hafc-10q_20210630.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, 2021

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

For the Transition Period From To

Commission File Number: 000-30421

HANMI FINANCIAL CORPORATION

(Exact Name of Registrant as Specified in its Charter)

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

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

(213) 382-2200

(Registrant’s Telephone Number, Including Area Code)

Not Applicable

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

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

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock, $0.001 par value

HAFC

Nasdaq Global Select Market

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

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

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

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

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

As of August 2, 2021, there were 30,696,546 outstanding shares of the Registrant’s Common Stock.

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

Three Months Ended June 30, 2021

Table of Contents


	Part I – Financial Information

Item 1.	Financial Statements	3

	Consolidated Balance Sheets at June 30, 2021 (unaudited) and December 31, 2020	3

	Consolidated Statements of Income for the three and six months ended June 30, 2021 and 2020 (unaudited)	4

	Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2021 and 2020 (unaudited)	5

	Consolidated Statements of Changes in Stockholders’ Equity for the three and six months ended June 30, 2021 and 2020 (unaudited)	6

	Consolidated Statements of Cash Flows for the six months ended June 30, 2021 and 2020 (unaudited)	8

	Notes to Consolidated Financial Statements (unaudited)	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	43

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	61

Item 4.	Controls and Procedures	62

	Part II – Other Information

Item 1.	Legal Proceedings	63

Item 1A.	Risk Factors	63

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	63

Item 3.	Defaults Upon Senior Securities	63

Item 4.	Mine Safety Disclosures	64

Item 5.	Other Information	64

Item 6.	Exhibits	65

Signatures		66

Part I — Financial Information

Item 1. Financial Statements

Hanmi Financial Corporation and Subsidiaries

Consolidated Balance Sheets

(in thousands, except share data)

	June 30,			December 31,
	2021			2020
	(Unaudited)
Assets
Cash and due from banks	$	697,789		$	391,849
Securities available for sale, at fair value (amortized cost of $866,204 as of June 30, 2021 and $749,458 as of December 31, 2020)		862,119			753,781
Loans held for sale, at the lower of cost or fair value		36,030			8,568
Loans receivable, net of allowance for credit losses of $83,372 as of June 30, 2021 and $90,426 as of December 31, 2020		4,736,720			4,789,742
Accrued interest receivable		14,397			16,363
Premises and equipment, net		26,225			26,431
Customers' liability on acceptances		1,907			1,319
Servicing assets		6,199			6,212
Goodwill and other intangible assets, net		11,504			11,612
Federal Home Loan Bank ("FHLB") stock, at cost		16,385			16,385
Income tax assets		41,208			42,704
Bank-owned life insurance		54,402			53,894
Prepaid expenses and other assets		73,970			83,028
Total assets	$	6,578,856		$	6,201,888

Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing	$	2,354,671		$	1,898,766
Interest-bearing		3,275,159			3,376,242
Total deposits		5,629,830			5,275,008
Accrued interest payable		1,855			4,564
Bank's liability on acceptances		1,907			1,319
Borrowings		150,000			150,000
Subordinated debentures ($126,800 face amount less unamortized discount and debt issuance costs of $7,557 and $7,828 as of June 30, 2021 and December 31, 2020, respectively)		119,243			118,972
Accrued expenses and other liabilities		73,044			74,981
Total liabilities		5,975,879			5,624,844
Stockholders' equity:
Preferred stock, $0.001 par value; authorized 10,000,000 shares; no shares issued as of June 30, 2021 and December 31, 2020		—			—
Common stock, $0.001 par value; authorized 62,500,000 shares; issued 33,617,311 shares (30,697,652 shares outstanding) as of June 30, 2021 and issued 33,560,801 shares (30,717,835 shares outstanding) as of December 31, 2020		33			33
Additional paid-in capital		579,595			578,360
Accumulated other comprehensive (loss) income, net of tax benefit of $1,226 as of June 30, 2021 and net of tax expense of $1,247 as of December 31, 2020		(2,859	)		3,076
Retained earnings		146,651			114,621
Less treasury stock; 2,919,659 shares as of June 30, 2021 and 2,842,966 shares as of December 31, 2020		(120,443	)		(119,046	)
Total stockholders' equity		602,977			577,044
Total liabilities and stockholders' equity	$	6,578,856		$	6,201,888

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,
	2021			2020		2021			2020
Interest and dividend income:
Interest and fees on loans receivable	$	52,785		$	52,230	$	103,400		$	106,878
Interest on securities		1,404			3,225		2,544			6,880
Dividends on FHLB stock		242			203		448			492
Interest on deposits in other banks		176			78		272			411
Total interest and dividend income		54,607			55,736		106,664			114,661
Interest expense:
Interest on deposits		3,003			8,889		6,953			21,631
Interest on borrowings		447			760		933			1,256
Interest on subordinated debentures		1,585			1,645		3,204			3,357
Total interest expense		5,035			11,294		11,090			26,244
Net interest income before credit loss expense		49,572			44,442		95,574			88,417
Credit loss (recovery) expense		(3,327	)		24,594		(1,217	)		40,333
Net interest income after credit loss (recovery) expense		52,899			19,848		96,791			48,084
Noninterest income:
Service charges on deposit accounts		2,344			2,032		4,599			4,432
Trade finance and other service charges and fees		1,259			961		2,280			1,948
Gain on sale of Small Business Administration ("SBA") loans		3,508			—		7,633			1,154
Net gain on sales of securities		—			15,712		99			15,712
Other operating income		1,775			2,226		4,081			3,908
Total noninterest income		8,886			20,931		18,692			27,154
Noninterest expense:
Salaries and employee benefits		18,302			14,701		35,122			32,450
Occupancy and equipment		4,602			4,508		9,198			8,983
Data processing		2,915			2,804		5,841			5,473
Professional fees		1,413			1,545		2,860			3,460
Supplies and communications		733			858		1,489			1,639
Advertising and promotion		374			456		732			1,190
Other operating expenses		2,444			2,266		5,074			5,011
Total noninterest expense		30,783			27,138		60,316			58,206
Income before tax		31,002			13,641		55,167			17,032
Income tax expense		8,880			4,466		16,386			5,506
Net income	$	22,122		$	9,175	$	38,781		$	11,526
Basic earnings per share	$	0.72		$	0.30	$	1.26		$	0.38
Diluted earnings per share	$	0.72		$	0.30	$	1.26		$	0.38
Weighted-average shares outstanding:
Basic		30,442,993			30,426,967		30,452,320			30,447,984
Diluted		30,520,456			30,426,967		30,526,120			30,450,231

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

Hanmi Financial Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Unaudited)

(in thousands)

	Three Months Ended June 30,						Six Months Ended June 30,
	2021			2020			2021			2020
Net income	$	22,122		$	9,175		$	38,781		$	11,526
Other comprehensive income (loss), net of tax:
Unrealized gain on securities:
Unrealized holding gain arising during period		3,476			(493	)		(8,309	)		11,431
Less: reclassification adjustment for net gain included in net income		—			(15,712	)		(99	)		(15,712	)
Income tax benefit (expense) related to items of other comprehensive income		(1,042	)		4,673			2,473			1,234
Other comprehensive income (loss), net of tax		2,434			(11,532	)		(5,935	)		(3,047	)
Comprehensive income	$	24,556		$	(2,357	)	$	32,846		$	8,479

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, 2021 and 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, 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 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

Balance at April 1, 2021		33,585,181		(2,902,648	)		30,682,533		$	33	$	578,958	$	(5,293	)	$	128,211		$	(120,087	)	$	581,822
Restricted stock awards, net of forfeitures		32,130		—			32,130			—		—		—			—			—			—
Share-based compensation expense		—		—			—			—		637		—			—			—			637
Restricted stock surrendered due to employee tax liability		—		(17,011	)		(17,011	)		—		—		—			—			(356	)		(356	)
Repurchase of common stock		—		—			—			—		—		—			—						—
Cash dividends declared (common stock, $0.12/share)		—		—			—			—		—		—			(3,682	)		—			(3,682	)
Net income		—		—			—			—		—		—			22,122			—			22,122
Change in unrealized gain on securities available for sale, net of income taxes		—		—			—			—		—		2,434			—			—			2,434
Balance at June 30, 2021		33,617,311		(2,919,659	)		30,697,652		$	33	$	579,595	$	(2,859	)	$	146,651		$	(120,443	)	$	602,977

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, 2021 and 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, 2020		33,475,402		(2,675,778	)		30,799,624		$	33	$	575,816	$	3,382		$	100,552		$	(116,515	)	$	563,268
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

Balance at January 1, 2021		33,560,801		(2,842,966	)		30,717,835		$	33	$	578,360	$	3,076		$	114,621		$	(119,046	)	$	577,044
Restricted stock awards, net of forfeitures		56,510		—			56,510			—		—		—			—			—			—
Share-based compensation expense		—		—			—			—		1,235		—			—			—			1,235
Restricted stock surrendered due to employee tax liability		—		(21,693	)		(21,693	)		—		—		—			—			(451	)		(451	)
Repurchase of common stock		—		(55,000	)		(55,000	)		—		—		—			—			(946	)		(946	)
Cash dividends declared (common stock, $0.22/share)		—		—			—			—		—		—			(6,751	)		—			(6,751	)
Net income		—		—			—			—		—		—			38,781			—			38,781
Change in unrealized gain (loss) on securities available for sale, net of income taxes		—		—			—			—		—		(5,935	)		—			—			(5,935	)
Balance at June 30, 2021		33,617,311		(2,919,659	)		30,697,652		$	33	$	579,595	$	(2,859	)	$	146,651		$	(120,443	)	$	602,977

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,
	2021			2020
Cash flows from operating activities:
Net income	$	38,781		$	11,526
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		7,728			5,018
Share-based compensation expense		1,235			1,395
Credit loss expense		(1,217	)		40,333
Gain on sales of securities		(99	)		(15,712	)
Gain on sales of SBA loans		(7,633	)		(1,154	)
Origination of SBA loans held for sale		(81,302	)		(30,139	)
Proceeds from sales of SBA loans		165,958			19,366
Change in bank-owned life insurance		(508	)		(552	)
Change in prepaid expenses and other assets		4,945			(34,408	)
Change in income tax assets		3,969			4,930
Change in accrued expenses and other liabilities		(1,188	)		23,324
Net cash provided by (used in) operating activities		130,669			23,927
Cash flows from investing activities:
Purchases of securities available for sale		(291,416	)		(615,454	)
Proceeds from matured, called and repayment of securities		162,622			108,444
Proceeds from sales of securities available for sale		8,035			495,566
Purchases of loans receivable		(1,532	)		—
Purchases of premises and equipment		(1,966	)		(2,279	)
Proceeds from disposition of premises and equipment		—			51
Proceeds from sales of other real estate owned ("OREO")		1,425			—
Change in loans receivable, excluding purchases		(48,571	)		(244,973	)
Net cash provided by (used in) investing activities		(171,403	)		(258,645	)
Cash flows from financing activities:
Change in deposits		354,822			510,819
Change in overnight borrowings		—			(15,000	)
Proceeds from borrowings		—			176,808
Cash paid for surrender of vested shares due to employee tax liability		(451	)		(291	)
Repurchase of common stock		(946	)		(2,196	)
Cash dividends paid		(6,751	)		(11,052	)
Net cash provided by (used in) financing activities		346,674			659,088
Net increase (decrease) in cash and due from banks		305,940			424,370
Cash and due from banks at beginning of year		391,849			121,678
Cash and due from banks at end of period	$	697,789		$	546,048

Supplemental disclosures of cash flow information:
Interest paid	$	13,799		$	28,804
Income taxes paid	$	11,511		$	99
Non-cash activities:
Transfer of loans receivable to other real estate owned	$	—		$	85
Income tax benefit (expense) related to items of other comprehensive income	$	2,473		$	1,234
Change in right-of-use asset obtained in exchange for lease liability	$	—		$	17,333

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

Hanmi Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three Months Ended June 30, 2021 and 2020

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, 2021, 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, 2020 (the “2020 Annual Report on Form 10-K”).

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

The outbreak of COVID-19 has resulted in restrictions on travel and 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 financial results will depend on future developments, 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, which are highly uncertain and cannot be predicted. This uncertainty may impact the accuracy of our significant estimates, which includes the allowance for credit losses, the allowance for credit losses related to off-balance sheet items, and the valuation of intangible assets including deferred tax assets, goodwill, and servicing assets.

Descriptions of our significant accounting policies are included in Note 1 - Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements in the 2020 Annual Report on Form 10-K.

Note 2 — Securities

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

			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gain		Loss			Value
	(in thousands)
June 30, 2021
U.S. Treasury securities	$	10,000	$	10	$	—		$	10,010
U.S. government agency and sponsored agency obligations:
Mortgage-backed securities		614,310		320		(3,427	)		611,203
Collateralized mortgage obligations		101,576		255		(380	)		101,451
Debt securities		87,477		4		(416	)		87,065
Total U.S. government agency and sponsored agency obligations		803,363		579		(4,223	)		799,719
Municipal bonds-tax exempt		52,841		—		(451	)		52,390
Total securities available for sale	$	866,204	$	589	$	(4,674	)	$	862,119

December 31, 2020
U.S. Treasury securities	$	9,997	$	135	$	—		$	10,132
U.S. government agency and sponsored agency obligations:
Mortgage-backed securities		515,169		4,260		(188	)		519,241
Collateralized mortgage obligations		133,632		186		(217	)		133,601
Debt securities		90,660		148		(1	)		90,807
Total U.S. government agency and sponsored agency obligations		739,461		4,594		(406	)		743,649
Total securities available for sale	$	749,458	$	4,729	$	(406	)	$	753,781

The amortized cost and estimated fair value of securities as of June 30, 2021 and December 31, 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.

	June 30, 2021				December 31, 2020
	Available for Sale				Available for Sale
	Amortized		Estimated		Amortized		Estimated
	Cost		Fair Value		Cost		Fair Value
	(in thousands)
Within one year	$	13,375	$	13,381	$	13,305	$	13,435
Over one year through five years		82,444		82,176		139,876		140,100
Over five years through ten years		53,202		53,314		25,764		25,768
Over ten years		717,183		713,248		570,513		574,478
Total	$	866,204	$	862,119	$	749,458	$	753,781

The following table summarizes debt securities available-for-sale in an unrealized loss position for which an allowance for credit losses has not been recorded at June 30, 2021 and December 31, 2020, aggregated by major security type and length of time in a continuous unrealized loss position:

	Holding Period
	Less than 12 Months							12 Months or More						Total
	Gross			Estimated		Number		Gross		Estimated		Number		Gross			Estimated		Number
	Unrealized			Fair		of		Unrealized		Fair		of		Unrealized			Fair		of
	Loss			Value		Securities		Loss		Value		Securities		Loss			Value		Securities
	(in thousands, except number of securities)
June 30, 2021
U.S. government agency and sponsored agency obligations:
Mortgage-backed securities	$	(3,427	)	$	433,473		72	$	—	$	—		—	$	(3,427	)	$	433,473		72
Collateralized mortgage obligations		(380	)		54,099		15		—		14		1		(380	)		54,113		16
Debt securities		(416	)		82,061		14		—		—		—		(416	)		82,061		14
Total U.S. government agency and sponsored agency obligations		(4,223	)		569,633		101		—		14		1		(4,223	)		569,647		102
Municipal bonds-tax exempt		(451	)		52,390		13		—		—		—		(451	)		52,390		13
Total	$	(4,674	)	$	622,023		114	$	—	$	14		1	$	(4,674	)	$	622,037		115

December 31, 2020
U.S. government agency and sponsored agency obligations:
Mortgage-backed securities	$	(188	)	$	76,023		10	$	—	$	—		—	$	(188	)	$	76,023		10
Collateralized mortgage obligations		(217	)		97,659		21		—		—		—		(217	)		97,659		21
Debt securities		(1	)		4,999		1		—		—		—		(1	)		4,999		1
Total U.S. government agency and sponsored agency obligations		(406	)		178,681		32		—		—		—		(406	)		178,681		32
Total	$	(406	)	$	178,681		32	$	—	$	—		—	$	(406	)	$	178,681		32

The Company evaluates its available-for-sale securities portfolio for impairment on a quarterly basis. This assessment takes into account the changes in the credit quality of these debt securities since acquisition and the likelihood of a credit loss occurring over the life of the securities. In the event that a credit loss is expected to occur in the future, an allowance is established and a corresponding credit loss is recognized. Based on this analysis, as of June 30, 2021, the Company determined that no credit losses are expected to be realized on the tax-exempt municipal bond portfolio. The remainder of the portfolio consists of U.S. Treasury obligations, U.S. government agency securities, and U.S. government sponsored agency securities, all of which have the backing of the U.S. government, and are therefore not expected to incur credit losses.

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
	(in thousands)
Gross realized gains on sales of securities	$	—	$	15,712	$	99	$	15,712
Gross realized losses on sales of securities		—		—		—		—
Net realized gains on sales of securities	$	—	$	15,712	$	99	$	15,712
Proceeds from sales of securities	$	—	$	495,566	$	8,035	$	495,566

There were no sales of securities during the three months ended June 30, 2021. During the three months ended June 30, 2020, there were $15.7 million in gains resulting from the sale of $495.6 million of securities previously recorded with $15.3 million in accumulated other comprehensive income.

During the six months ended June 30, 2021, there were $99,000 in gains resulting from the sale of $8.0 million of securities previously recorded with $142,000 unrealized gains in accumulated other comprehensive income. During the six months ended June 30, 2020, there were $15.7 million in net gains in earnings resulting from the sale of $495.6 million of securities previously recorded with $15.3 million unrealized gains in accumulated other comprehensive income.

Securities available for sale with market values of $40.5 million and $27.3 million as of June 30, 2021 and December 31, 2020, respectively, were pledged to secure borrowings from the Federal Reserve Bank (“FRB”) Discount Window.

At June 30, 2021, there were no holdings of securities of any one issuer, other than the U.S. government and its agencies in an amount greater than 10 percent of shareholders’ equity.

Note 3 — Loans

Loans Receivable

Loans consisted of the following as of the dates indicated:

	June 30, 2021			December 31, 2020
	(in thousands)
Real estate loans:
Commercial property
Retail	$	828,157		$	824,606
Hospitality		795,651			859,953
Other ⁽¹⁾		1,766,592			1,610,377
Total commercial property loans		3,390,400			3,294,936
Construction		61,614			58,882
Residential/consumer loans		348,730			345,831
Total real estate loans		3,800,744			3,699,649
Commercial and industrial loans		587,729			757,255
Leases receivable		431,619			423,264
Loans receivable		4,820,092			4,880,168
Allowance for credit losses		(83,372	)		(90,426	)
Loans receivable, net	$	4,736,720		$	4,789,742

⁽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.

The Coronavirus Aid, Relief, and Economic Security (“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; and (b) allowing financial institutions to temporarily modify loan terms by deferring loan payments, loan fees, etc. without considering them Troubled Debt Restructurings (“TDRs”).

At June 30, 2021 and December 31, 2020, there were $144.1 million and $295.7 million, respectively, of PPP loans included in commercial and industrial loans in the table above. In addition, at June 30, 2021 and December 31, 2020, there were $72.3 million and $155.6 million, respectively, of loans modified under Section 4013 of the CARES Act.

Accrued interest on loans was $12.9 million and $15.2 million at June 30, 2021 and December 31, 2020, respectively. Accrued interest at June 30, 2021 and December 31, 2020 included unpaid deferred interest receivable for loans currently or previously modified under the CARES Act of $4.1 million and $7.5 million, net of a $680,000 and $1.7 million valuation allowance, respectively.

At June 30, 2021 and December 31, 2020, loans of $2.23 billion and $2.17 billion, respectively, were pledged to secure advances from the FHLB.

Loans Held for Sale

The following is the activity for loans held for sale for the three months ended June 30, 2021 and 2020:

	Real Estate			Commercial and Industrial			Total
	(in thousands)
June 30, 2021
Balance at beginning of period	$	10,930		$	21,744		$	32,674
Originations and transfers		26,185			12,938			39,123
Sales		(24,022	)		(11,738	)		(35,760	)
Principal paydowns and amortization		(1	)		(6	)		(7	)
Balance at end of period	$	13,092		$	22,938		$	36,030

June 30, 2020
Balance at beginning of period	$	—		$	—		$	—
Originations		12,661			5,281			17,942
Sales		—			—			—
Principal paydowns and amortization		—			—			—
Balance at end of period	$	12,661		$	5,281		$	17,942

Loans held for sale was comprised of $22.0 million and $8.6 million of the guaranteed portion of SBA 7(a) loans and $14.1 million and $0 in second draw PPP loans at June 30, 2021 and December 31, 2020, respectively. During the three months ended June 30, 2021, the Company recognized $203,000 of gains on the sale of $9.5 million second draw PPP loans. For the six months ended June 30, 2021, the Company recognized $2.7 million of gains on the sale of $118.1 million second draw PPP loans.

The following is the activity for loans held for sale for the six months ended June 30, 2021 and 2020:

	Real Estate			Commercial and Industrial			Total
	(in thousands)
June 30, 2021
Balance at beginning of period	$	8,042		$	526		$	8,568
Originations and transfers		42,468			38,834			81,302
Sales		(37,417	)		(16,416	)		(53,833	)
Principal payoffs and amortization		(1	)		(6	)		(7	)
Balance at end of period	$	13,092		$	22,938		$	36,030

June 30, 2020
Balance at beginning of period	$	2,943		$	3,077		$	6,020
Originations		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

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, 2021 and 2020:

	Real Estate			Commercial and Industrial			Leases Receivable			Total
	(in thousands)
June 30, 2021
Balance at beginning of period	$	57,762		$	16,387		$	14,243		$	88,392
Less loans charged off		—			271			1,200			1,471
Recoveries on loans receivable previously charged off		(180	)		(174	)		(209	)		(563	)
Provision for credit losses		5,087			(8,231	)		(968	)		(4,112	)
Ending balance	$	63,029		$	8,059		$	12,284		$	83,372
Individually evaluated	$	270		$	1,216		$	3,209		$	4,695
Collectively evaluated	$	62,759		$	6,843		$	9,075		$	78,677

Loans receivable	$	3,800,744		$	587,729		$	431,619		$	4,820,092
Individually evaluated	$	28,832		$	1,639		$	9,112		$	39,583
Collectively evaluated	$	3,771,912		$	586,090		$	422,507		$	4,780,509

June 30, 2020
Balance at beginning of period	$	39,132		$	11,588		$	15,780		$	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		17,279			2,178			1,674			21,131
Ending balance	$	56,418		$	13,388		$	16,524		$	86,330
Individually evaluated	$	2,809		$	123		$	2,262		$	5,194
Collectively evaluated	$	53,609		$	13,265		$	14,262		$	81,136

Loans receivable	$	3,632,432		$	730,399		$	462,811		$	4,825,642
Individually evaluated	$	49,582		$	13,771		$	8,456		$	71,809
Collectively evaluated	$	3,582,850		$	716,628		$	454,355		$	4,753,833

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, 2021 and 2020:

	Real Estate			Commercial and Industrial			Leases Receivable			Total
	(in thousands)
June 30, 2021
Balance at beginning of period	$	51,876		$	21,410		$	17,140			90,426
Less loans charged off		1,509			365			3,102			4,976
Recoveries on loans receivable previously charged off		(453	)		(273	)		(344	)		(1,070	)
Provision for credit losses		12,209			(13,259	)		(2,098	)		(3,148	)
Ending balance	$	63,029		$	8,059		$	12,284		$	83,372
Individually evaluated	$	270		$	1,216		$	3,209		$	4,695
Collectively evaluated	$	62,759		$	6,843		$	9,075		$	78,677

Loans receivable	$	3,800,744		$	587,729		$	431,619		$	4,820,092
Individually evaluated	$	28,832		$	1,639		$	9,112		$	39,583
Collectively evaluated	$	3,771,912		$	586,090		$	422,507		$	4,780,509

June 30, 2020
Balance at beginning of period	$	36,435		$	16,206		$	8,767		$	61,408
Adjustment related to adoption of ASU 2016-13		14,028			(2,497	)		5,902			17,433
Adjusted balance as of January 1, 2020		50,463			13,709			14,669			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		20,032			12,124			3,891			36,047
Ending balance	$	56,418		$	13,388		$	16,524		$	86,330
Individually evaluated	$	2,809		$	123		$	2,262		$	5,194
Collectively evaluated	$	53,609		$	13,265		$	14,262		$	81,136

Loans receivable	$	3,632,432		$	730,399		$	462,811		$	4,825,642
Individually evaluated	$	49,582		$	13,771		$	8,456		$	71,809
Collectively evaluated	$	3,582,850		$	716,628		$	454,355		$	4,753,833

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

	June 30, 2021							December 31, 2020
	Allowance Amount		Total Loans		Percentage of Total Loans			Allowance Amount		Total Loans		Percentage of Total Loans
	(in thousands)
Real estate loans:
Commercial property
Retail	$	4,496	$	828,157		17.2	%	$	4,855	$	824,606		16.9	%
Hospitality		36,166		795,651		16.5	%		28,801		859,953		17.6	%
Other		13,129		1,766,592		36.7	%		13,991		1,610,377		33.0	%
Total commercial property loans		53,791		3,390,400		70.4	%		47,647		3,294,936		67.5	%
Construction		8,489		61,614		1.3	%		2,876		58,882		1.2	%
Residential/consumer loans		749		348,730		7.2	%		1,353		345,831		7.1	%
Total real estate loans		63,029		3,800,744		78.9	%		51,876		3,699,649		75.8	%
Commercial and industrial loans		8,059		587,729		12.2	%		21,410		757,255		15.5	%
Leases receivable		12,284		431,619		8.9	%		17,140		423,264		8.7	%
Total	$	83,372	$	4,820,092		100.0	%	$	90,426	$	4,880,168		100.0	%

The following table represents the amortized cost basis of collateral-dependent loans by class of loans as of June 30, 2021 and December 31, 2020, for which repayment is expected to be obtained through the sale of the underlying collateral.

	June 30, 2021		December 31, 2020
	Amortized Cost		Amortized Cost
	(in thousands)
Real estate loans:
Commercial property
Retail	$	6,135	$	6,330
Hospitality		8,641		20,612
Other ⁽¹⁾		458		8,410
Total commercial property loans		15,234		35,352
Construction		10,046		24,854
Residential/consumer loans		1,702		2,867
Total real estate loans		26,982		63,073
Commercial and industrial loans		—		41
Total	$	26,982	$	63,114

⁽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.

Loan Quality Indicators

As part of the on-going monitoring of the quality of our loans portfolio, we utilize an internal loan grading system to identify credit risk and assign an appropriate grade (from 0 to 8) for each loan in our portfolio. A third-party loan review is performed at least on an annual basis. Additional adjustments are made when determined to be necessary. The loan grade definitions are as follows:

Pass and Pass-Watch: Pass and Pass-Watch loans, grades (0-4), are in compliance with the Bank’s credit policy and regulatory requirements, and do not exhibit any potential or defined weaknesses as defined under “Special Mention,” “Substandard” or “Doubtful.” This category is the strongest level of the Bank’s loan grading system. It consists of all performing loans with no identified credit weaknesses. It includes cash and stock/security secured loans or other investment grade loans.

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

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

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

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

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

Loans by Vintage Year and Risk Rating

	Term Loans
	Amortized Cost Basis by Origination Year ⁽¹⁾
	2021		2020		2019		2018		2017		Prior		Revolving Loans Amortized Cost Basis		Total
	(in thousands)
June 30, 2021
Real estate loans:
Commercial property
Risk Rating
Pass / Pass-Watch	$	473,896	$	815,959	$	498,159	$	448,016	$	316,594	$	644,736	$	51,004	$	3,248,364
Special Mention		—		6,391		16,488		2,052		3,055		48,203		1,120		77,309
Classified		—		—		5,495		21,496		4,595		33,141		—		64,727
Total commercial property		473,896		822,350		520,142		471,564		324,244		726,080		52,124		3,390,400

Construction
Risk Rating
Pass / Pass Watch		9,476		29,345		—		—		—		—		—		38,821
Special Mention		—		—		—		—		—		12,747		—		12,747
Classified		—		—		—		—		—		10,046		—		10,046
Total construction		9,476		29,345		—		—		—		22,793		—		61,614

Residential/consumer loans
Risk Rating
Pass / Pass-Watch		77,142		22,757		254		28,284		104,611		101,458		7,483		341,989
Special Mention		—		—		—		930		379		2,884		—		4,193
Classified		—		—		—		—		2,229		319		—		2,548
Total residential/consumer loans		77,142		22,757		254		29,214		107,219		104,661		7,483		348,730

Total real estate loans
Risk Rating
Pass / Pass-Watch		560,514		868,061		498,413		476,300		421,205		746,194		58,487		3,629,174
Special Mention		—		6,391		16,488		2,982		3,434		63,834		1,120		94,249
Classified		—		—		5,495		21,496		6,824		43,506		—		77,321
Total real estate loans		560,514		874,452		520,396		500,778		431,463		853,534		59,607		3,800,744

Commercial and industrial loans:
Risk Rating
Pass / Pass-Watch		119,307		205,706		39,765		19,031		13,969		10,664		128,019		536,461
Special Mention		429		3,446		4,685		8,038		8,624		55		2,303		27,580
Classified		—		—		14,571		205		553		6,317		2,042		23,688
Total commercial and industrial loans		119,736		209,152		59,021		27,274		23,146		17,036		132,364		587,729

Leases receivable:
Risk Rating
Pass / Pass-Watch		103,420		97,760		132,502		67,887		19,069		1,869		—		422,507
Special Mention		—		—		—		—		—		—		—		—
Classified		—		502		5,541		2,015		636		418		—		9,112
Total leases receivable		103,420		98,262		138,043		69,902		19,705		2,287		—		431,619

Total loans receivable:
Risk Rating
Pass / Pass-Watch		783,241		1,171,527		670,680		563,218		454,243		758,727		186,506		4,588,142
Special Mention		429		9,837		21,173		11,020		12,058		63,889		3,423		121,829
Classified		—		502		25,607		23,716		8,013		50,241		2,042		110,121
Total loans receivable	$	783,670	$	1,181,866	$	717,460	$	597,954	$	474,314	$	872,857	$	191,971	$	4,820,092

	Term Loans
	Amortized Cost Basis by Origination Year ⁽¹⁾
	2020		2019		2018		2017		2016		Prior		Revolving Loans Amortized Cost Basis		Total

December 31, 2020
Real estate loans:
Commercial property
Risk Rating
Pass / Pass-Watch	$	920,876	$	513,962	$	479,221	$	343,659	$	418,361	$	459,367	$	31,283	$	3,166,729
Special Mention		13,680		2,484		8,630		1,671		14,971		11,907		—		53,343
Classified		—		3,528		7,303		4,712		21,351		37,840		130		74,864
Total commercial property		934,556		519,974		495,154		350,042		454,683		509,114		31,413		3,294,936

Construction
Risk Rating
Pass / Pass-Watch		33,415		613		—		—		—		—		—		34,028
Special Mention		—		—		—		—		—		—		—		—
Classified		—		—		—		—		24,854		—		—		24,854
Total construction		33,415		613		—		—		24,854		—		—		58,882

Residential/consumer loans
Risk Rating
Pass / Pass-Watch		27,997		962		37,123		127,987		82,124		54,003		7,353		337,549
Special Mention		—		—		930		829		537		2,782		—		5,078
Classified		—		—		—		2,259		301		644		—		3,204
Total residential/consumer loans		27,997		962		38,053		131,075		82,962		57,429		7,353		345,831

Total real estate loans
Risk Rating
Pass / Pass-Watch		982,288		515,537		516,344		471,646		500,485		513,370		38,636		3,538,306
Special Mention		13,680		2,484		9,560		2,500		15,508		14,689		—		58,421
Classified		—		3,528		7,303		6,971		46,506		38,484		130		102,922
Total real estate loans		995,968		521,549		533,207		481,117		562,499		566,543		38,766		3,699,649

Commercial and industrial loans:
Risk Rating
Pass / Pass-Watch		406,486		73,159		54,110		17,834		4,464		9,910		146,722		712,685
Special Mention		6,950		4,509		4,436		1,110		31		1,074		447		18,557
Classified		—		890		5,115		9,465		4,380		1,519		4,644		26,013
Total commercial and industrial loans		413,436		78,558		63,661		28,409		8,875		12,503		151,813		757,255

Leases receivable:
Risk Rating
Pass / Pass-Watch		113,712		165,242		91,408		30,405		10,096		1,167		—		412,030
Special Mention		—		—		—		—		—		—		—		—
Classified		452		5,728		3,137		876		804		237		—		11,234
Total leases receivable		114,164		170,970		94,545		31,281		10,900		1,404		—		423,264

Total loans receivable:
Risk Rating
Pass / Pass-Watch		1,502,486		753,938		661,862		519,885		515,045		524,447		185,358		4,663,021
Special Mention		20,630		6,993		13,996		3,610		15,539		15,763		447		76,978
Classified		452		10,146		15,555		17,312		51,690		40,240		4,774		140,169
Total loans receivable	$	1,523,568	$	771,077	$	691,413	$	540,807	$	582,274	$	580,450	$	190,579	$	4,880,168

⁽¹⁾	Includes extensions, renewals, or modifications of credit contracts, which consist of a new credit decision. Certain prior period amounts have been reclassified to conform to current period presentation.

Loans by Vintage Year and Payment Performance

	Term Loans
	Amortized Cost Basis by Origination Year ⁽¹⁾
	2021		2020		2019		2018		2017		Prior		Revolving Loans Amortized Cost Basis		Total
	(in thousands)
June 30, 2021
Real estate loans:
Commercial property
Payment performance
Performing	$	473,896	$	822,350	$	520,142	$	471,543	$	321,945	$	711,316	$	52,124	$	3,373,316
Nonperforming		—		—		—		21		2,299		14,764		—		17,084
Total commercial property		473,896		822,350		520,142		471,564		324,244		726,080		52,124		3,390,400

Construction
Payment performance
Performing		9,476		29,345		—		—		—		12,747		—		51,568
Nonperforming		—		—		—		—		—		10,046		—		10,046
Total construction		9,476		29,345		—		—		—		22,793		—		61,614

Residential/consumer loans
Payment performance
Performing		77,142		22,757		254		29,214		105,836		104,342		7,483		347,028
Nonperforming		—		—		—		—		1,383		319		—		1,702
Total residential/consumer loans		77,142		22,757		254		29,214		107,219		104,661		7,483		348,730

Total real estate loans
Payment performance
Performing		560,514		874,452		520,396		500,757		427,781		828,405		59,607		3,771,912
Nonperforming		—		—		—		21		3,682		25,129		—		28,832
Total real estate loans		560,514		874,452		520,396		500,778		431,463		853,534		59,607		3,800,744

Commercial and industrial loans:
Payment performance
Performing		119,736		209,152		58,200		23,371		14,078		16,753		132,364		573,654
Nonperforming		—		—		821		3,903		9,068		283		—		14,075
Total commercial and industrial loans		119,736		209,152		59,021		27,274		23,146		17,036		132,364		587,729

Leases receivable:
Payment performance
Performing		103,420		97,760		132,502		67,887		19,069		1,869		—		422,507
Nonperforming		—		502		5,541		2,015		636		418		—		9,112
Total leases receivable		103,420		98,262		138,043		69,902		19,705		2,287		—		431,619