hafc-10q_20220630.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, 2022

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

For the Transition Period From To

Commission File Number: 000-30421

HANMI FINANCIAL CORPORATION

(Exact Name of Registrant as Specified in its Charter)

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

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

(213) 382-2200

(Registrant’s Telephone Number, Including Area Code)

Not Applicable

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

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

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock, $0.001 par value

HAFC

Nasdaq Global Select Market

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

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

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

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

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

As of August 2, 2022, there were 30,484,719 outstanding shares of the Registrant’s Common Stock.

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

Three Months Ended June 30, 2022

Table of Contents


	Part I – Financial Information

Item 1.	Financial Statements	3

	Consolidated Balance Sheets at June 30, 2022 (unaudited) and December 31, 2021	3

	Consolidated Statements of Income for the three and six months ended June 30, 2022 and 2021 (unaudited)	4

	Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2022 and 2021 (unaudited)	5

	Consolidated Statements of Changes in Stockholders’ Equity for the three and six months ended June 30, 2022 and 2021 (unaudited)	6

	Consolidated Statements of Cash Flows for the six months ended June 30, 2022 and 2021 (unaudited)	8

	Notes to Consolidated Financial Statements (unaudited)	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	40

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	59

Item 4.	Controls and Procedures	59

	Part II – Other Information

Item 1.	Legal Proceedings	60

Item 1A.	Risk Factors	60

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	60

Item 3.	Defaults Upon Senior Securities	60

Item 4.	Mine Safety Disclosures	60

Item 5.	Other Information	60

Item 6.	Exhibits	61

Signatures		62

Part I — Financial Information

Item 1. Financial Statements

Hanmi Financial Corporation and Subsidiaries

Consolidated Balance Sheets

(in thousands, except share data)

	June 30,			December 31,
	2022			2021
	(Unaudited)
Assets
Cash and due from banks	$	217,237		$	608,965
Securities available for sale, at fair value (amortized cost of $955,318 and $922,654 as of June 30, 2022 and December 31, 2021, respectively)		860,221			910,790
Loans held for sale, at the lower of cost or fair value		18,528			13,342
Loans receivable, net of allowance for credit losses of $73,067 and $72,557 as of June 30, 2022 and December 31, 2021, respectively		5,582,335			5,078,984
Accrued interest receivable		14,044			11,976
Premises and equipment, net		24,207			24,788
Customers' liability on acceptances		616			—
Servicing assets		7,353			7,080
Goodwill and other intangible assets, net		11,310			11,395
Federal Home Loan Bank ("FHLB") stock, at cost		16,385			16,385
Income tax assets		61,871			44,060
Bank-owned life insurance		55,395			54,905
Prepaid expenses and other assets		86,466			75,917
Total assets	$	6,955,968		$	6,858,587

Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing	$	2,782,737		$	2,574,517
Interest-bearing		3,196,653			3,211,752
Total deposits		5,979,390			5,786,269
Accrued interest payable		986			1,161
Bank's liability on acceptances		616			—
Borrowings		145,000			137,500
Subordinated debentures ($136,800 and $224,100 face amount less unamortized discount and debt issuance costs of $7,687 and $9,094 as of June 30, 2022 and December 31, 2021, respectively)		129,113			215,006
Accrued expenses and other liabilities		82,567			75,234
Total liabilities		6,337,672			6,215,170
Stockholders' equity:
Preferred stock, $0.001 par value; authorized 10,000,000 shares; no shares issued as of June 30, 2022 and December 31, 2021		—			—
Common stock, $0.001 par value; authorized 62,500,000 shares; issued 33,701,784 shares (30,482,990 shares outstanding) and 33,603,839 shares (30,407,261 shares outstanding) as of June 30, 2022 and December 31, 2021, respectively		33			33
Additional paid-in capital		582,018			580,796
Accumulated other comprehensive income (loss), net of tax benefit of $28,529 and $3,421 as of June 30, 2022 and December 31, 2021, respectively		(66,568	)		(8,443	)
Retained earnings		229,135			196,784
Less treasury stock; 3,218,794 shares and 3,196,578 shares as of June 30, 2022 and December 31, 2021, respectively		(126,322	)		(125,753	)
Total stockholders' equity		618,296			643,417
Total liabilities and stockholders' equity	$	6,955,968		$	6,858,587

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

Hanmi Financial Corporation and Subsidiaries

Consolidated Statements of Income (Unaudited)

(in thousands, except share and per share data)

	Three Months Ended June 30,					Six Months Ended June 30,
	2022		2021			2022		2021
Interest and dividend income:
Interest and fees on loans receivable	$	59,855	$	52,785		$	113,779	$	103,400
Interest on securities		2,930		1,404			5,447		2,544
Dividends on FHLB stock		242		242			490		448
Interest on deposits in other banks		193		176			408		272
Total interest and dividend income		63,220		54,607			120,124		106,664
Interest expense:
Interest on deposits		2,457		3,003			4,470		6,953
Interest on borrowings		370		447			707		933
Interest on subordinated debentures		1,349		1,585			4,947		3,204
Total interest expense		4,176		5,035			10,124		11,090
Net interest income before credit loss expense		59,044		49,572			110,000		95,574
Credit loss expense (recovery)		1,596		(3,327	)		220		(1,217	)
Net interest income after credit loss expense (recovery)		57,448		52,899			109,780		96,791
Noninterest income:
Service charges on deposit accounts		2,875		2,344			5,750		4,599
Trade finance and other service charges and fees		1,416		1,259			2,558		2,280
Gain on sale of Small Business Administration ("SBA") loans		2,774		3,508			5,295		7,633
Net gain on sales of securities		—		—			—		99
Other operating income		2,245		1,775			4,226		4,081
Total noninterest income		9,310		8,886			17,829		18,692
Noninterest expense:
Salaries and employee benefits		18,779		18,302			36,496		35,122
Occupancy and equipment		4,597		4,602			9,243		9,198
Data processing		3,114		2,915			6,351		5,841
Professional fees		1,231		1,413			2,661		2,860
Supplies and communications		581		733			1,245		1,489
Advertising and promotion		660		374			1,477		732
Other operating expenses		2,513		2,444			5,694		5,074
Total noninterest expense		31,475		30,783			63,167		60,316
Income before tax		35,283		31,002			64,442		55,167
Income tax expense		10,233		8,880			18,697		16,386
Net income	$	25,050	$	22,122		$	45,745	$	38,781
Basic earnings per share	$	0.82	$	0.72		$	1.50	$	1.26
Diluted earnings per share	$	0.82	$	0.72		$	1.50	$	1.26
Weighted-average shares outstanding:
Basic		30,296,897		30,442,993			30,271,761		30,452,320
Diluted		30,412,348		30,520,456			30,391,273		30,526,120

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

Hanmi Financial Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Unaudited)

(in thousands)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2022			2021			2022			2021
Net income	$	25,050		$	22,122		$	45,745		$	38,781
Other comprehensive income (loss), net of tax:
Unrealized gain on securities:
Unrealized holding (loss) gain arising during period		(31,070	)		3,476			(83,233	)		(8,309	)
Less: reclassification adjustment for net gain included in net income		—			—			—			(99	)
Income tax benefit (expense) related to items of other comprehensive income		9,321			(1,042	)		25,108			2,473
Other comprehensive income (loss), net of tax		(21,749	)		2,434			(58,125	)		(5,935	)
Comprehensive income (loss)	$	3,301		$	24,556		$	(12,380	)	$	32,846

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, 2022 and 2021

(in thousands, except share data)

	Common Stock - Number of Shares								Stockholders' Equity
													Accumulated
											Additional		Other						Treasury			Total
	Shares		Treasury			Shares			Common		Paid-in		Comprehensive			Retained			Stock,			Stockholders'
	Issued		Shares			Outstanding			Stock		Capital		Income (Loss)			Earnings			at Cost			Equity
Balance at 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	)
Cash dividends paid (common stock, $0.12/share)		—		—			—			—		—		—			(3,682	)		—			(3,682	)
Net income		—		—			—			—		—		—			22,122			—			22,122
Change in unrealized gain (loss) 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

Balance at April 1, 2022		33,670,197		(3,201,739	)		30,468,458		$	33	$	581,337	$	(44,819	)	$	210,788		$	(125,887	)	$	621,452
Restricted stock awards, net of forfeitures		31,587		—			31,587			—		—		—			—			—			—
Share-based compensation expense		—		—			—			—		681		—			—			—			681
Restricted stock surrendered due to employee tax liability		—		(17,055	)		(17,055	)		—		—		—			—			(435	)		(435	)
Cash dividends paid (common stock, $0.22/share)		—		—			—			—		—		—			(6,703	)		—			(6,703	)
Net income		—		—			—			—		—		—			25,050			—			25,050
Change in unrealized gain (loss) on securities available for sale, net of income taxes		—		—			—			—		—		(21,749	)		—			—			(21,749	)
Balance at June 30, 2022		33,701,784		(3,218,794	)		30,482,990		$	33	$	582,018	$	(66,568	)	$	229,135		$	(126,322	)	$	618,296

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, 2022 and 2021

(in thousands, except share data)

	Common Stock - Number of Shares								Stockholders' Equity
													Accumulated
											Additional		Other						Treasury			Total
	Shares		Treasury			Shares			Common		Paid-in		Comprehensive			Retained			Stock,			Stockholders'
	Issued		Shares			Outstanding			Stock		Capital		Income (Loss)			Earnings			at Cost			Equity
Balance at January 1, 2021		33,560,801		(2,842,966	)		30,717,835		$	33	$	578,360	$	3,076		$	114,621		$	(119,046	)	$	577,044
Restricted stock awards, net of forfeitures		56,510		—			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 paid (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

Balance at January 1, 2022		33,603,839		(3,196,578	)		30,407,261		$	33	$	580,796	$	(8,443	)	$	196,784		$	(125,753	)	$	643,417
Restricted stock awards, net of forfeitures		97,945		—			97,945			—		—		—			—			—			—
Share-based compensation expense		—		—			—			—		1,222		—			—			—			1,222
Restricted stock surrendered due to employee tax liability		—		(22,216	)		(22,216	)		—		—		—			—			(569	)		(569	)
Cash dividends paid (common stock, $0.44/share)		—		—			—			—		—		—			(13,394	)		—			(13,394	)
Net income		—		—			—			—		—		—			45,745			—			45,745
Change in unrealized gain (loss) on securities available for sale, net of income taxes		—		—			—			—		—		(58,125	)		—			—			(58,125	)
Balance at June 30, 2022		33,701,784		(3,218,794	)		30,482,990		$	33	$	582,018	$	(66,568	)	$	229,135		$	(126,322	)	$	618,296

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,
	2022			2021
Cash flows from operating activities:
Net income	$	45,745		$	38,781
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		9,581			7,728
Share-based compensation expense		1,222			1,235
Credit loss expense (recovery)		220			(1,217	)
Gain on sales of securities		—			(99	)
Gain on sales of SBA loans		(5,295	)		(7,633	)
Origination of SBA loans held for sale		(76,704	)		(81,302	)
Proceeds from sales of SBA loans		76,808			165,958
Change in bank-owned life insurance		(490	)		(508	)
Change in prepaid expenses and other assets		(17,382	)		4,945
Change in income tax assets		7,297			3,969
Change in accrued expenses and other liabilities		9,682			(1,188	)
Net cash provided by (used in) operating activities		50,684			130,669
Cash flows from investing activities:
Purchases of securities available for sale		(95,378	)		(291,416	)
Proceeds from matured, called and repayment of securities		60,167			162,622
Proceeds from sales of securities available for sale		—			8,035
Purchases of loans receivable		(11,030	)		(1,532	)
Purchases of premises and equipment		(1,401	)		(1,966	)
Proceeds from sales of other real estate owned ("OREO")		—			1,425
Change in loans receivable, excluding purchases		(494,128	)		(48,571	)
Net cash provided by (used in) investing activities		(541,770	)		(171,403	)
Cash flows from financing activities:
Change in deposits		193,121			354,822
Proceeds from borrowings		224,820			33,250
Repayment of borrowings		(217,320	)		(33,250	)
Proceeds from redeemed subordinated debentures		12,700			—
Redemption of subordinated debentures		(100,000	)		—
Cash paid for surrender of vested shares due to employee tax liability		(569	)		(451	)
Repurchase of common stock		—			(946	)
Cash dividends paid		(13,394	)		(6,751	)
Net cash provided by (used in) financing activities		99,358			346,674
Net increase (decrease) in cash and due from banks		(391,728	)		305,940
Cash and due from banks at beginning of year		608,965			391,849
Cash and due from banks at end of period	$	217,237		$	697,789
Supplemental disclosures of cash flow information:
Interest paid	$	10,299		$	13,799
Income taxes paid	$	10,500		$	11,511
Non-cash activities:
Income tax benefit related to items of other comprehensive income	$	25,108		$	2,473
Change in right-of-use asset obtained in exchange for lease liability	$	130		$	—

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

Hanmi Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 1 — Organization and Basis of Presentation

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

In management’s opinion, the accompanying unaudited consolidated financial statements of Hanmi Financial and its subsidiaries reflect all adjustments of a normal and recurring nature that are necessary for a fair presentation of the results for the interim periods ended June 30, 2022, but are not necessarily indicative of the results that will be reported for the entire year or any other interim period. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted. The unaudited consolidated financial statements are prepared in conformity with GAAP and in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission. The interim information should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Annual Report on Form 10-K”).

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

The extent to which the COVID-19 pandemic may impact business activity or financial results will depend on future developments, including new 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 2021 Annual Report on Form 10-K.

Note 2 — Securities

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

			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gain		Loss			Value
	(in thousands)
June 30, 2022
U.S. Treasury securities	$	23,948	$	—	$	(1,009	)	$	22,939
U.S. government agency and sponsored agency obligations:
Mortgage-backed securities		617,020		66		(63,330	)		553,756
Collateralized mortgage obligations		99,314		—		(8,584	)		90,730
Debt securities		136,387		—		(8,553	)		127,834
Total U.S. government agency and sponsored agency obligations		852,721		66		(80,467	)		772,320
Municipal bonds-tax exempt		78,649		—		(13,687	)		64,962
Total securities available for sale	$	955,318	$	66	$	(95,163	)	$	860,221

December 31, 2021
U.S. Treasury securities	$	15,457	$	1	$	(61	)	$	15,397
U.S. government agency and sponsored agency obligations:
Mortgage-backed securities		615,393		18		(7,906	)		607,505
Collateralized mortgage obligations		95,153		41		(1,590	)		93,604
Debt securities		117,499		—		(1,603	)		115,896
Total U.S. government agency and sponsored agency obligations		828,045		59		(11,099	)		817,005
Municipal bonds-tax exempt		79,152		117		(881	)		78,388
Total securities available for sale	$	922,654	$	177	$	(12,041	)	$	910,790

The amortized cost and estimated fair value of securities as of June 30, 2022 and December 31, 2021, by contractual or expected maturity, are shown below. Collateralized mortgage obligations are included in the table shown below based on their expected maturities. All other securities are included based on their contractual maturities.

	June 30, 2022				December 31, 2021
	Available for Sale				Available for Sale
	Amortized		Estimated		Amortized		Estimated
	Cost		Fair Value		Cost		Fair Value
	(in thousands)
Within one year	$	6,663	$	6,532	$	1,103	$	1,108
Over one year through five years		159,129		149,461		126,483		125,069
Over five years through ten years		38,830		36,105		51,338		50,770
Over ten years		750,696		668,123		743,730		733,843
Total	$	955,318	$	860,221	$	922,654	$	910,790

The following table summarizes debt securities available-for-sale in an unrealized loss position for which an allowance for credit losses has not been recorded at June 30, 2022 and December 31, 2021, aggregated by major security type and length of time in a continuous unrealized loss position:

	Holding Period
	Less than 12 Months							12 Months or More							Total
	Gross			Estimated		Number		Gross			Estimated		Number		Gross			Estimated		Number
	Unrealized			Fair		of		Unrealized			Fair		of		Unrealized			Fair		of
	Loss			Value		Securities		Loss			Value		Securities		Loss			Value		Securities
	(in thousands, except number of securities)
June 30, 2022
U.S. Treasury securities	$	(1,009	)	$	22,940		8	$	—		$	—		—	$	(1,009	)	$	22,940		8
U.S. government agency and sponsored agency obligations:
Mortgage-backed securities		(40,268	)		381,684		89		(23,062	)		166,953		39		(63,330	)		548,637		128
Collateralized mortgage obligations		(5,762	)		71,244		22		(2,822	)		19,485		6		(8,584	)		90,729		28
Debt securities		(6,276	)		98,611		20		(2,277	)		29,223		6		(8,553	)		127,834		26
Total U.S. government agency and sponsored agency obligations		(52,306	)		551,539		131		(28,161	)		215,661		51		(80,467	)		767,200		182
Municipal bonds-tax exempt		(7,417	)		36,941		11		(6,270	)		28,021		8		(13,687	)		64,962		19
Total	$	(60,732	)	$	611,420		150	$	(34,431	)	$	243,682		59	$	(95,163	)	$	855,102		209

December 31, 2021
U.S. Treasury securities	$	(61	)	$	8,391		2	$	—		$	—		—	$	(61	)	$	8,391		2
U.S. government agency and sponsored agency obligations:
Mortgage-backed securities		(6,252	)		535,610		102		(1,654	)		59,457		11		(7,906	)		595,067		113
Collateralized mortgage obligations		(1,256	)		76,894		16		(334	)		12,548		3		(1,590	)		89,442		19
Debt securities		(1,503	)		110,996		21		(100	)		4,900		1		(1,603	)		115,896		22
Total U.S. government agency and sponsored agency obligations		(9,011	)		723,500		139		(2,088	)		76,905		15		(11,099	)		800,405		154
Municipal bonds-tax exempt		(881	)		68,548		17		—					—		(881	)		68,548		17
Total	$	(9,953	)	$	800,439		158	$	(2,088	)	$	76,905		15	$	(12,041	)	$	877,344		173

The Company evaluates its available-for-sale securities portfolio for impairment on a quarterly basis. This assessment takes into account the changes in the credit quality of these debt securities since acquisition and the likelihood of a credit loss occurring over the life of the securities. In the event that a credit loss is expected to occur in the future, an allowance is established and a corresponding credit loss is recognized. Based on this analysis, as of June 30, 2022, the Company determined that no credit losses are expected to be realized on the tax-exempt municipal bond portfolio. The remainder of the portfolio consists of U.S. Treasury obligations, U.S. government agency securities, and U.S. government sponsored agency securities, all of which have the backing of the U.S. government, and are therefore not expected to incur credit losses.

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

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2022		2021		2022		2021
	(in thousands)
Gross realized gains on sales of securities	$	—	$	—	$	—	$	99
Gross realized losses on sales of securities		—		—		—		—
Net realized gains on sales of securities	$	—	$	—	$	—	$	99
Proceeds from sales of securities	$	—	$	—	$	—	$	8,035

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

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

Securities available for sale with market values of $27.3 million and $34.7 million as of June 30, 2022 and December 31, 2021, respectively, were pledged to secure borrowings from the Federal Reserve Bank (“FRB”) Discount Window.

At June 30, 2022, there were no holdings of securities of any one issuer, other than the U.S. government and its agencies in an amount greater than 10 percent of shareholders’ equity.

Note 3 — Loans

Loans Receivable

Loans consisted of the following as of the dates indicated:

	June 30, 2022			December 31, 2021
	(in thousands)
Real estate loans:
Commercial property
Retail	$	1,071,379		$	970,134
Hospitality		651,586			717,692
Other ⁽¹⁾		2,011,727			1,919,033
Total commercial property loans		3,734,692			3,606,859
Construction		94,882			95,006
Residential ⁽²⁾		521,576			400,546
Total real estate loans		4,351,150			4,102,411
Commercial and industrial loans		766,894			561,831
Equipment financing agreements		537,358			487,299
Loans receivable		5,655,402			5,151,541
Allowance for credit losses		(73,067	)		(72,557	)
Loans receivable, net	$	5,582,335		$	5,078,984

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

⁽²⁾	Includes $2.7 million of home equity loans and lines, and $5.9 million of personal loans.

At June 30, 2022 and December 31, 2021, PPP loans of $1.1 million and $3.0 million, respectively, were included in commercial and industrial loans in the table above.

Accrued interest on loans was $12.0 million and $10.1 million at June 30, 2022 and December 31, 2021, respectively.

At June 30, 2022 and December 31, 2021, loans of $2.45 billion and $2.30 billion, respectively, were pledged to secure advances from the FHLB.

Loans Held for Sale

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

	Real Estate			Commercial and Industrial			Total
	(in thousands)
June 30, 2022
Balance at beginning of period	$	11,825		$	3,792		$	15,617
Originations and transfers		29,531			15,320			44,851
Sales		(30,380	)		(11,557	)		(41,937	)
Principal paydowns and amortization		—			(3	)		(3	)
Balance at end of period	$	10,976		$	7,552		$	18,528

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

Loans held for sale was comprised of $18.5 million and $13.3 million of the guaranteed portion of SBA 7(a) loans at June 30, 2022 and December 31, 2021, respectively. All second draw PPP loans were sold by the third quarter of 2021. For the three and six months ended June 30, 2021, the Company recognized $0.2 million and $2.7 million, respectively, of gains on the sale of $9.5 million and $118.1 million, respectively, of second draw PPP loans.

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

	Real Estate			Commercial and Industrial			Total
	(in thousands)
June 30, 2022
Balance at beginning of period	$	6,954		$	6,388		$	13,342
Originations and transfers		49,695			27,009			76,704
Sales		(45,673	)		(25,841	)		(71,514	)
Principal payoffs and amortization		—			(4	)		(4	)
Balance at end of period	$	10,976		$	7,552		$	18,528

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

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, 2022 and 2021:

	Real Estate			Commercial and Industrial			Equipment Financing Agreements			Total
	(in thousands)
June 30, 2022
Balance at beginning of period	$	46,355		$	12,944		$	12,213		$	71,512
Less loans charged off		—			21			585			606
Recoveries on loans receivable previously charged off		(64	)		(133	)		(325	)		(522	)
Provision (recovery) for credit losses		(307	)		1,219			727			1,639
Ending balance	$	46,112		$	14,275		$	12,680		$	73,067

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 (recovery) for credit losses		5,087			(8,231	)		(968	)		(4,112	)
Ending balance	$	63,029		$	8,059		$	12,284		$	83,372

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, 2022 and 2021:

	Real Estate			Commercial and Industrial			Equipment Financing Agreements			Total
	(in thousands)
June 30, 2022
Balance at beginning of period	$	48,890		$	12,418		$	11,249			72,557
Less loans charged off		530			79			832			1,441
Recoveries on loans receivable previously charged off		(259	)		(451	)		(747	)		(1,457	)
Provision (recovery) for credit losses		(2,507	)		1,485			1,516			494
Ending balance	$	46,112		$	14,275		$	12,680		$	73,067

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 (recovery) for credit losses		12,209			(13,259	)		(2,098	)		(3,148	)
Ending balance	$	63,029		$	8,059		$	12,284		$	83,372

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, 2022										December 31, 2021
	Allowance Amount		Percentage of Total Allowance			Total Loans		Percentage of Total Loans			Allowance Amount		Percentage of Total Allowance			Total Loans		Percentage of Total Loans
	(dollars in thousands)
Real estate loans:
Commercial property
Retail	$	7,889		10.8	%	$	1,071,379		18.9	%	$	6,579		9.1	%	$	970,134		18.8	%
Hospitality		16,935		23.2	%		651,586		11.5	%		22,670		31.2	%		717,692		13.9	%
Other		16,832		23.0	%		2,011,727		35.6	%		15,065		20.8	%		1,919,033		37.3	%
Total commercial property loans		41,656		57.0	%		3,734,692		66.0	%		44,314		61.1	%		3,606,859		70.0	%
Construction		3,915		5.4	%		94,882		1.7	%		4,078		5.6	%		95,006		1.8	%
Residential		541		0.7	%		521,576		9.2	%		498		0.7	%		400,546		7.8	%
Total real estate loans		46,112		63.1	%		4,351,150		76.9	%		48,890		67.4	%		4,102,411		79.6	%
Commercial and industrial loans		14,275		19.5	%		766,894		13.6	%		12,418		17.1	%		561,831		10.9	%
Equipment financing agreements		12,680		17.4	%		537,358		9.5	%		11,249		15.5	%		487,299		9.5	%
Total	$	73,067		100.0	%	$	5,655,402		100.0	%	$	72,557		100.0	%	$	5,151,541		100.0	%

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

	June 30, 2022		December 31, 2021
	Amortized Cost		Amortized Cost
	(in thousands)
Real estate loans:
Commercial property
Retail	$	1,647	$	1,917
Hospitality		—		—
Other ⁽¹⁾		1,409		499
Total commercial property loans		3,056		2,416
Residential		1,300		982
Total real estate loans		4,356		3,398
Total	$	4,356	$	3,398

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

Loan Quality Indicators

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

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

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

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

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

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

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

Loans by Vintage Year and Risk Rating

	Term Loans
	Amortized Cost Basis by Origination Year ⁽¹⁾
	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis			Total
	(in thousands)
June 30, 2022
Real estate loans:
Commercial property
Risk Rating
Pass / Pass-Watch	$	879,948	$	946,844	$	647,528	$	435,041	$	335,270	$	340,079	$	40,419		$	3,625,129
Special Mention		—		—		18,260		9,665		21,604		15,029		1,702			66,260
Classified		855		—		—		5,846		15,406		21,196		—			43,303
Total commercial property		880,803		946,844		665,788		450,552		372,280		376,304		42,121			3,734,692

Construction
Risk Rating
Pass / Pass-Watch		27,800		67,082		—		—		—		—		—			94,882
Special Mention		—		—		—		—		—		—		—			—
Classified		—		—		—		—		—		—		—			—
Total construction		27,800		67,082		—		—		—		—		—			94,882

Residential
Risk Rating
Pass / Pass-Watch		171,190		181,418		13,869		239		15,061		131,140		7,315			520,232
Special Mention		—		—		351		—		—		44		—			395
Classified		—		—		—		—		—		949		—			949
Total residential		171,190		181,418		14,220		239		15,061		132,133		7,315			521,576

Total real estate loans
Risk Rating
Pass / Pass-Watch		1,078,938		1,195,344		661,397		435,280		350,331		471,219		47,734			4,240,243
Special Mention		—		—		18,611		9,665		21,604		15,073		1,702			66,655
Classified		855		—		—		5,846		15,406		22,145		—			44,252
Total real estate loans		1,079,793		1,195,344		680,008		450,791		387,341		508,437		49,436			4,351,150

Commercial and industrial loans:
Risk Rating
Pass / Pass-Watch		293,422		146,800		48,760		31,896		12,953		15,109		201,245			750,185
Special Mention		—		—		—		13,687		—		112		(1	)		13,798
Classified		—		36		—		94		113		726		1,942			2,911
Total commercial and industrial loans		293,422		146,836		48,760		45,677		13,066		15,947		203,186			766,894

Equipment financing agreements:
Risk Rating
Pass / Pass-Watch		158,217		202,589		61,068		74,023		30,769		4,848		—			531,514
Special Mention		—		—		—		—		—		—		—			—
Classified		—		1,682		480		2,646		903		133		—			5,844
Total equipment financing agreements		158,217		204,271		61,548		76,669		31,672		4,981		—			537,358

Total loans receivable:
Risk Rating
Pass / Pass-Watch		1,530,577		1,544,733		771,225		541,199		394,053		491,176		248,979			5,521,942
Special Mention		—		—		18,611		23,352		21,604		15,185		1,701			80,453
Classified		855		1,718		480		8,586		16,422		23,004		1,942			53,007
Total loans receivable	$	1,531,432	$	1,546,451	$	790,316	$	573,137	$	432,079	$	529,365	$	252,622		$	5,655,402

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

	Term Loans
	Amortized Cost Basis by Origination Year ⁽¹⁾
	2021		2020		2019		2018		2017		Prior		Revolving Loans Amortized Cost Basis			Total

December 31, 2021
Real estate loans:
Commercial property
Risk Rating
Pass / Pass-Watch	$	1,203,197	$	706,470	$	488,250	$	406,288	$	277,680	$	384,064	$	41,413		$	3,507,362
Special Mention		—		18,869		7,593		—		6,999		16,879		1,703			52,043
Classified		—		—		5,450		17,247		2,965		21,792		—			47,454
Total commercial property		1,203,197		725,339		501,293		423,535		287,644		422,735		43,116			3,606,859

Construction
Risk Rating
Pass / Pass-Watch		73,808		631		—		—		—		—		—			74,439
Special Mention		—		—		—		—		—		20,567		—			20,567
Classified		—		—		—		—		—		—		—			—
Total construction		73,808		631		—		—		—		20,567		—			95,006

Residential
Risk Rating
Pass / Pass-Watch		194,948		16,975		247		19,813		73,567		82,076		8,381			396,007
Special Mention		—		—		—		930		406		2,221		—			3,557
Classified		—		—		—		—		965		17		—			982
Total residential		194,948		16,975		247		20,743		74,938		84,314		8,381			400,546

Total real estate loans
Risk Rating
Pass / Pass-Watch		1,471,953		724,076		488,497		426,101		351,247		466,140		49,794			3,977,808
Special Mention		—		18,869		7,593		930		7,405		39,667		1,703			76,167
Classified		—		—		5,450		17,247		3,930		21,809		—			48,436
Total real estate loans		1,471,953		742,945		501,540		444,278		362,582		527,616		51,497			4,102,411

Commercial and industrial loans:
Risk Rating
Pass / Pass-Watch		264,762		55,135		36,937		15,780		10,874		6,016		148,148			537,652
Special Mention		—		274		13,989		—		67		4,802		(5	)		19,127
Classified		—		3		708		145		19		886		3,291			5,052
Total commercial and industrial loans		264,762		55,412		51,634		15,925		10,960		11,704		151,434			561,831

Equipment financing agreements:
Risk Rating
Pass / Pass-Watch		239,738		79,400		101,460		47,485		10,683		1,388		—			480,154
Special Mention		—		—		—		—		—		—		—			—
Classified		716		981		3,575		1,328		347		198		—			7,145
Total equipment financing agreements		240,454		80,381		105,035		48,813		11,030		1,586		—			487,299

Total loans receivable:
Risk Rating
Pass / Pass-Watch		1,976,453		858,611		626,894		489,366		372,804		473,544		197,942			4,995,614
Special Mention		—		19,143		21,582		930		7,472		44,469		1,698			95,294
Classified		716		984		9,733		18,720		4,296		22,893		3,291			60,633
Total loans receivable	$	1,977,169	$	878,738	$	658,209	$	509,016	$	384,572	$	540,906	$	202,931		$	5,151,541

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

Loans by Vintage Year and Payment Performance

	Term Loans
	Amortized Cost Basis by Origination Year ⁽¹⁾
	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Total
	(in thousands)
June 30, 2022
Real estate loans:
Commercial property
Payment performance
Performing	$	880,803	$	946,844	$	665,788	$	450,552	$	372,280	$	372,661	$	42,121	$	3,731,049
Nonperforming		—		—		—		—		—		3,643		—		3,643
Total commercial property		880,803		946,844		665,788		450,552		372,280		376,304		42,121		3,734,692

Construction
Payment performance
Performing		27,800		67,082		—		—		—		—		—		94,882
Nonperforming		—		—		—		—		—		—		—		—
Total construction		27,800		67,082		—		—		—		—		—		94,882

Residential
Payment performance
Performing		171,190		181,418		13,869		239		15,061		131,184		7,315		520,276
Nonperforming		—		—		351		—		—		949		—		1,300
Total residential		171,190		181,418		14,220		239		15,061		132,133		7,315		521,576

Total real estate loans
Payment performance
Performing		1,079,793		1,195,344		679,657		450,791		387,341		503,845		49,436		4,346,207
Nonperforming		—		—		351		—		—		4,592		—		4,943
Total real estate loans		1,079,793		1,195,344		680,008		450,791		387,341		508,437		49,436		4,351,150

Commercial and industrial loans:
Payment performance
Performing		293,422		146,800		48,760		45,669		13,066		15,733		203,186		766,636
Nonperforming		—		36		—		8		—		214		—		258
Total commercial and industrial loans		293,422		146,836		48,760		45,677		13,066		15,947		203,186		766,894

Equipment financing agreements:
Payment performance
Performing		158,217		202,589		61,068		74,023		30,769		4,848		—		531,514
Nonperforming		—		1,682		480		2,646		903		133		—		5,844
Total equipment financing agreements		158,217		204,271		61,548		76,669		31,672		4,981		—		537,358

Total loans receivable:
Payment performance
Performing		1,531,432		1,544,733		789,485		570,483		431,176		524,426		252,622		5,644,357
Nonperforming		—		1,718		831		2,654		903		4,939		—		11,045
Total loans receivable	$	1,531,432	$	1,546,451	$	790,316	$	573,137	$	432,079	$	529,365	$	252,622	$	5,655,402

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

	Term Loans
	Amortized Cost Basis by Origination Year ⁽¹⁾
	2021		2020		2019		2018		2017		Prior		Revolving Loans Amortized Cost Basis		Total

December 31, 2021
Real estate loans:
Commercial property
Payment performance
Performing	$	1,203,197	$	725,339	$	501,293	$	423,515	$	286,935	$	419,464	$	43,116	$	3,602,859
Nonperforming		—		—		—		20		709		3,271		—		4,000
Total commercial property		1,203,197		725,339		501,293		423,535		287,644		422,735		43,116		3,606,859

Construction
Payment performance