2,761		33		—
Total real estate loans		48,302		51,180		34,841		13,461		2,807
Commercial and industrial loans		13,771		14,589		12,877		893		123
Leases receivable		8,456		8,521		1,797		6,660		2,262
Consumer loans		1,280		1,599		1,208		72		2
Total	$	71,809	$	75,889	$	50,723	$	21,086	$	5,194

December 31, 2019
Real estate loans:
Commercial property
Retail	$	434	$	459	$	111	$	323	$	19
Hospitality		244		400		22		223		24
Other		14,864		15,151		14,696		167		12
Total commercial property loans		15,542		16,010		14,829		713		55
Construction		27,201		28,000		—		27,201		13,973
Residential property		1,124		1,163		1,089		35		—
Total real estate loans		43,867		45,173		15,918		27,949		14,028
Commercial and industrial loans		13,700		14,090		143		13,557		8,885
Leases receivable		5,902		5,909		1,112		4,790		2,863
Consumer loans		1,297		1,588		1,220		77		1
Total	$	64,766	$	66,760	$	18,393	$	46,373	$	25,778

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 June 30, 2020.

	June 30, 2020
	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:
Retail	$	1,355	$	—	$	—	$	1,355
Other		3,883		620		—		4,503
Commercial property loans		5,238		620		—		5,858
Construction loans		13,046		12,808		—		25,854
Residential property loans		2,761		33		—		2,794
Total real estate loans		21,045		13,461		—		34,506
Commercial and industrial loans		12,878		907		—		13,785
Leases receivable		1,797		7,488		—		9,285
Consumer loans		688		—		—		688
Total	$	36,408	$	21,856	$	—	$	58,264

The following is a summary of interest foregone on nonaccrual loans for the periods indicated:

	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
	(in thousands)
Interest income that would have been recognized had impaired loans performed in accordance with their original terms	$	1,386		$	1,120		$	2,998		$	2,009
Less: Interest income recognized on impaired loans		(508	)		(696	)		(1,085	)		(1,378	)
Interest foregone on impaired loans	$	878		$	424		$	1,913		$	631

There were no commitments to lend additional funds to borrowers whose loans are included above.

The following table details nonaccrual loans, disaggregated by loan class, as of the dates indicated:

	June 30, 2020		December 31, 2019
	(in thousands)
Real estate loans:
Commercial property
Retail	$	1,355	$	277
Hospitality		—		225
Other		4,503		14,864
Total Commercial property loans		5,858		15,366
Construction		25,854		27,201
Residential property		2,794		1,124
Total real estate loans		34,506		43,691
Commercial and industrial loans		13,785		13,479
Leases receivable		9,285		5,902
Consumer loans		688		689
Total nonaccrual loans	$	58,264	$	63,761

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

	June 30, 2020		December 31, 2019
	(in thousands)
Nonaccrual loans	$	58,264	$	63,761
Loans receivable 90 days or more past due and still accruing		—		—
Total nonperforming loans receivable		58,264		63,761
Other real estate owned ("OREO")		148		63
Total nonperforming assets	$	58,412	$	63,824

OREO is included in prepaid expenses and other assets in the accompanying Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019.

Troubled Debt Restructurings

As of June 30, 2020 and December 31, 2019, total TDRs were $31.6 million and $56.3 million, respectively. A debt restructuring is considered a TDR if we grant a concession that we would not have otherwise considered, to the borrower for economic or legal reasons related to the borrower’s financial difficulties. Loans are considered to be TDRs if they were restructured, such as reducing the amount of principal and interest due monthly, and/or allowing for interest only monthly payments for three months or more or other payment structure modifications.

The following table details TDRs as of June 30, 2020 and December 31, 2019:

	Nonaccrual TDRs										Accrual TDRs
	Deferral of Principal		Deferral of Principal and/or Interest		Reduction of Principal and/or Interest		Extension of Maturity		Total		Deferral of Principal		Deferral of Principal and/or Interest		Reduction of Principal and/or Interest		Extension of Maturity		Total
June 30, 2020
Real estate loans	$	—	$	1,483	$	13,548	$	618	$	15,649	$	—	$	—	$	—	$	13,796	$	13,796
Commercial and industrial loans		—		181		247		296		724		—		—		51		85		136
Consumer loans		661		—		—		—		661		521		—		71		—		592
Total	$	661	$	1,664	$	13,795	$	914	$	17,034	$	521	$	—	$	122	$	13,881	$	14,524

December 31, 2019
Real estate loans	$	—	$	132	$	27,740	$	13,926	$	41,798	$	—	$	—	$	—	$	—	$	—
Commercial and industrial loans		—		153		12,527		312		12,991		—		36		71		114		222
Consumer loans		689		—		—		—		689		531		—		77		—		608
Total	$	689	$	285	$	40,266	$	14,238	$	55,478	$	531	$	36	$	148	$	114	$	830

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

	Three Months ended						Twelve Months ended
	June 30, 2020						December 31, 2019
	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		2	$	2,002	$	1,973		5	$	40,743	$	41,798
Commercial and industrial loans		—		—		—		2		12,779		12,562
Consumer loans		—		—		—		1		549		531
Total		2	$	2,002	$	1,973		8	$	54,071	$	54,891

	Six Months ended						Twelve Months ended
	June 30, 2020						December 31, 2019
	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		2	$	2,002	$	1,973		5	$	40,743	$	41,798
Commercial and industrial loans		—		—		—		2		12,779		12,562
Consumer loans		—		—		—		1		549		531
Total		2	$	2,002	$	1,973		8	$	54,071	$	54,891

All TDRs are individually analyzed using one of these 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 June 30, 2020 and December 31, 2019, TDRs were subjected to specific impairment analysis. We determined impairment allowances of $0.1 million and $22.7 million, respectively, related to these loans and such allowances were included in the allowance for credit losses.

A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms. One loan for $33,000 defaulted during the three- and six-months ended June 30, 2020 following modification. During the year ended December 31, 2019, one loan for $132,000 defaulted within the twelve-month period following modification.

Note 4 — Servicing Assets

The changes in servicing assets for the three months ended June 30, 2020 and 2019 were as follows:

	Three Months Ended June 30,
	2020			2019
	(in thousands)
Servicing assets:
Balance at beginning of period	$	6,727		$	7,978
Addition related to sale of SBA loans		—			344
Amortization		(540	)		(755	)
Balance at end of period	$	6,187		$	7,567

The changes in servicing assets for the six months ended June 30, 2020 and 2019 were as follows:

	Six Months Ended June 30,
	2020			2019
	(in thousands)
Servicing assets:
Balance at beginning of period	$	6,956		$	8,520
Addition related to sale of SBA loans		354			659
Amortization		(1,123	)		(1,612	)
Balance at end of period	$	6,187		$	7,567

At June 30, 2020 and December 31, 2019, we serviced loans sold to unaffiliated parties in the amounts of $412.3 million and $422.3 million, respectively. These represented loans that have been 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 $1.2 million and $1.1 million for the three months ended June 30, 2020 and 2019, respectively. The Company recorded servicing fee income of $2.3 million and $2.2 million for the six months ended June 30, 2020 and 2019, 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 $433,000 and $573,000 for the three months ended June 30, 2020 and 2019, respectively and $969,000 and $1.3 million for the six months ended June 30, 2020 and 2019, respectively.

Note 5 — Income Taxes

The Company’s income tax expense was $4.5 million and $1.2 million representing an effective income tax rate of 32.7 percent and 31.5 percent for the three months ended June 30, 2020 and 2019, respectively. The Company’s income tax expense was $5.5 million and $7.5 million representing an effective income tax rate of 32.3 percent and 30.2 percent for the six months ended June 30, 2020 and 2019, respectively.

Management concluded that as of June 30, 2020 and December 31, 2019, a valuation allowance of $4.9 million was appropriate against certain state net operating losses and certain tax credits. For all other deferred tax assets, management believes it was more likely than not that these deferred tax assets will be realized principally through future taxable income and reversal of existing taxable temporary differences. The net deferred tax asset was $43.3 million and $36.8 million and the net current tax liability was $8.2 million and $0 as of June 30, 2020 and December 31, 2019, respectively.

The Company is subject to examination by federal and state tax authorities for certain years ended December 31, 2015 through 2019. Management does not anticipate any material changes in our consolidated financial statements which may arise as a result of these audits or examinations. During the quarter ended June 30, 2020, 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.

The Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, was signed into law on March 27, 2020. The tax package is broad, with provisions for tax payment relief, significant business incentives, and certain corrections to the 2017 Tax Cuts and Jobs Act, or the Tax Act. The tax relief measures for entities includes a five-year net operating loss carry back, increases in interest expense deduction limits, accelerates alternative minimum tax credit refunds, provides payroll tax relief, and provides a technical correction to allow accelerated deductions for qualified improvement property. ASC Topic 740, Income Taxes, requires the effect of changes in tax law be recognized in the period in which new legislation is enacted. The enactment of the CARES Act is not material to the Company’s income taxes for the three and six months ended June 30, 2020, and is not expected to have a material impact on its financial statements for the full year ended December 31, 2020.

Note 6 — Goodwill and other intangibles

The third-party originators intangible of $483,000 and goodwill of $11.0 million were recorded as a result of the acquisition of a leasing 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:

		June 30, 2020							December 31, 2019
	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	$	(1,657	)	$	556	$	2,213	$	(1,567	)	$	646
Third-party originators intangible	7 years		483		(328	)		155		483		(287	)		196
Goodwill	N/A		11,031		—			11,031		11,031		—			11,031
Total intangible assets		$	13,727	$	(1,985	)	$	11,742	$	13,727	$	(1,854	)	$	11,873

Intangible assets amortization expense for the three-month periods ended June 30, 2020 and 2019 was $65,000 and $65,000, respectively, and for the six-month periods ended June 30, 2020 and 2019 was $131,000 and $155,000, respectively. During the first quarter of 2020, the Company performed an impairment analysis on its goodwill and other intangible assets and determined there was no impairment.

Note 7 — Deposits

Time deposits at or exceeding the FDIC insurance limit of $250,000 at June 30, 2020 and December 31, 2019 were $308.5 million and $299.9 million, respectively.

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

At June 30, 2020	Time Deposits of $250,000 or More		Other Time Deposits		Total
	(in thousands)
2020	$	213,200	$	549,973	$	763,174
2021		94,456		514,553		609,009
2022		—		59,134		59,134
2023		796		1,841		2,636
2024 and thereafter		—		1,062		1,062
Total	$	308,453	$	1,126,562	$	1,435,015

At December 31, 2019
2020	$	291,940	$	1,098,666	$	1,390,606
2021		7,186		130,331		137,517
2022		—		25,155		25,155
2023		789		1,185		1,974
2024 and thereafter		—		669		669
Total	$	299,914	$	1,256,005	$	1,555,919

Accrued interest payable on deposits was $8.6 million and $11.2 million at June 30, 2020 and December 31, 2019, respectively. Total deposits reclassified to loans due to overdrafts at June 30, 2020 and December 31, 2019 were $442,000 and $1.5 million, respectively.

Note 8 — Borrowings

At June 30, 2020, the Bank had no overnight advances and $150.0 million in term advances outstanding with the FHLB with a weighted average interest rate of 1.63 percent. At December 31, 2019, the Bank had $15.0 million in overnight advances with a weighted average interest rate of 1.66 percent and $75.0 million of term advances with the FHLB with a weighted average rate of 1.71 percent. The Bank had $101.8 million of 0.35 percent advances with the FRB under the Paycheck Protection Program Lending Facility. The advances were repaid subsequent to the end of the second quarter. There were no outstanding borrowings with the FRB as of December 31, 2019. Interest expense on borrowings for the three months ended June 30, 2020 was $760,000. There was no interest expense on borrowings for the three-month period ended June 30, 2019. Interest expense on borrowings for the six months ended June 30, 2020 and 2019 was $1.3 million and $72,000, respectively.

	June 30, 2020					December 31, 2019
	Outstanding Balance		Weighted Average Rate			Outstanding Balance		Weighted Average Rate
	(dollars in thousands)
Overnight advances	$	—		0.00	%	$	15,000		1.66	%
Advances due with 12 months		50,000		1.66	%		25,000		1.75	%
Advances due over 12 months through 24 months		50,000		1.59	%		25,000		1.66	%
Advances due over 24 months through 36 months		50,000		1.63	%		25,000		1.72	%
Outstanding advances	$	150,000		1.63	%	$	90,000		1.70	%

The following is financial data pertaining to FHLB advances:

	June 30, 2020			December 31, 2019
	(dollars in thousands)
Weighted-average interest rate at end of period		1.63	%		1.70	%
Weighted-average interest rate during the period		1.39	%		1.89	%
Average balance of FHLB advances	$	163,269		$	40,374
Maximum amount outstanding at any month-end	$	300,000		$	285,000

The Bank maintains a secured credit facility with the FHLB, allowing the Bank to borrow on an overnight and term basis. The Bank had $2.4 billion and $1.4 billion of loans pledged as collateral with the FHLB as of June 30, 2020 and December 31, 2019, respectively. Remaining available borrowing capacity was $1.5 billion, subject to the FHLB statutory lending limit of $1.4 billion, and $878.4 million at June 30, 2020 and December 31, 2019, respectively.

The Bank also had securities with market values of $50.0 million and $30.2 million at June 30, 2020 and December 31, 2019, respectively, pledged with the Federal Reserve Bank (“FRB”), which provided $47.9 million and $29.6 million in available borrowing capacity through the Fed Discount Window as of June 30, 2020 and December 31, 2019, 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, weighted-average number of common shares includes the impact of unvested 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 June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Basic EPS
Net income	$	9,175	$	2,656	$	11,526	$	17,328
Less: income allocated to unvested restricted stock		55		16		80		99
Income allocated to common shares	$	9,120	$	2,640	$	11,446	$	17,229
Weighted-average shares for basic EPS		30,426,967		30,685,301		30,447,984		30,688,698
Basic EPS ⁽¹⁾	$	0.30	$	0.09	$	0.38	$	0.56

Effect of dilutive stock options		—		42,380		2,247		40,322

Income allocated to common shares	$	9,120	$	2,640	$	11,446	$	17,229
Weighted-average shares for diluted EPS		30,426,967		30,727,681		30,450,231		30,729,020
Diluted EPS ⁽¹⁾	$	0.30	$	0.09	$	0.38	$	0.56

⁽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 and six months ended June 30, 2020 or 2019.

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 June 30, 2020, 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 became effective on January 1, 2019, and must be met to avoid limitations on the ability of the Bank to pay dividends, repurchase shares or pay discretionary bonuses. The Bank's capital conservation buffer was 5.62 percent and 6.64 percent and the Company's capital conservation buffer was 4.86 percent and 5.78 percent as of June 30, 2020 and December 31, 2019, respectively.

In March 2020, the OCC, the Board of Governors of the Federal Reserve System, and the FDIC 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 June 30, 2020 and December 31, 2019 were as follows:

						Minimum					Minimum to Be
						Regulatory					Categorized as
	Actual					Requirement					“Well Capitalized”
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(in thousands)
June 30, 2020
Total capital (to risk-weighted assets):
Hanmi Financial	$	717,493		14.04	%	$	408,870		8.00	%	N/A		N/A
Hanmi Bank	$	695,899		13.62	%	$	408,716		8.00	%	$	510,895		10.00	%
Tier 1 capital (to risk-weighted assets):
Hanmi Financial	$	554,813		10.86	%	$	306,652		6.00	%	N/A		N/A
Hanmi Bank	$	631,681		12.36	%	$	306,537		6.00	%	$	408,716		8.00	%
Common equity Tier 1 capital (to risk-weighted assets)
Hanmi Financial	$	534,582		10.46	%	$	229,989		4.50	%	N/A		N/A
Hanmi Bank	$	631,681		12.36	%	$	229,903		4.50	%	$	332,082		6.50	%
Tier 1 capital (to average assets):
Hanmi Financial	$	554,813		9.69	%	$	229,116		4.00	%	N/A		N/A
Hanmi Bank	$	631,681		11.03	%	$	229,017		4.00	%	$	286,271		5.00	%

December 31, 2019
Total capital (to risk-weighted assets):
Hanmi Financial	$	714,288		15.11	%	$	378,059		8.00	%	N/A		N/A
Hanmi Bank	$	691,024		14.64	%	$	377,516		8.00	%	$	471,895		10.00	%
Tier 1 capital (to risk-weighted assets):
Hanmi Financial	$	556,820		11.78	%	$	283,544		6.00	%	N/A		N/A
Hanmi Bank	$	631,978		13.39	%	$	283,137		6.00	%	$	377,516		8.00	%
Common equity Tier 1 capital (to risk-weighted assets)
Hanmi Financial	$	536,781		11.36	%	$	212,658		4.50	%	N/A		N/A
Hanmi Bank	$	631,978		13.39	%	$	212,353		4.50	%	$	306,732		6.50	%
Tier 1 capital (to average assets):
Hanmi Financial	$	556,820		10.15	%	$	219,367		4.00	%	N/A		N/A
Hanmi Bank	$	631,978		11.56	%	$	218,748		4.00	%	$	273,435		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.

Loans held for sale - Loans held for sale are all SBA loans and carried at the lower of cost or fair value. Management obtains quotes, bids or pricing indication sheets on all or part of these 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 June 30, 2020 and December 31, 2019, the entire balance of SBA loans held for sale was recorded at its cost. We record SBA loans held for sale on a nonrecurring basis with Level 2 inputs.

Individually analyzed loans receivable - Nonaccrual loans receivable and performing restructured loans receivable are individually analyzed for reporting purposes and are measured and recorded at fair value on a non-recurring basis to determine if they exhibit credit risk characteristics. All such loans receivable with a carrying balance over $250,000 are analyzed individually for the amount to determine if a reserve is required, if any. All such loans with a carrying balance of $250,000 or less are evaluated for analyzed in pools to determine if they exhibit any credit risk characteristics requiring reserves. The Company does not record loans at fair value on a recurring basis. However, from time to time, nonrecurring fair value adjustments to collateral-dependent impaired 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.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

As of June 30, 2020 and December 31, 2019, 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)
June 30, 2020
Assets:
Securities available for sale:
U.S. Treasury securities	$	45,262	$	—	$	—	$	45,262
U.S. government agency and sponsored agency obligations:
Mortgage-backed securities		—		413,263		—		413,263
Collateralized mortgage obligations		—		120,294		—		120,294
Debt securities		—		77,152		—		77,152
Total U.S. government agency and sponsored agency obligations		—		610,709		—		610,709
Total securities available for sale	$	45,262	$	610,709	$	—	$	655,971

December 31, 2019
Assets:
Securities available for sale:
U.S. Treasury securities	$	35,205	$	—	$	—	$	35,205
U.S. government agency and sponsored agency obligations:
Mortgage-backed securities		—		410,800		—		410,800
Collateralized mortgage obligations		—		164,592		—		164,592
Debt securities		—		23,879		—		23,879
Total U.S. government agency and sponsored agency obligations		—		599,271		—		599,271
Total securities available for sale	$	35,205	$	599,271	$	—	$	634,477

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

As of June 30, 2020 and December 31, 2019, 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)
June 30, 2020
Assets:
Collateral dependent impaired loans ⁽¹⁾	$	44,120	$	—	$	—	$	44,120
Other real estate owned		148		—		—		148
Bank-owned premises		1,900		—		—		1,900

December 31, 2019
Assets:
Collateral dependent impaired loans ⁽²⁾	$	31,049	$	—	$	—	$	31,049
Other real estate owned		63		—		—		63
Bank-owned premises		1,900		—		—		1,900

⁽¹⁾	Consisted of real estate loans of $42.6 million, commercial and industrial loans of $288,000, and consumer loans of $1.2 million. $43.9 million was secured by real estate and one commercial and industrial loan for $247,000 was fully secured by cash.

(2)	Consisted of real estate loans of $27.2 million and commercial and industrial loans of $3.9 million. $27.2 million was secured by real estate and $3.9 million was secured by personal property.

The following table represents quantitative information about Level 3 fair value comments for assets measured at fair value on a non-recurring basis at June 30, 2020 and December 31, 2019:

	Fair Value		Valuation Techniques	Unobservable Input(s)	Range (Weighted Average)
	(in thousands)
June 30, 2020
Collateral dependent impaired loans:
Real estate loans:
Commercial property
Retail	$	1,355	Market approach	Market data comparison	(30)% to (3)% /(17%)
Other		15,441	Market approach	Market data comparison	(18)% to 42% / 18% ⁽²⁾
Construction		23,067	Market approach	Market data comparison	(18)% to 43% / 21% ⁽²⁾
Residential property		2,761	Market approach	Market data comparison	(13)% to 15% / 6% ⁽²⁾
Total real estate loans		42,624
Commercial and industrial loans:
Commercial term		288	Market approach	Market data comparison	(9)% to 11% / 1% ^{(2) (3)}
Consumer loans		1,208	Market approach	Market data comparison	(13)% to 15% / 6% ⁽²⁾
Total	$	44,120

Bank-owned premises		1,900	Market approach	Market data comparison	(30)% to 55% /(2)% ⁽²⁾

December 31, 2019
Collateral dependent impaired loans:
Real estate loans:
Commercial property
Other	$	13,926	Market approach	Market data comparison	⁽¹⁾
Construction		13,228	Market approach	Market data comparison	(3)% to 43% /21% ⁽²⁾
Total real estate loans		27,154
Commercial and industrial loans:
Commercial lines of credit		3,895	Market approach	Market data comparison	(8)% to 42% /18% ⁽²⁾
Total	$	31,049

Bank-owned premises		1,900	Market approach	Market data comparison	(30)% to 55% /(2)% ⁽²⁾

⁽¹⁾

The values were estimated by current market data comparison, supplemented by cost information. The properties compared when possible, with others for sale and that have sold in the general time period. Adjustments are made for differences in equipment, mileage, cosmetics, conversions, originality, condition as well as sale terms and current economic conditions at time of sale.

⁽²⁾

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.

⁽³⁾	Includes one loan secured by cash collateral.

The fair value of the Level 3 loans receivable demonstrating credit risk characteristics at June 30, 2020 were determined utilizing the fair value measurement methodology for assets measured on a non-recurring basis. Such loans receivable measured at fair value at June 30, 2020 consisted of seven commercial real estate loans with a fair value of $16.8 million, two construction

loans with a fair value of $23.1 million, five residential mortgages with a fair value of $2.8 million, one commercial term loan with a fair value of $41,000, one commercial term loan fully secured by cash with a fair value of $247,000, and three consumer loans with a fair value of $1.2 million. The fair value of collateral dependent loans is determined on a non-recurring basis using either the sales comparison approach or the income approach by obtaining third party appraisals.

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.

Effective January 1, 2018, the Company adopted ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (Topic 825). This standard, 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 have concluded that the carrying amounts approximate fair value, the fair value estimates shown below are based on an exit price notion as of June 30, 2020, as required by ASU 2016-01. The financial instruments for which we have 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 are 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:

	June 30, 2020
	Carrying		Fair Value
	Amount		Level 1		Level 2		Level 3
	(in thousands)
Financial assets:
Cash and due from banks	$	546,048	$	546,048	$	—	$	—
Securities available for sale		655,971		45,262		610,709		—
Loans held for sale		17,942		—		17,942		—
Loans receivable, net of allowance for credit losses		4,739,312		—		—		4,690,692
Accrued interest receivable		21,372		21,372		—		—
Financial liabilities:
Noninterest-bearing deposits		1,865,213		—		1,865,213		—
Interest-bearing deposits		3,344,568		—		—		3,353,585
Borrowings and subordinated debentures		370,478		—		254,116		120,139
Accrued interest payable		8,655		8,655		—		—

	December 31, 2019
	Carrying		Fair Value
	Amount		Level 1		Level 2		Level 3
	(in thousands)
Financial assets:
Cash and due from banks	$	121,678	$	121,678	$	—	$	—
Securities available for sale		634,477		35,205		599,272		—
Loans held for sale		6,020		—		6,382		—
Loans receivable, net of allowance for credit losses		4,548,739		—		—		4,520,322
Accrued interest receivable		11,742		11,742		—		—
Financial liabilities:
Noninterest-bearing deposits		1,391,624		—		1,391,624		—
Interest-bearing deposits		3,307,338		—		—		3,317,867
Borrowings and subordinated debentures		208,377		—		89,831		118,807
Accrued interest payable		11,215		11,215		—		—

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 undisbursed loan commitments as of the dates indicated:

	June 30,		December 31,
	2020		2019
	(in thousands)
Commitments to extend credit	$	486,852	$	371,287
Standby letters of credit		45,574		31,372
Commercial letters of credit		12,335		11,133
Total undisbursed loan commitments	$	544,761	$	413,792

The allowance for credit losses related to off-balance sheet items is maintained at a level believed to be sufficient to absorb probable losses related to these unfunded credit facilities. The determination of the allowance adequacy is 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 June 30,				Six Months Ended June 30,
	2020		2019		2020			2019
	(in thousands)
Balance at beginning of period	$	2,885	$	1,100	$	2,397		$	1,439
Adjustment related to adoption of ASU 2016-13		—		—		(335	)		—
Adjusted balance at beginning of period		2,885		1,100		2,062			1,439
Provision expense (income) for credit losses		3,462		233		4,285			(106	)
Balance at end of period	$	6,347	$	1,333	$	6,347		$	1,333

Note 13 — Leases

The Company adopted ASU 2016-02, Leases (Topic 842), effective January 1, 2019. We had approximately 44 operating leases for real estate and other assets at June 30, 2020. These included various leases for our branch and office locations as well as those for postage and copier machines and an advertising billboard. Our leases had initial lease terms of two to twenty-five years. Most leases included one or more options to renew, with renewal terms that can extend the lease term from two to twelve years.

For leases where we were reasonably certain to renew, those option periods were included within the lease term and, therefore, the measurement of the right-of-use asset and lease liability. Certain leases included options to terminate the lease, which allows the contract parties to terminate their obligations under the lease contract, typically in return for an agreed financial consideration. The terms and conditions of the termination options vary by contract. Leases with an initial term of 12 months or less were not recognized on the balance sheet. We recognized lease expense for these leases on a straight- line basis over the lease term. Certain lease agreements included payments based on Consumer Price Index (CPI) on which variable lease payments were determined and included in the right-of-use asset and liability. Variable lease payments that were not based on CPI were excluded from the right-of-use asset and lease liability and recognized in the period in which the obligations for those payments were incurred. Our lease agreements did not contain any material residual value guarantees, restrictions or covenants.

In determining whether a contract contained a lease, we determined whether an arrangement was or included a lease at contract inception. Operating lease right-of-use asset and liability were recognized at commencement date and initially measured based on the present value of lease payments over the defined lease term. The opening balance for both our right-of-use asset and lease liability were $40.9 million as of the adoption date of January 1, 2019.

We had real estate lease agreements with lease and non-lease components, which are generally accounted for separately. However, we elected the practical expedient to not separate non-lease components from lease components for all classes of underlying assets. For certain equipment leases, such as machine equipment, we accounted for the lease and associated non-lease components as a single lease component.

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. In order to apply the incremental borrowing rate, a portfolio approach with a collateralized rate was utilized. Assets were grouped based on similar lease terms and economic environments in a manner whereby the Company reasonably expects that the application does not differ materially from a lease-by-lease approach.

The Company's right-of-use asset is included in prepaid expenses and other assets and our lease liability is included in accrued expenses and other liabilities in the accompanying consolidated balance sheet.

As of June 30, 2020, the right-of-use asset and lease liability balances were $50.4 million and $51.4 million, respectively. As of December 31, 2019, the right-of-use asset and lease liability were $36.5 million and $37.2 million, respectively. For the three-month period ended June 30, 2020 and 2019, net lease expense recorded under such leases amounted to $2.0 million and $1.9 million, respectively. For the six-month period ended June 30, 2020 and 2019, net lease expense recorded under such leases amounted to $4.1 million and $3.8 million, respectively.

The following table presents the Company's remaining lease liability by maturity as of June 30, 2020:

	Amount
	(in thousands)
2020	$	6,975
2021		6,733
2022		6,631
2023		6,485
2024		6,075
Thereafter		24,825
Remaining lease commitments		57,725
Interest		(6,306	)
Present value of lease liability	$	51,419

Weighted average remaining lease terms for the Company's operating leases were 8.07 and 8.57 years as of June 30, 2020 and December 31, 2019, respectively. Weighted average discount rates used for the Company's operating leases was 2.56 percent and 3.23 percent as of June 30, 2020 and 2019, respectively. The Company chose the practical expedients and reviewed the lease

and non-lease components for any impairment or otherwise, subsequently determining that no cumulative-effect adjustment to equity was necessary as part of implementing the modified retrospective approach for its adoption of ASC 842.

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 $1.8 million and $3.7 million for the three and six months ended June 30, 2020 and 2019, respectively.

Note 14 — Liquidity

Hanmi Financial

As of June 30, 2020, Hanmi Financial had $20.3 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 June 30, 2020 and December 31, 2019, the Bank had $150.0 million and $90.0 million of FHLB advances and $235.2 million and $264.2 million, respectively, of brokered deposits. The Bank had $101.8 million of 0.35 percent advances with the FRB under the Paycheck Protection Program Lending Facility as of June 30, 2020. These advances were repaid subsequent to the end of the second quarter. There were no outstanding borrowings with the FRB as of December 31, 2019.

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 June 30, 2020, the remaining available borrowing capacity was $1.5 billion compared with $878.4 million, as of December 31, 2019.

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, leases and securities, and otherwise fund working capital needs and capital expenditures, the Bank may utilize the remaining borrowing capacity from its FHLB borrowing arrangement.

Note 15 — Derivatives and Hedging Activities

Accounting Policy for Derivative Instruments and Hedging Activities

FASB ASC 815, Derivatives and Hedging (“ASC 815”), provides the disclosure requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how the entity accounts for derivative instruments and related hedged items, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Further, qualitative disclosures are required that explain the Company’s objectives and strategies for using derivatives, as well as quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.

As required by ASC 815, the Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.

Risk Management Objective of Using Derivatives

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s borrowings.

Non-Designated Hedges

Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting derivatives that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings.

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Balance Sheet as of June 30, 2020. No such instruments were outstanding as of December 31, 2019.

Derivative Assets

Derivative Liabilities

As of June 30, 2020

As of December 31, 2019

As of June 30, 2020

As of December 31, 2019

Notional Amount

Balance Sheet Location

Fair Value

Balance Sheet Location

Fair Value

Notional Amount

Balance Sheet Location

Fair Value

Balance Sheet Location

Fair Value

(in thousands)

Derivatives not designated as hedging instruments

Interest rate products

29,492

Other Assets

1,085

Other Assets

N/A

29,492

Other Liabilities

1,183

Other Liabilities

N/A

Total derivatives not designated as hedging instruments

1,085

N/A

1,183

N/A

The table below presents the effect of the Company’s derivative financial instruments that are not designated as hedging instruments on the Income Statement as of June 30, 2020. No such instruments were outstanding as of December 31, 2019.

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
		Quarter Ended June 30, 2020
		(in thousands)
Interest rate products	Other income	$	(98	)
Total		$	(98	)

Fee income recognized from the Company's derivative financial instruments for the three and six months ended June 30, 2020 was $512,000.

The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives as of June 30, 2020. The net amounts of derivative assets or liabilities can be reconciled to the tabular disclosure of fair value. The tabular disclosure of fair value provides the location that derivative assets and liabilities are presented on the Balance Sheet.

Offsetting of Derivative Assets
As of June 30, 2020
							Gross Amounts Not Offset in the Statement of Financial Position
	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Statement of Financial Position		Net Amounts of Assets presented in the Statement of Financial Position		Financial Instruments		Cash Collateral Received		Net Amount
	(in thousands)
Derivatives	$	1,085	$	—	$	1,085	$	1,085	$	—	$	1,085


Offsetting of Derivative Liabilities
As of June 30, 2020
							Gross Amounts Not Offset in the Statement of Financial Position
	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Statement of Financial Position		Net Amounts of Liabilities presented in the Statement of Financial Position		Financial Instruments		Cash Collateral Provided		Net Amount
	(in thousands)
Derivatives	$	1,183	$	—	$	1,183	$	—	$	1,120	$	63

The Company has agreements with each of its derivative counterparties that contain a provision where 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 June 30, 2020, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $1.2 million. As of June 30, 2020, the Company had posted $1.1 million of collateral related to these agreements and is essentially over-collateralized since its net liability position is $98,000 ($1.1 million fair value of assets less $1.2 million fair value of liabilities) as of the end of the period. If the Company had breached any of these provisions at June 30, 2020, it could have been required to settle its obligations under the agreements at their termination value of $1.2 million.

Note 16 — Subsequent Events

At the date of issuance of this report, no subsequent events were noted.

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 six months ended June 30, 2020. This analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 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 June 30, 2020 (this “Report”).

The COVID-19 pandemic has caused significant economic dislocation in the United States as many state and local governments have ordered non-essential businesses to close and residents to shelter in place at home. This has resulted in an unprecedented slow-down in economic activity, a dramatic increase in unemployment and extreme volatility in the stock market, and in particular, bank stocks, have significantly declined in value. In response to the COVID-19 outbreak, the Federal Reserve reduced the benchmark Federal funds rate to a target range of 0 percent to 0.25 percent, and the yields on 10- and 30-year treasury notes have declined to historic lows. Various state governments and federal agencies are requiring lenders to provide forbearance and other relief to borrowers (e.g., waiving late payment and other fees). The federal banking agencies have encouraged financial institutions to prudently work with affected borrowers and recently passed legislation has provided relief from reporting loan classifications due to modifications related to the COVID-19 outbreak. Certain industries have been particularly hard-hit, including the travel and hospitality industry, the restaurant industry and the retail industry. Finally, the spread of the coronavirus has caused us to modify our business practices, including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences. We have many employees working remotely and we may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers and business partners.

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, plans and objectives of management for future operations, 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. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance, strategies, outlook, needs, plans, objectives or achievements to differ from those expressed or implied by the forward-looking statement. 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; 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; risks of natural disasters; a failure in or breach of our operational or security systems or infrastructure, including cyber-attacks; the failure to maintain current technologies; 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 imposition of tariffs or other domestic or international governmental policies impacting the value of the products of our borrowers; 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; ability to identify a suitable strategic partner or to consummate a strategic transaction; adequacy of our allowance for credit losses; 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.

Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 outbreak on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and when and how the economy may be reopened. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations: demand for our products and services may decline, making it difficult to grow assets and income; if the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income; collateral for loans, especially real estate, may decline in value, which could cause credit loss expense to increase; our allowance for credit losses may have to be increased if borrowers experience financial difficulties beyond forbearance periods, which will adversely affect our net income; the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; as the result of the decline in the Federal Reserve Board’s target federal funds rate, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income; a material decrease in net income or a net loss over several quarters could result in a decrease in the rate of our quarterly cash dividend; our cyber security risks are increased as the result of an increase in the number of employees working remotely; we rely on third party vendors for certain services and the unavailability of a critical service due to the COVID-19 outbreak could have an adverse effect on us; Federal Deposit Insurance Corporation premiums may increase if the agency experiences additional resolution costs; potential goodwill impairment charges could result if acquired assets and operations are adversely affected and remain at reduced levels; due to recent legislation and government action limiting foreclosure of real property and reduced governmental capacity to effect business transactions and property transfers, we may have more difficulty taking possession of collateral supporting our loans, which may negatively impact our ability to minimize our losses, which could adversely impact our financial results; and we face litigation, regulatory enforcement and reputation risk as a result of our participation in the Paycheck Participation Program (“PPP”) and the risk that the Small Business Administration may not fund some or all PPP loan guaranties. Moreover, our future success and profitability substantially depends on the management skills of our executive officers and directors, many of whom have held officer and director positions with us for many years. The unanticipated loss or unavailability of key employees due to the outbreak could harm our ability to operate our business or execute our business strategy. We may not be successful in finding and integrating suitable successors in the event of key employee loss or unavailability.

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 2019 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 consolidated financial statements in our 2019 Annual Report on Form 10-K. We had no significant changes in our accounting policies since the filing of our 2019 Annual Report on Form 10-K, except for the adoption of ASU 2016-13 as described in Note 1 of the June 30, 2020 unaudited condensed consolidated financial statements.

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 2019 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.

Selected Financial Data

The following table sets forth certain selected financial data for the periods indicated:

	As of or for the Three Months Ended June 30,						As of or for the Six Months Ended June 30,
	2020			2019			2020			2019
	(in thousands, except per share data)
Summary balance sheets:
Cash and due from banks	$	546,048		$	130,851		$	546,048		$	130,851
Securities		655,971			639,995			655,971			639,995
Loans receivable, net ⁽¹⁾		4,739,312			4,506,416			4,739,312			4,506,416
Assets		6,218,163			5,511,752			6,218,163			5,511,752
Deposits		5,209,781			4,762,068			5,209,781			4,762,068
Liabilities		5,670,727			4,947,294			5,670,727			4,947,294
Stockholders’ equity		547,436			564,458			547,436			564,458
Tangible stockholders' equity ⁽⁴⁾		535,694			552,430			535,694			552,430
Average loans receivable ⁽²⁾		4,680,048			4,491,377			4,599,222			4,512,134
Average securities		589,932			629,062			606,821			609,414
Average assets		5,895,445			5,499,649			5,700,549			5,467,208
Average deposits		4,817,776			4,746,777			4,722,082			4,731,585
Average stockholders’ equity		548,338			568,753			554,147			563,411
Per share data:
Earnings per share – basic	$	0.30		$	0.09		$	0.38		$	0.56
Earnings per share – diluted	$	0.30		$	0.09		$	0.38		$	0.56
Book value per share ⁽³⁾	$	17.86		$	18.22		$	17.86		$	18.22
Tangible book value per share ⁽⁴⁾	$	17.47		$	17.83		$	17.47		$	17.83
Cash dividends per share	$	0.12		$	0.24		$	0.36		$	0.48
Common shares outstanding		30,657,629			30,975,163			30,657,629			30,975,163

Performance ratios:
Return on average assets ^{(5) (12)}		0.63	%		0.19	%		0.41	%		0.64	%
Return on average stockholders’ equity ^{(6) (12)}		6.73	%		1.87	%		4.18	%		6.20	%
Net interest margin ⁽⁷⁾		3.15	%		3.30	%		3.25	%		3.41	%
Efficiency ratio ⁽⁸⁾		41.51	%		59.43	%		50.36	%		58.13	%
Dividend payout ratio ⁽⁹⁾		40.00	%		266.67	%		94.74	%		85.71	%
Average stockholders’ equity to average assets		9.30	%		10.34	%		9.72	%		10.31	%

Asset quality ratios:
Non-performing loans to loans ⁽¹⁰⁾		1.21	%		1.40	%		1.21	%		1.40	%
Non-performing assets to assets ⁽¹¹⁾		0.94	%		1.15	%		0.94	%		1.15	%
Net loan charge-offs (recoveries) to average loans, annualized		0.11	%		0.02	%		1.24	%		0.02	%
Allowance for credit losses to loans		1.79	%		1.08	%		1.79	%		1.08	%
Allowance for credit losses to nonperforming loans		148.17	%		78.35	%		148.17	%		78.35	%
Capital ratios:
Total risk-based capital:
Hanmi Financial		14.04	%		14.99	%		14.04	%		14.99	%
Hanmi Bank		13.62	%		14.62	%		13.62	%		14.62	%
Tier 1 risk-based capital:
Hanmi Financial		10.86	%		11.83	%		10.86	%		11.83	%
Hanmi Bank		12.36	%		13.54	%		12.36	%		13.54	%
Common equity tier 1 capital
Hanmi Financial		10.46	%		11.41	%		10.46	%		11.41	%
Hanmi Bank		12.36	%		13.54	%		12.36	%		13.54	%
Tier 1 leverage:
Hanmi Financial		9.69	%		10.20	%		9.69	%		10.20	%
Hanmi Bank		11.03	%		11.67	%		11.03	%		11.67	%

⁽¹⁾	Excludes loans held for sale and net of allowance for credit losses.

⁽²⁾	Includes loans held for sale and before allowance for credit losses.

⁽³⁾	Stockholders’ equity divided by shares of common stock outstanding.

⁽⁴⁾	Tangible stockholder’s equity divided by common shares outstanding. Tangible stockholders’ equity is a “Non-GAAP” financial measure, as discussed in the following section.

⁽⁵⁾	Net income divided by average assets.

⁽⁶⁾	Net income divided by average stockholders’ equity.

⁽⁷⁾	Net interest income divided by average interest-earning assets. Computed on a tax-equivalent basis using the statutory federal tax rate.

⁽⁸⁾	Noninterest expense divided by the sum of net interest income and noninterest income.

⁽⁹⁾	Dividends declared per share divided by basic earnings per share.

⁽¹⁰⁾	Nonperforming loans receivable, excluding loans held for sale, consist of nonaccrual loans receivable, and loans receivable past due 90 days or more still accruing interest.

⁽¹¹⁾	Nonperforming assets consist of nonperforming loans receivable and real estate owned.

⁽¹²⁾	Amounts calculated on annualized net income.

Non-GAAP Financial Measures

The Company provides certain supplemental financial information by methods other than in accordance with U.S. GAAP, including tangible assets, tangible stockholders' equity and tangible book value per share. These non-GAAP measures are used by management in analyzing Hanmi Financial’s capital strength.

Tangible equity is calculated by subtracting goodwill and other intangible assets (principally core deposit intangibles) from stockholders’ equity. Banking and financial institution regulators also exclude goodwill and core deposit intangibles from stockholders’ equity when assessing the capital adequacy of a financial institution.

Management believes the presentation of these financial measures excluding the impact of the items described in the preceding paragraph provide useful supplemental information that are essential to a proper understanding of the capital strength of Hanmi Financial. These disclosures should not be viewed as a substitution for results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.

Tangible Assets, Tangible Stockholders’ Equity and Tangible Book Value Per Share

The following table reconciles these non-GAAP performance measures to the most comparable GAAP performance measures as of the dates indicated:

	As of
	June 30, 2020			June 30, 2019			December 31, 2019
	(in thousands, except per share data)
Total assets	$	6,218,163		$	5,511,752		$	5,538,184
Less goodwill and other intangible assets		(11,742	)		(12,028	)		(11,873	)
Tangible assets	$	6,206,421		$	5,499,724		$	5,526,311
Total stockholders' equity	$	547,436		$	564,458		$	563,267
Less goodwill and other intangible assets		(11,742	)		(12,028	)		(11,873	)
Tangible stockholders' equity	$	535,694		$	552,430		$	551,394

Stockholders' equity to assets		8.80	%		10.24	%		10.17	%
Tangible common equity to tangible assets ⁽¹⁾		8.63	%		10.04	%		9.98	%
Common shares outstanding		30,657,629			30,975,163			30,799,624

Book value per share	$	17.86		$	18.22		$	18.29
Effect of goodwill and other intangible assets		(0.38	)		(0.39	)		(0.39	)
Tangible common equity per common share ⁽¹⁾	$	17.47		$	17.83		$	17.90

⁽¹⁾	There were no preferred shares outstanding at the periods indicated.

Executive Overview

Net income was $9.2 million, or $0.30 per diluted share, for the three months ended June 30, 2020 compared with $2.7 million, or $0.09 per diluted share, for the same period a year ago. The increase in net income for the 2020 second quarter reflects primarily the $15.7 million gain on sale of securities offset by a higher credit loss expense.

Net income for the six months ended June 30, 2020 and 2019 was $11.5 million, or $0.38 per diluted share and $17.3 million, or $0.56 per diluted share, respectively. The decline in net income for the 2020 six-month period reflects primarily an increase in credit loss expense offset by the gain on the sale of securities.

The Company adopted effective January 1, 2020, Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses, which replaced the incurred loss methodology for estimating credit losses with a forward-looking current expected credit losses (“CECL”) methodology. The adoption resulted in a $17.4 million increase to the beginning balance of the allowance for credit losses, a $0.3 million decrease to the beginning balance of the allowance for off-balance sheet-items and an after-tax charge of $12.2 million to the beginning balance of retained earnings.

For the second quarter of 2020, credit loss expense was $24.6 million compared with $16.7 million for the second quarter of 2019. The 2020 second quarter credit loss expense included a $21.1 million provision for loan losses and a $3.5 million provision for off-balance sheet items. The 2020 second quarter credit loss expense reflects the change in the macroeconomic assumptions in determining the allowance for credit losses including a higher unemployment rate for the subsequent four quarters and a lower projected annual GDP growth rate.

For the six months ended 2020, credit loss expense was $40.3 million compared with loan loss provision of $17.8 million for the same period in 2019. The credit loss expense for the six-months ended June 30, 2020 included a $36.0 million provision for loan losses and a $4.3 million provision for off-balance sheet items.

Second quarter noninterest income increased to $20.9 million from $6.2 million for the first quarter, primarily due to $479.9 million in sales of securities resulting in $15.7 million in gains. The gains on sales of securities reflect the repositioning of the securities portfolio to capture the high-level of unrealized gains arising from the very low rate environment. Hanmi reinvested the proceeds into U.S. Treasuries and U.S. Government agencies mortgage-backed securities, collateralized mortgage obligations, and notes.

Other financial highlights include the following:

Cash and due from banks increased $424.4 million to $546.0 million as of June 30, 2020 from $121.7 million at December 31, 2019, primarily from a higher volume of non-interest bearing deposits and increased borrowings. The increase in borrowings was largely intended to boost bank liquidity amid disruptions caused to businesses and individuals by the outbreak of COVID-19. The increase in deposits reflects depositors placing proceeds from PPP loans and proceeds from other government assistance programs with the Bank, as well as an increase from our marketing efforts and depositors seeking safety for their funds.

Loans receivable, before the allowance for credit losses, were $4.83 billion at June 30, 2020 compared with $4.61 billion at December 31, 2019. The increase reflects strong loan production which included $308.8 million of PPP loans and $225.3 million in new loan production. Loans held for sale, representing the guaranteed portion of SBA 7(a) loans, were $17.9 million and $6.0 million at June 30, 2020 and December 31, 2019, respectively. We did not sell any SBA loans during the second quarter because of the disruptions in the secondary market resulting from the COVID-19 crisis. Secondary market activity resumed late in the second quarter.

Deposits were $5.21 billion at June 30, 2020 compared with $4.70 billion at December 31, 2019. The increase reflects principally the $473.6 million increase in non-interest bearing demand deposits.

Return on average assets for the three months ended June 30, 2020 and 2019 was 0.63 percent and 0.19 percent respectively, while the return on average stockholders’ equity was 6.73 percent and 1.87 percent for the same respective periods. Return on average assets for the six months ended June 30, 2020 and 2019 was 0.41 percent and 0.64 percent, respectively, while the return on average stockholders’ equity was 4.18 percent and 6.20 percent for the same respective periods.

Tangible book value per share was $17.47 at June 30, 2020 compared with $17.90 at December 31, 2019; tangible stockholders’ equity to tangible assets was 8.63 percent at June 30, 2020 compared with 9.98 percent at December 31, 2019.

The Bank continues to be well-capitalized at June 30, 2020 with a Total risk-based capital ratio of 13.62 percent, a Tier-1 risk-based capital ratio of 12.36 percent, a Common Equity Tier 1 capital ratio of 12.36 percent and a Tier 1 leverage ratio of 11.03 percent.

Results of Operations

Net Interest Income

Our primary source of revenue is net interest income, which is the difference between interest and fees 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
	June 30, 2020								June 30, 2019
				Interest		Average						Interest		Average
	Average			Income /		Yield /			Average			Income /		Yield /
	Balance			Expense		Rate			Balance			Expense		Rate
Assets	(in thousands)
Interest-earning assets:
Loans receivable ⁽¹⁾	$	4,680,048		$	52,230		4.49	%	$	4,491,377		$	56,872		5.08	%
Securities ⁽²⁾		589,932			3,225		2.19	%		629,062			3,774		2.40	%
FHLB stock		16,385			203		5.00	%		16,385			283		6.93	%
Interest-bearing deposits in other banks		386,956			78		0.08	%		92,753			557		2.41	%
Total interest-earning assets		5,673,321			55,736		3.95	%		5,229,577			61,486		4.72	%

Noninterest-earning assets:
Cash and due from banks		69,667								100,916
Allowance for credit losses		(66,926	)							(34,714	)
Other assets		219,383								203,870
Total assets	$	5,895,445							$	5,499,649

Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Deposits:
Demand: interest-bearing	$	92,676		$	18		0.08	%	$	83,932		$	32		0.15	%
Money market and savings		1,677,081			2,309		0.55	%		1,541,976			6,083		1.58	%
Time deposits		1,458,351			6,562		1.81	%		1,863,685			10,613		2.28	%
Total interest-bearing deposits		3,228,108			8,889		1.11	%		3,489,593			16,728		1.92	%
Borrowings		342,437			760		0.89	%		59			—		0.00	%
Subordinated debentures		118,583			1,645		5.55	%		118,007			1,764		5.96	%
Total interest-bearing liabilities		3,689,128			11,294		1.23	%		3,607,659			18,492		2.06	%

Noninterest-bearing liabilities and equity:
Demand deposits: noninterest-bearing		1,589,668								1,257,184
Other liabilities		68,311								66,053
Stockholders' equity		548,338								568,753
Total liabilities and stockholders' equity	$	5,895,445							$	5,499,649

Net interest income (taxable equivalent basis)				$	44,442							$	42,994

Cost of deposits ⁽³⁾							0.74	%							1.41	%
Net interest spread (taxable equivalent basis) ⁽⁴⁾							2.72	%							2.66	%
Net interest margin (taxable equivalent basis) ⁽⁵⁾							3.15	%							3.30	%

(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 (on a tax equivalent basis) 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
	June 30, 2020 vs June 30, 2019
	Increases (Decreases) Due to Change In
	Volume			Rate			Total
	(in thousands)
Interest and dividend income:
Loans receivable ⁽¹⁾	$	2,273		$	(6,915	)	$	(4,642	)
Securities ⁽²⁾		(228	)		(321	)		(549	)
FHLB stock		—			(80	)		(80	)
Interest-bearing deposits in other banks		458			(937	)		(479	)
Total interest and dividend income		2,503			(8,253	)		(5,750	)

Interest expense:
Demand: interest-bearing	$	3		$	(17	)	$	(14	)
Money market and savings		493			(4,267	)		(3,774	)
Time deposits		(2,073	)		(1,978	)		(4,051	)
Borrowings		761			(1	)		760
Subordinated debentures		9			(128	)		(119	)
Total interest expense		(807	)		(6,391	)		(7,198	)
Change in net interest income	$	3,310		$	(1,862	)	$	1,448

(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.

Interest and dividend income, on a taxable equivalent basis, decreased $5.7 million, or 9.4 percent, to $55.7 million for the three months ended June 30, 2020 from $61.5 million for the same period in 2019. Interest expense decreased $7.2 million, or 38.9 percent, to $11.3 million for the three months ended June 30, 2020 from $18.5 million for the same period in 2019. For the three months ended June 30, 2020 and 2019, net interest income, on a taxable equivalent basis, was $44.4 million and $43.0 million, respectively. Net interest income increased during the three months ended June 30, 2020 compared with the same period in 2019 mainly due to decreases in rates paid on money market, savings, and time deposits, offset by decreases in yields earned on loans. The net interest spread and net interest margin, on a taxable equivalent basis, for the three months ended June 30, 2020 were 2.72 percent and 3.15 percent, respectively, compared with 2.66 percent and 3.30 percent, respectively, for the same period in 2019.

The average balance of interest-earning assets increased $443.7 million, or 8.49 percent, to $5.67 billion for the three months ended June 30, 2020 from $5.23 billion for the same period in 2019. The average balance of loans receivable increased $188.7 million, or 4.20 percent, to $4.68 billion for the three months ended June 30, 2020 from $4.49 billion for the same period in 2019. The average balance of interest-bearing liabilities increased $81.5 million, or 2.26 percent, to $3.69 billion for the three months ended June 30, 2020, compared with $3.61 billion for the same period in 2019.

The average yield on interest-earning assets, on a taxable equivalent basis, decreased 77 basis points to 3.95 percent for the three months ended June 30, 2020 from 4.72 percent for the same period in 2019, primarily due to the decrease in the general level of interest rates but was partially offset by higher volume in interest-bearing deposits at other banks. The average cost of interest-bearing liabilities decreased by 83 basis points to 1.23 percent for the three months ended June 30, 2020 from 2.06 percent for the same period in 2019, mainly due to lower market interest rates and a smaller percentage of higher-costing time deposits in the portfolio.

	Six Months Ended June 30,
	2020								2019
				Interest		Average						Interest		Average
	Average			Income /		Yield /			Average			Income /		Yield /
	Balance			Expense		Rate			Balance			Expense		Rate
Assets	(in thousands)
Interest-earning assets:
Loans receivable ⁽¹⁾	$	4,599,222		$	106,878		4.67	%	$	4,512,134		$	115,206		5.15	%
Securities ⁽²⁾		606,821			6,880		2.27	%		609,414			7,371		2.42	%
FHLB stock		16,385			492		6.05	%		16,385			572		7.04	%
Interest-bearing deposits in other banks		245,734			411		0.34	%		72,997			892		2.46	%
Total interest-earning assets		5,468,162			114,661		4.22	%		5,210,930			124,041		4.80	%

Noninterest-earning assets:
Cash and due from banks		83,782								104,932
Allowance for credit losses		(63,990	)							(33,356	)
Other assets		212,595								184,702
Total assets	$	5,700,549							$	5,467,208

Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Deposits:
Demand: interest-bearing	$	87,805		$	39		0.09	%	$	84,608		$	61		0.15	%
Money market and savings		1,682,047			7,088		0.85	%		1,534,385			11,760		1.55	%
Time deposits		1,490,548			14,504		1.96	%		1,858,155			20,589		2.23	%
Total interest-bearing deposits		3,260,400			21,631		1.33	%		3,477,148			32,410		1.88	%
Borrowings		236,548			1,256		1.07	%		5,306			72		2.74	%
Subordinated debentures		118,513			3,357		5.67	%		117,935			3,536		5.99	%
Total interest-bearing liabilities		3,615,461			26,244		1.46	%		3,600,389			36,018		2.02	%

Noninterest-bearing liabilities and equity:
Demand deposits: noninterest-bearing		1,461,682								1,254,437
Other liabilities		69,259								48,971
Stockholders' equity		554,147								563,411
Total liabilities and stockholders' equity	$	5,700,549							$	5,467,208

Net interest income (taxable equivalent basis)				$	88,417							$	88,023

Cost of deposits ⁽³⁾							0.92	%							1.38	%
Net interest spread (taxable equivalent basis) ⁽⁴⁾							2.76	%							2.78	%
Net interest margin (taxable equivalent basis) ⁽⁵⁾							3.25	%							3.41	%

(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.

	Six Months Ended June 30,
	June 30, 2020 vs June 30, 2019
	Increases (Decreases) Due to Change In
	Volume			Rate			Total
	(in thousands)
Interest and dividend income:
Loans receivable ⁽¹⁾	$	2,272		$	(10,600	)	$	(8,328	)
Securities ⁽²⁾		(31	)		(460	)		(491	)
FHLB stock		—			(80	)		(80	)
Interest-bearing deposits in other banks		781			(1,262	)		(481	)
Total interest and dividend income		3,022			(12,402	)		(9,380	)

Interest expense:
Demand: interest-bearing	$	2		$	(24	)	$	(22	)
Money market and savings		1,052			(5,724	)		(4,672	)
Time deposits		(3,754	)		(2,331	)		(6,085	)
Borrowings		1,255			(71	)		1,184
Subordinated debentures		16			(195	)		(179	)
Total interest expense		(1,429	)		(8,345	)		(9,774	)
Change in net interest income	$	4,451		$	(4,057	)	$	394

(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.

Interest and dividend income, on a taxable equivalent basis, decreased $9.4 million, or 7.6 percent, to $114.7 million for the six months ended June 30, 2020 from $124.0 million for the same period in 2019. Interest expense decreased $9.8 million, or 27.1 percent, to $26.2 million for the six months ended June 30, 2020 from $36.0 million for the same period in 2019. For the six months ended June 30, 2020 and 2019, net interest income, on a taxable equivalent basis, was $88.4 million and $88.0 million, respectively. Net interest income increased during the six months ended June 30, 2020 compared with the same period in 2019 mainly due to decreases on rates paid for money market, savings and time deposits, as well as lower average balances on time deposits, offset by decreases in the average yields on loans receivable. The net interest spread and net interest margin, on a taxable equivalent basis, for the six months ended June 30, 2020 were 2.76 percent and 3.25 percent, respectively, compared with 2.78 percent and 3.41 percent, respectively, for the same period in 2019.

The average balance of interest-earning assets increased $257.2 million, or 4.90 percent, to $5.47 billion for the six months ended June 30, 2020 from $5.21 billion for the same period in 2019. The average balance of loans receivable increased $87.1 million, or 1.90 percent, to $4.60 billion for the six months ended June 30, 2020 from $4.51 billion for the same period in 2019. The average balance of interest-bearing liabilities increased $15.1 million, or 0.42 percent, to $3.62 billion for the six months ended June 30, 2020, compared with $3.60 billion for the same period in 2019.

The average yield on interest-earning assets, on a taxable equivalent basis, decreased 58 basis points to 4.22 percent for the six months ended June 30, 2020 from 4.80 percent for the same period in 2019, primarily due to the decrease in the general level of interest rates of interest-earning assets partially offset by an increase in the average balance of interest-bearing deposits at other banks. The average cost of interest-bearing liabilities decreased by 56 basis points to 1.46 percent for the six months ended June 30, 2020 from 2.02 percent for the same period in 2019, mainly due to lower market interest rates and a smaller percentage of higher-costing time deposits in the portfolio.

Credit Loss Expense

For the three months ended June 30, 2020, credit loss expense was $24.6 million, comprised of a $21.1 million provision for loan losses and a $3.5 million provision for off-balance sheet items compared with a loan loss provision for $16.7 million for the same period in 2019 and a provision for off-balance sheet items of $0.2 million. The credit loss expense for the three months ended June 30, 2020 reflects principally deteriorating assumptions about unemployment and economic activity as well as higher levels of unused loan commitments.

The credit loss expense for the six months ended June 30, 2020 and 2019 was $40.3 million and $17.8 million. Included in credit loss expense was the provision for loan losses of $36.0 million and provision for off-balance sheet items of $4.3 million for the six months ended June 30, 2020. The loan loss provision for the six months ended June 30, 2019 was $17.8 million, and the provision for off-balance sheet items was a credit to expense of $0.1 million.

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 June 30,				Increase (Decrease)
	2020		2019		Amount
	(in thousands)
Service charges on deposit accounts	$	2,032	$	2,486	$	(454	)
Trade finance and other service charges and fees		961		1,204		(243	)
Servicing income		855		600		255
Bank-owned life insurance income		276		281		(5	)
All other operating income		1,095		293		802
Service charges, fees & other		5,219		4,864		355
Gain on sale of SBA loans		—		1,060		(1,060	)
Net gain (loss) on sales of securities		15,712		570		15,142
Gain on sale of bank premises		—		1,235		(1,235	)
Total noninterest income	$	20,931	$	7,729	$	13,202

For the three months ended June 30, 2020, noninterest income was $20.9 million, an increase of $13.2 million, or 170.8 percent, compared with $7.7 million for the same period in 2019. Most of the increase was attributable to $15.7 million in gains on sale of $479.9 million of securities reflecting the repositioning of the securities portfolio to capture the high level of unrealized gains arising from the very low rate environment. Securities transactions for the year ago period resulted in gains of $0.5 million as we sold the remaining tax-exempt municipal bonds during the three months ended June 30, 2019. There were no gains on sale of SBA loans during the three months ended June 30, 2020 compared with $1.1 million for the same period a year ago.

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

	Six Months Ended June 30,				Increase (Decrease)
	2020		2019		Amount
	(in thousands)
Service charges on deposit accounts	$	4,432	$	4,844	$	(412	)
Trade finance and other service charges and fees		1,948		2,328		(380	)
Servicing income		1,416		1,083		333
Bank-owned life insurance income		553		533		20
All other operating income		1,939		679		1,260
Service charges, fees & other		10,288		9,467		821
Gain on sale of SBA loans		1,154		1,986		(832	)
Net gain (loss) on sales of securities		15,712		1,295		14,417
Gain on sale of bank premises		—		1,235		(1,235	)
Total noninterest income	$	27,154	$	13,983	$	13,171

For the six months ended June 30, 2020, noninterest income was $27.2 million, an increase of $13.2 million, or 94.2 percent, compared with $14.0 million for the same period in 2019. Increase in noninterest income for the six months ended June 30, 2020 was mostly attributed to $15.7 million in gains on sales of securities. Securities transactions for the same period a year ago resulted in gains of $1.3 million as we sold all of our tax-exempt municipal bonds during the six months ended June 30, 2019. In addition, other operating income increased from $512,000 of fees relating to back-to-back swap contracts with a notional amount of $29.5 million and higher levels of bank interchange fees of $699,000. These were partially offset by lower gains on sales of SBA loans which were $1.2 million for the six months ended June 30, 2020 compared with $2.0 million for the same period a year ago, and the absence of a gain on the sale of bank premises in 2020 compared to a $1.2 million gain for the six months ended June 30, 2019.

Noninterest Expense

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

	Three Months Ended June 30,					Increase (Decrease)
	2020			2019		Amount
	(in thousands)
Salaries and employee benefits	$	14,701		$	16,881	$	(2,180	)
Occupancy and equipment		4,508			3,468		1,040
Data processing		2,804			2,140		664
Professional fees		1,545			1,983		(438	)
Supplies and communications		858			649		209
Advertising and promotion		456			945		(489	)
All other operating expenses		2,457			3,687		(1,230	)
Subtotal		27,329			29,753		(2,424	)
Provision expense (income) for losses on off-balance sheet items ⁽¹⁾		—			233		(233	)
Other real estate owned expense		(191	)		158		(349	)
Total noninterest expense	$	27,138		$	30,144	$	(3,006	)

(1)	Provision expense (income) for losses on off-balance sheet items is now included in credit loss expense; the provision for losses on off-balance sheet items was $3.5 million for the six months ended June 30, 2020.

For the three months ended June 30, 2020, noninterest expense was $27.1 million, a decrease of $3.0 million, or 10.0 percent, compared with $30.1 million for the same period in 2019. The decrease was primarily due to lower salaries and employee benefits expense from $3.1 million in higher capitalized salaries mainly related to the origination of PPP loans.

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

	Six Months Ended June 30,						Increase (Decrease)
	2020			2019			Amount
	(in thousands)
Salaries and employee benefits	$	32,450		$	32,619		$	(169	)
Occupancy and equipment		8,983			7,989			994
Data processing		5,473			4,223			1,250
Professional fees		3,460			3,632			(172	)
Supplies and communications		1,639			1,493			146
Advertising and promotion		1,190			1,705			(515	)
Merger and integration costs		—			641			(641	)
All other operating expenses		5,200			7,089			(1,889	)
Subtotal		58,395			59,391			(996	)
Provision expense (income) for losses on off-balance sheet items ⁽¹⁾		—			(106	)		106
Other real estate owned expense		(189	)		(75	)		(114	)
Total noninterest expense	$	58,206		$	59,210		$	(1,004	)

(1)	Provision expense (income) for losses on off-balance sheet items is now included in credit loss expense; the provision for losses on off-balance sheet items was $4.3 million for the six months ended June 30, 2020.

For the six months ended June 30, 2020, noninterest expense was $58.2 million, a decrease of $1.0 million, or 1.7 percent, compared with $59.2 million for the same period in 2019. The decrease was primarily due to a reduction of other operating expenses from gains on sales and disposals of repossessed assets, offset by an increase in data processing and occupancy and equipment costs.

Income Tax Expense

Income tax expense was $4.5 million and $1.2 million representing an effective income tax rate of 32.7 percent and 31.5 percent for the three months ended June 30, 2020 and 2019, respectively. The increase in the effective tax rate for the three months ended June 30, 2020, compared to the same period in 2019 was principally due to higher pre-tax income during the second quarter.

Income tax expense was $5.5 million and $7.5 million representing an effective income tax rate of 32.3 percent and 30.2 percent for the six months ended June 30, 2020 and 2019, respectively. The increase in the effective tax rate for the six months ended June 30, 2020, compared to the same period in 2019 was principally due to lower tax-exempt interest and dividends.

Financial Condition

Securities

As of June 30, 2020, our securities portfolio consisted of U.S. government agency and sponsored agency mortgage-backed securities, collateralized mortgage obligations 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 June 30, 2020 and December 31, 2019.

The following table summarizes the amortized cost, estimated fair value and unrealized gain (loss) on securities as of the dates indicated:

	June 30, 2020							December 31, 2019
			Estimated		Unrealized					Estimated		Unrealized
	Amortized		Fair		Gain			Amortized		Fair		Gain
	Cost		Value		(Loss)			Cost		Value		(Loss)
	(in thousands)
Securities available for sale:
U.S. Treasury securities	$	44,982	$	45,262	$	280		$	34,947	$	35,206	$	259
U.S. government agency and sponsored agency obligations:
Mortgage-backed securities		413,278		413,263		(15	)		406,813		410,800		3,987
Collateralized mortgage obligations		120,080		120,294		214			164,232		164,592		360
Debt securities		77,160		77,152		(8	)		23,733		23,879		146
Total U.S. government agency and sponsored agency obligations		610,518		610,709		191			594,778		599,271		4,493
Total securities available for sale	$	655,500	$	655,971	$	471		$	629,725	$	634,477	$	4,752

As of June 30, 2020, securities available for sale increased $21.5 million, or 3.4 percent, to $656.0 million, compared with $634.5 million as of December 31, 2019. The increase reflects partial utilization of excess liquidity.

The following table summarizes the contractual maturity schedule for securities, at amortized cost, and their weighted- average yield as of June 30, 2020:

						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
	(in thousands)
Securities available for sale:
U.S. Treasury securities	$	34,988		0.51	%	$	9,996		2.67	%	$	—		0.00	%	$	—		0.00	%	$	44,984		0.99	%
U.S. government agency and sponsored agency obligations:
Mortgage-backed securities		7,083		1.95	%		4,685		2.10	%		—		0.00	%		401,510		1.54	%		413,278		1.56	%
Collateralized mortgage obligations		11		1.68	%		1,411		1.48	%		1,813		1.42	%		116,843		1.02	%		120,078		1.03	%
Debt securities		—		0.00	%		67,160		0.54	%		10,000		0.85	%		—		0.00	%		77,160		0.58	%
Total U.S. government agency and sponsored agency obligations		7,094		1.95	%		73,256		0.66	%		11,813		0.94	%		518,353		1.43	%		610,516		1.33	%
Total securities available for sale	$	42,082		0.75	%	$	83,252		0.90	%	$	11,813		0.94	%	$	518,353		1.43	%	$	655,500		1.31	%

Loans Receivable

The following table shows the loans portfolio composition by type as of the dates indicated, excluding loans held for sale:

	June 30, 2020			December 31, 2019
	(in thousands)
Real estate loans:
Commercial property
Retail	$	808,157		$	869,302
Hospitality		882,812			922,288
Other⁽¹⁾		1,504,916			1,358,432
Total commercial property loans		3,195,885			3,150,022
Construction		70,357			76,455
Residential property		354,064			402,028
Total real estate loans		3,620,306			3,628,505
Commercial and industrial loans		730,399			484,093
Leases receivable		462,811			483,879
Consumer loans ⁽²⁾		12,126			13,670
Loans receivable		4,825,642			4,610,147
Allowance for credit losses		(86,330	)		(61,408	)
Loans receivable, net	$	4,739,312		$	4,548,739

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

(2)	Consumer loans include home equity lines of credit of $7.6 million and $8.2 million as of June 30, 2020 and December 31, 2019, respectively.

As of June 30, 2020 and December 31, 2019, net loans receivable was $4.74 billion and $4.55 billion, respectively, representing an increase of $190.6 million, or 4.2 percent. The increase in net loans receivable as of June 30, 2020 compared with December 31, 2019 was attributable to an increase of new loan production by $534.1 million, of which $308.8 million related to the loans issued under the Paycheck Protection Program. These increases were partially offset by an increase in the allowance for credit losses by $24.9 million from an adjustment of $17.4 million related to adoption CECL (ASU 2016-13) on January 1, 2020 and additional provisions for the forecasted impact to the loan portfolio as of June 30, 2020 due to the ongoing pandemic.

Industry

Our loans receivable 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
	June 30, 2020		Outstanding
	(in thousands)
Lessor of nonresidential buildings	$	1,384,992		28.7	%
Hospitality		944,923		19.6	%

There was no other concentration of loans receivable to any one type of industry exceeding 10.0 percent of loans receivable outstanding.

Loan Quality Indicators

As of June 30, 2020 and December 31, 2019, pass/pass-watch, special mention and classified loans, disaggregated by loan class, were as follows:

	Pass/Pass- Watch		Special Mention		Classified		Total
	(in thousands)
June 30, 2020
Real estate loans:
Commercial property
Retail	$	800,437	$	1,182	$	6,538	$	808,157
Hospitality		879,131		—		3,681		882,812
Other		1,469,272		6,059		29,585		1,504,916
Total commercial property loans		3,148,840		7,241		39,804		3,195,885
Construction		44,503		—		25,854		70,357
Residential property		350,520		784		2,760		354,064
Total real estate loans		3,543,863		8,025		68,418		3,620,306
Commercial and industrial loans		702,443		12,423		15,533		730,399
Leases receivable		453,528		—		9,283		462,811
Consumer loans		10,752		686		688		12,126
Total loans receivable	$	4,710,586	$	21,134	$	93,922	$	4,825,642

December 31, 2019
Real estate loans:
Commercial property
Retail	$	859,739	$	2,835	$	6,728	$	869,302
Hospitality		915,834		939		5,515		922,288
Other		1,329,817		7,807		20,809		1,358,432
Total commercial property loans		3,105,390		11,580		33,052		3,150,022
Construction		36,956		1,613		37,886		76,455
Residential property		398,737		2,512		779		402,028
Total real estate loans		3,541,082		15,705		71,718		3,628,505
Commercial and industrial loans		458,184		10,222		15,687		484,093
Leases receivable		477,977		—		5,902		483,879
Consumer loans		12,247		705		718		13,670
Total loans receivable	$	4,489,491	$	26,632	$	94,025	$	4,610,147

Classified loans were $93.9 million at June 30, 2020 compared with $94.0 million at the end of 2019, while special mention loans were $21.1 million at the end of the second quarter compared with $26.6 million at December 31, 2019. The decrease in classified loans primarily reflects the $25.2 million charge-off of the previously identified troubled loan relationship, offset by the addition of two film-tax credit loans totaling $12.6 million and one construction loan totaling $12.8 million.

Nonperforming Loans and 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 that management intends to offer for sale.

Except for nonperforming loans set forth in the table below and the matters described in the following paragraph, we are not aware of any other loans as of June 30, 2020 for which known credit problems of the borrower would cause serious doubts as to the ability of such borrowers to comply with their present repayment terms, or any known events that would result in the loan being designated as nonperforming at some future date. We cannot, however, predict the extent to which a deterioration in general economic conditions, real estate values, increases in general rates of interest, or changes in the financial condition or business of borrower may adversely affect a borrower’s ability to pay.

On March 22, 2020, banking regulators issued a statement titled the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19. Additionally, Section 4013 of the CARES Act further provides that a qualified loan modification is exempt by law from classification as a TDR as defined by GAAP, from the period beginning March 1, 2020 and until the earlier of December 31, 2020 or the date that is 60 days after the date on which the national emergency concerning the COVID-19 outbreak declared by the President of the United States under the National Emergencies Act (50 U.S.C. 1601 et seq.) terminates. Accordingly, we are offering short-term modifications made in response to COVID-19 to borrowers who are current and otherwise not past due. These include short-term, 90 days or less, modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. As of June 30, 2020, the Bank approved 2,443 modification requests representing $1.4 billion of loans and leases, or 29.0 percent of the loan portfolio, of which 698 or $1.3 billion represented loan modifications and 1,745 or $1.0 million represented lease modifications.

The following table provides information with respect to the components of nonperforming assets as of the dates indicated:

							Increase (Decrease)
	June 30, 2020			December 31, 2019			Amount			Percentage
	(in thousands)
Nonperforming loans:
Real estate loans:
Commercial property
Retail	$	1,355		$	277		$	1,078			388.9	%
Hospitality		—			225			(225	)		-100.0	%
Other		4,503			14,864			(10,361	)		-69.7	%
Total commercial property loans		5,858			15,366			(9,508	)		-61.9	%
Construction		25,854			27,201			(1,347	)		-5.0	%
Residential property		2,794			1,124			1,670			148.5	%
Total real estate loans		34,506			43,691			(9,185	)		-21.0	%
Commercial and industrial loans		13,785			13,479			306			2.3	%
Leases receivable		9,285			5,902			3,383			57.3	%
Consumer loans		688			689			(1	)		-0.1	%
Total nonaccrual loans		58,264			63,761			(5,497	)		-8.6	%
Loans 90 days or more past due and still accruing		—			—			—			100.0	%
Total nonperforming loans ⁽¹⁾		58,264			63,761			(5,497	)		-8.6	%
Other real estate owned		148			63			85			134.9	%
Total nonperforming assets	$	58,412		$	63,824		$	(5,412	)		-8.5	%

Nonperforming loans as a percentage of loans		1.21	%		1.38	%
Nonperforming assets as a percentage of assets		0.94	%		1.15	%
Performing troubled debt restructured loans	$	14,524		$	830

⁽¹⁾	Includes nonperforming TDRs of $17.0 million and $55.5 million as of June 30, 2020 and December 31, 2019, respectively.

Nonperforming loans were $58.3 million and $63.8 million as of June 30, 2020 and December 31, 2019, respectively. The decrease reflects principally the $25.2 million charge-off of the troubled loan relationship, the pay-off of a $5.5 million past due film-tax credit loan, as well as two other loans totaling $14.1 million returning to accruing status offset by the addition of three loans totaling $22.9 million and leases totaling $1.6 million.

Delinquent loans (defined as 30 to 89 days past due and still accruing) were $10.0 million as of June 30, 2020 compared with $10.3 million as of December 31, 2019.

As of June 30, 2020, OREO consisted of three properties with a combined carrying value of $0.1 million compared to two properties with a combined carrying value of $0.01 million as of December 31, 2019.

The following table provides information with respect to the amortized cost basis of nonperforming loans:

	June 30, 2020
	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 loans	$	5,238	$	620	$	—	$	5,858
Construction loans		13,046		12,808		—		25,854
Residential property loans		2,761		33		—		2,794
Total real estate loans		21,045		13,461		—		34,506
Commercial and industrial loans		12,878		907		—		13,785
Leases receivable		1,797		7,488		—		9,285
Consumer loans		688		—		—		688
Total nonperforming loans	$	36,408	$	21,856	$	—	$	58,264

Individually Evaluated Loans

Prior to the adoption of ASU 2016-13, impaired loans were measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan was collateral dependent, less estimated costs to sell. If the estimated value of the impaired loan was less than the recorded investment in the loan, we charged-off the deficiency against the allowance for credit losses or we established a specific allowance in the allowance for credit losses. Additionally, we excluded from the quarterly migration analysis impaired loans when determining the amount of the allowance for credit losses required for the period.

We review, under ASU 2016-13, all loans on an individual basis when they do not share similar risk characteristics with loan pools.

The following table provides information on individually evaluated loans as of June 30, 2020 and impaired loans as of December 31, 2019:

	June 30, 2020					December 31, 2019
	Recorded Investment		Percentage			Recorded Investment		Percentage
	(dollars in thousands)
Real estate loans:
Commercial property
Retail	$	1,355		1.9	%	$	434		0.7	%
Hospitality		—		0.0	%		244		0.4	%
Other		18,299		25.5	%		14,864		22.9	%
Total commercial property loans		19,654		27.4	%		15,542		24.0	%
Construction		25,854		36.0	%		27,201		42.0	%
Residential property		2,794		3.9	%		1,124		1.7	%
Total real estate loans		48,302		67.3	%		43,867		67.7	%
Commercial and industrial loans		13,771		19.1	%		13,700		21.2	%
Leases receivable		8,456		11.8	%		5,902		9.1	%
Consumer loans		1,280		1.8	%		1,297		2.0	%
Total	$	71,809		100.0	%	$	64,766		100.0	%

Individually evaluated loans increased $7.0 million, or 10.9 percent, to $71.8 million as of June 30, 2020, from $64.8 million at December 31, 2019, principally due to the addition of two film-tax credits totaling $12.6 million, one construction loan totaling $12.8 million, and one commercial real estate loan totaling $1.4 million, offset by a charge-off of $25.2 million of a $40.0 million troubled loan relationship (comprised of $13.5 million construction/land loan charge off and an $11.7 million commercial business loan charge-off). Specific allowances associated with individually evaluated loans were $5.2 million as of June 30, 2020 compared with $25.8 million as of December 31, 2019. The decrease was primarily due to the charge-off of $25.2 million troubled loan relationship, offset by a specific provision for the $12.8 million construction loan.

During the three months ended June 30, 2020, we would have recognized $1.4 million of interest income had loans individually evaluated performed in accordance with their original terms. During the three months ended June 30, 2019, we would have recognized $1.1 million of interest income had impaired loans receivable performed in accordance with their original terms. Of these amounts, we actually recognized interest income of $0.5 million and $0.7 million for the three months ended June 30, 2020 and 2019, respectively.

During the six months ended June 30, 2020, we would have recognized $3.0 million of interest income had loans individually evaluated performed in accordance with their original terms. During the six months ended June 30, 2019, we would have recognized $2.0 million of interest income had impaired loans receivable performed in accordance with their original terms. Of these amounts, we actually recognized interest income of $1.1 million and $1.4 million for the six months ended June 30, 2020 and 2019, respectively.

Troubled Debt Restructurings (TDRs)

The following table provides information on TDRs as of the dates indicated:

	June 30, 2020						December 31, 2019
	Nonaccrual TDRs		Accrual TDRs		Total		Nonaccrual TDRs		Accrual TDRs		Total
	(in thousands)
Real estate loans	$	15,649	$	13,796	$	29,445	$	41,798	$	—	$	41,798
Commercial and industrial loans		724		136		860		12,991		222		13,213
Consumer loans		661		592		1,253		689		608		1,297
Total	$	17,034	$	14,524	$	31,558	$	55,478	$	830	$	56,308

For the three months and six months ended June 30, 2020, we restructured two loans for $2.0 million classified as TDRs.

As of June 30, 2020, TDRs on an accrual status were $14.5 million, all of which were temporary interest rate and payment reductions and extensions of maturity of which a $0.01 million allowance relating to these loans was included in the allowance for credit losses. For the TDRs on an accrual status, we determined that, based on the financial capabilities of the borrowers at the time of the loan restructuring and the borrowers’ past performance in the payment of debt service under the previous loan terms, performance and collection under the revised terms is probable. As of June 30, 2020, TDRs on a nonaccrual status were $17.0 million, and a $0.1 million allowance relating to these loans was included in the allowance for credit losses.

As of December 31, 2019, TDRs on an accrual status were $0.8 million, all of which were temporary interest rate and payment reductions, extensions of maturity, or principal deferrals of which a $0.03 million allowance relating to these loans was included in the allowance for credit losses. As of December 31, 2019, TDRs on a nonaccrual status were $55.5 million, and a $22.7 million allowance relating to these loans was included in the allowance for credit losses.

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

reason for the change from relying on the FRED economic data to Moody’s data was because Moody’s data is updated more frequently and timely than FOMC or FRED, and thus provides a better forecast for PD/LGD models. Since reasonable and supportable forecasts of economic conditions are imbedded directly to DCF model, qualitative adjustments are reduced but considered. Qualitative adjustments were based on the Company's judgment of company, market, industry or business specific data, changes in the underlying loan composition of specific portfolios.

Management determined that, due to model limitations, the regression model that supports the DCF calculation for the SBA and commercial property, construction, and residential real estate portfolios does not take into account the volatile nature of COVID-19 on these portfolios, as well as the government assistance programs based on the maturities. As a result, at June 30, 2020, the Company utilized the Probability of Default/Loss Given Default (PD/LGD) method for the SBA and commercial property, construction, and residential real estate portfolios. The Company previously applied the DCF method to the real estate secured portfolios in the implementation of CECL at January 1, 2020 and through March 31, 2020 and determined that the change from DCF to PD/LGD was not material. See Note 1 – Organization and Basis of Presentation for a further description of the methodologies applied at the inception of CECL and during the three months ended March 31, 2020. The Company used historical periods that included an economic downturn to derive historical losses for better alignment in the estimation of expected losses. The Company leveraged Frye-Jacobs modeled LGD rates for loan segments with no historical losses. In addition, for those loans granted a loan modification due to COVID-19, the Company used historical periods under PD/LGD as of March 31, 2020 to reflect the moratorium on TDRs under Section 4013 of the CARES Act. The PD/LGD method incorporates a forecast into loss estimates using a qualitative adjustment. Qualitative loss factors were based on the Company's judgment of company, market, industry or business specific data, changes in the underlying loan composition of specific portfolios, trends relating to credit quality, delinquency, nonperforming and adversely rated loans, and reasonable and supportable forecasts of economic conditions.

The allowance for credit losses was $86.3 million at June 30, 2020 compared with $61.4 million at December 31, 2019. The allowance attributed to loans individually evaluated for impairment was $5.2 million at June 30, 2020 compared with $25.8 million at December 31, 2019, the decline primarily reflecting the $25.2 million charge-off of the previously identified troubled loan relationship during the first quarter of 2020. The allowance attributed to loans collectively evaluated for impairment was $81.1 million at June 30, 2020 compared with $35.6 million at December 31, 2019. The increase principally reflects the adoption of ASU 2016-13 as well as the change from January 1, 2020 to June 30, 2020 in the macroeconomic assumptions including a higher projected average unemployment rate for the subsequent four quarters and a lower projected GDP growth rate. The Company recognizes the inherent uncertainties in the estimate of the allowance for credit losses and the effect the COVID-19 pandemic may have on borrowers.

The following tables reflect our allocation of the allowance for credit losses by loan category:

	June 30, 2020										December 31, 2019
	Allowance					Total					Allowance					Total
	Amount		Percentage			Loans		Percentage			Amount		Percentage			Loans		Percentage
	(in thousands)
Real estate loans:
Commercial property
Retail	$	7,341		8.5	%	$	808,157		16.7	%	$	4,911		8.0	%	$	869,302		18.9	%
Hospitality		11,984		13.9	%		882,812		18.3	%		6,686		10.9	%		922,288		20.0	%
Other		24,920		28.9	%		1,504,916		31.2	%		8,060		13.1	%		1,358,432		29.4	%
Total commercial property loans		44,245		51.3	%		3,195,885		66.2	%		19,657		32.0	%		3,150,022		68.3	%
Construction		9,331		10.8	%		70,357		1.5	%		15,003		24.4	%		76,455		1.7	%
Residential property		2,640		3.1	%		354,064		7.3	%		1,695		2.8	%		402,028		8.7	%
Total real estate loans		56,216		65.2	%		3,620,306		75.0	%		36,355		59.2	%		3,628,505		78.7	%
Commercial and industrial loans		13,387		15.5	%		730,399		15.1	%		16,206		26.4	%		484,093		10.5	%
Leases receivable		16,525		19.1	%		462,811		9.6	%		8,767		14.3	%		483,879		10.5	%
Consumer loans		202		0.2	%		12,126		0.3	%		80		0.1	%		13,670		0.3	%
Total	$	86,330		100.0	%	$	4,825,642		100.0	%	$	61,408		100.0	%	$	4,610,147		100.0	%

The following table set forth certain information regarding the allowance for credit losses and the allowance for credit losses related to off-balance sheet items for the periods presented.

	As of and For the Three Months Ended						As of and For the Six Months Ended
	June 30, 2020			June 30, 2019			June 30, 2020			June 30, 2019
	(in thousands)
Allowance for credit losses:
Balance at beginning of period	$	66,500		$	32,896		$	61,408		$	31,974
Adjustment related to adoption of ASU 2016-13		—			—			17,433			—
Adjusted balance as of January 1, 2020		66,500			32,896			78,841			31,974
Less loans receivable charged off		1,573			1,536			29,046			2,634
Recoveries on loans receivable previously charged-off		(272	)		(1,327	)		(488	)		(2,230	)
Provision for credit losses		21,131			16,699			36,047			17,816
Ending balance	$	86,330		$	49,386		$	86,330		$	49,386

Allowance for credit losses related to off-balance sheet items:
Balance at beginning of period	$	2,885		$	1,100		$	2,397		$	1,439
Adjustment related to adoption of ASU 2016-13		—			—			(335	)		—
Adjusted balance as of January 1, 2020		2,885			1,100			2,062			1,439
Provision (income) for off-balance sheet items		3,462			233			4,285			(106	)
Ending balance	$	6,347		$	1,333		$	6,347		$	1,333

Ratios:
Net loan charge-offs (recoveries) to average loans, annualized		0.11	%		0.02	%		1.24	%		0.02	%
Allowance for credit losses to loans receivable		1.79	%		1.08	%		1.79	%		1.08	%
Net loan charge-offs (recoveries) to allowance for credit losses, annualized		6.03	%		1.69	%		66.16	%		1.64	%
Allowance for credit losses to nonperforming loans		148.17	%		78.35	%		148.17	%		78.35	%

Balance:
Average loans receivable during period	$	4,680,048		$	4,491,377		$	4,599,222		$	4,512,134
Loans receivable at end of period		4,825,642			4,555,802			4,825,642			4,555,802
Nonperforming loans at end of period		58,264			63,031			58,264			63,031

The allowance for credit losses was $86.3 million as of June 30, 2020 generating an allowance for credit losses to loans receivable of 1.79 percent compared with 1.08 percent at June 30, 2019. The increase principally reflects the change in the accounting for the allowance for credit losses previously described and the effect of the COVID-19 pandemic.

The allowance for credit losses at June 30, 2020 included a $25.7 million specific qualitative amount for the uncertainties arising from the COVID-19 crisis. The Company analyzed the segments of the portfolio believed to be the most vulnerable to the crisis at this time – hospitality, food service, and retail – representing approximately $1.69 billion, or 35.0 percent of the portfolio. For these segments, the Company used varying revenue shocks to identify post-stressed real estate secured loans with debt-service-coverage ratios of one or less and compared those to estimated post-stressed real estate valuations as well as peak historical loss rates for unsecured loans in developing this estimate. The Company recognizes the inherent uncertainties in this estimate and the effects this crisis may have on our borrowers. The Company expects the estimate of the allowance for credit losses will change in future periods because of changes in economic conditions, economic forecasts, and other factors.

The allowance for credit losses related to off-balance sheet items, primarily unfunded loan commitments, was $6.3 million and $1.3 million as of June 30, 2020 and 2019, respectively.

The following table presents a summary of net charge-offs and recoveries:

	Three Months Ended								Six Months Ended
	Charge- offs		Recoveries			Net Charge- Offs (Recoveries)			Charge- offs		Recoveries			Net Charge- Offs (Recoveries)
	(in thousands)
June 30, 2020
Real estate loans	$	91	$	(98	)	$	(7	)	$	14,233	$	(156	)	$	14,077
Commercial and industrial loans		438		(60	)		378			12,589		(144	)		12,445
Leases receivable		1,044		(114	)		930			2,224		(188	)		2,036
Total	$	1,573	$	(272	)	$	1,301		$	29,046	$	(488	)	$	28,558

June 30, 2019
Real estate loans	$	—	$	(1,133	)	$	(1,133	)	$	113	$	(1,563	)	$	(1,450	)
Commercial and industrial loans		562		(89	)		473			695		(471	)		224
Leases receivable		974		(105	)		869			1,826		(196	)		1,630
Total	$	1,536	$	(1,327	)	$	209		$	2,634	$	(2,230	)	$	404

For the three months ended June 30, 2020, total charge-offs were $1.6 million, an increase of $0.1 million, from $1.5 million for the same period in 2019. Charge-offs were offset by recoveries during the three months ended June 30, 2020 of $0.3 million, a decrease of $1.0 million, from $1.3 million for the same period in 2019. For the six months ended June 30, 2020, total charge-offs were $29.0 million, an increase of $26.4 million, or 1,002.7 percent, from $2.6 million for the same period in 2019. The first quarter of 2020 included a $25.2 million charge off of a $40.0 million troubled loan relationship (comprised of $13.5 million real estate construction loan charge off and an $11.7 million commercial and industrial loan charge off). Charge-offs were offset by recoveries during the six months ended June 30, 2020 of $0.5 million, a decrease of $1.7 million, or 78.1 percent, from $2.2 million for the same period in 2019.

Deposits

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

	June 30, 2020					December 31, 2019
	Balance		Percent			Balance		Percent
	(dollars in thousands)
Demand – noninterest-bearing	$	1,865,213		35.8	%	$	1,391,624		29.6	%
Interest-bearing:
Demand		96,941		1.9	%		84,323		1.8	%
Money market and savings		1,812,612		34.8	%		1,667,096		35.5	%
Time deposits of $100,000 or more ⁽¹⁾		1,307,496		25.1	%		1,402,063		29.8	%
Other time deposits		127,519		2.5	%		153,856		3.3	%
Total deposits	$	5,209,781		100.0	%	$	4,698,962		100.0	%

⁽¹⁾	Includes $308.5 million and $299.9 million of time deposits of $250,000 or more as of June 30, 2020 and December 31, 2019, respectively.

Deposits increased $510.8 million, or 10.9 percent, to $5.21 billion as of June 30, 2020 from $4.70 billion as of December 31, 2019. The increase in deposits was mainly attributable to the $473.6 million increase in demand – noninterest-bearing deposits and increase of $145.5 million in money market and savings accounts.

Borrowings

At June 30, 2020, the Bank had $150.0 million in term advances from the FHLB compared with $75.0 million at December 31, 2019. There were no overnight advances at June 30, 2020, compared to $15.0 million at December 31, 2019. In addition, the Bank had $101.8 million in PPPLF advances during the second quarter. The Bank repaid the PPPLF advance subsequent to the end of the 2020 second quarter.

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). 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%	$	21,993			11.42	%	$	37,241			19.43	%
200%	$	14,389			7.47	%	$	24,798			12.94	%
100%	$	7,261			3.77	%	$	13,206			6.89	%
(100%)	$	(713	)		(0.37	%)	$	(675	)		(0.35	%)

Change in	Economic Value of Equity (EVE)
Interest	Dollar			Percentage
Rate	Change			Change
	(dollars in thousands)
300%	$	155,509			40.17	%
200%	$	117,882			30.45	%
100%	$	71,973			18.59	%
(100%)	$	(94,600	)		(24.43	%)

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 nature and timing of interest rate levels including yield curve shape, prepayments on loans receivable and securities, pricing strategies on loans receivable and deposits, and replacement of asset and liability cash flows. 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 dividend paid on common stock for the second and third quarter of 2020 to $0.12 and $0.08 per share, respectively, from $0.24 per share paid in the first quarter of 2020. The Board believes these actions were the most prudent course of action as it continues to monitor the results of operations and financial condition of the Company and expects to continue to re-evaluate quarterly the level of any subsequent regular quarterly dividend. We cannot assure you that future dividends will not be reduced or eliminated based on such re-evaluation.

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 DBO, in an amount not exceeding the greatest 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 July 1, 2020, after giving effect to the 2020 third quarter dividend declared by the Company, the Bank has the ability to pay $6.8 million of dividends without the prior approval of the Commissioner of Business Oversight.

At June 30, 2020, the Bank’s total risk-based capital ratio of 13.62 percent, Tier 1 risk-based capital ratio of 12.36 percent, common equity Tier 1 capital ratio of 12.36 percent and Tier 1 leverage capital ratio of 11.03 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 June 30, 2020, the Company's total risk-based capital ratio was 14.04 percent, Tier 1 risk-based capital ratio was 10.86 percent, common equity Tier 1 capital ratio was 10.46 percent and Tier 1 leverage capital ratio was 9.69 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 2019 Annual Report on Form 10-K.

Liquidity

Hanmi Financial

At June 30, 2020, Hanmi Financial had $20.3 million in cash on deposit with its bank subsidiary. Management believes that Hanmi Financial, on a stand-alone basis, has adequate liquid assets to meet its current 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 June 30, 2020, the Bank had $150.0 million in advances from the FHLB, and $235.2 million of brokered deposits. The Bank had $101.8 million of 0.35 percent advances with the FRB under the Paycheck Protection Program Lending Facility. The advances were repaid subsequent to the end of the second quarter. There were no outstanding borrowings with the FRB as of December 31, 2019.

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 percent of its assets. As of June 30, 2020, the total remaining available borrowing capacity was $1.5 billion.

As a means of augmenting its liquidity, the Bank had an available borrowing source of $47.9 million from the Federal Reserve Discount Window, to which the Bank pledged securities with a carrying value of $50.0 million, and had no borrowings under this source as of June 30, 2020.

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 2019 Annual Report on Form 10-K.

Contractual Obligations

There have been no material changes to the contractual obligations described in our 2019 Annual Report on Form 10-K.

Recently Issued Accounting Standards

No newly issued standards were noted.

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

During the three months ended June 30, 2020, pursuant to Rule 13a-15 of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), our management, including our principal executive officer and principal financial officer, conducted an evaluation of the effectiveness and design of our disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) and have concluded that the Company’s disclosure controls and procedures are effective as of the end of the period covered by this Quarterly Report on Form 10-Q.

Remediation of Material Weakness

During the fourth quarter of 2019 and the first quarter of 2020, the Company identified a material weakness in internal controls over financial reporting resulting in a conclusion that the Company’s disclosure controls and procedures were not effective. The material weakness in internal control over financial reporting resulted from ineffective information technology general controls in the area of user access and segregation of duties over certain information technology (“IT”) systems that support the recording of transactions and financial reporting processes. We believe that this control deficiency was a result of insufficient training of personnel around changes in our IT environment. The material weakness did not result in any identified misstatements to the financial statements, and there were no changes to previously released financial results.

Management with the oversight of the Audit Committee, was actively engaged in addressing this material weakness beginning in the fourth quarter of 2019 and continuing through the first half of 2020. Management reviewed this material weakness with the Audit Committee and continued to update the Audit Committee as to the status of the remediation efforts. Management implemented enhanced IT controls, including but not limited to, strengthening user access controls, training personnel around changes in our IT environment, and augmenting systemic controls related to the segregation of duties within the financial systems. During the second quarter of 2020, Management completed its testing of the operating effectiveness of the implemented controls, and concluded they were effective. As a result, we have concluded that the material weakness previously identified had been remediated as of June 30, 2020.

Changes in Internal Control Over Financial Reporting

Other than described above, during the most recent fiscal quarter, there has been no change in our internal controls over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, that have materially affected or are reasonably likely to materially affect Hanmi Financial’s internal controls 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

In addition to the other information contained in this Quarterly Report on Form 10-Q, the following risk factor represents material updates and additions to the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 as filed with the SEC. Additional risks not presently known to us, or that we currently deem immaterial, may also adversely affect our business, financial condition or results of operations. Further, to the extent that any of the information contained in this Quarterly Report on Form 10-Q constitutes forward-looking statements, the risk factor set forth below also is a cautionary statement identifying important factors that could cause our actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of us.

The economic impact of the COVID-19 outbreak could adversely affect our financial condition and results of operations.

•

demand for our products and services may decline, making it difficult to grow assets and income;

•

if the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income;

•

collateral for loans, especially real estate, may decline in value, which could cause credit loss expense to increase;

•

our allowance for credit losses may have to be increased if borrowers experience financial difficulties beyond forbearance periods, which will adversely affect our net income;

•

the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us;

•

as the result of the decline in the Federal Reserve Board’s target federal funds rate, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income;

•

a material decrease in net income or a net loss over several quarters could result in a decrease in the rate of our quarterly cash dividend;

•

our cyber security risks are increased as the result of an increase in the number of employees working remotely;

•

we rely on third party vendors for certain services and the unavailability of a critical service due to the COVID-19 outbreak could have an adverse effect on us;

•

Federal Deposit Insurance Corporation premiums may increase if the agency experiences additional resolution costs;

•

potential goodwill impairment charges could result if acquired assets and operations are adversely affected and remain at reduced levels;

•

due to recent legislation and government action limiting foreclosure of real property and reduced governmental capacity to effect business transactions and property transfers, we may have more difficulty taking possession of collateral supporting our loans, which may negatively impact our ability to minimize our losses, which could adversely impact our financial results; and

•

we face litigation, regulatory enforcement and reputation risk as a result of our participation in the Paycheck Participation Program (“PPP”) and the risk that the Small Business Administration may not fund some or all PPP loan guaranties.

Moreover, our future success and profitability substantially depends on the management skills of our executive officers and directors, many of whom have held officer and director positions with us for many years. The unanticipated loss or unavailability of key employees due to the outbreak could harm our ability to operate our business or execute our business strategy. We may not be successful in finding and integrating suitable successors in the event of key employee loss or unavailability.

Any one or a combination of the factors identified above could negatively impact our business, financial condition and results of operations and prospects.

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 June 30, 2020, approximately 1.0 million shares remained available for future purchases under that stock repurchase program. Shortly following the federal proclamation declaring a national emergency concerning the COVID-19 outbreak, Hanmi suspended its share repurchase program and does not anticipate it will consider resumption of share repurchases until the rescission of the national emergency. During the three months ended June 30, 2020, the Company acquired 12,811 shares from employees in connection with the satisfaction of employee tax withholding obligations incurred through vesting of Company stock awards.

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 June 30, 2020, 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.

Date:	August 10, 2020	By:	/s/ Romolo C. Santarosa
			Romolo C. Santarosa
			Senior Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)