Equibles

10-Q

HANMI FINANCIAL CORP (HAFC)

10-Q 2023-11-08 For: 2023-09-30
View Original
Added on April 04, 2026

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended September 30, 2023

or

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

For the Transition Period From To

Commission File Number: 000-30421

HANMI FINANCIAL CORPORATION

(Exact Name of Registrant as Specified in its Charter)

Delaware 95-4788120
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
900 Wilshire Boulevard, Suite 1250
--- ---
Los Angeles, California 90017
(Address of Principal Executive Offices) (Zip Code)

(213) 382-2200

(Registrant’s Telephone Number, Including Area Code)

Not Applicable

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

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

Title of each class Trading<br><br>Symbol(s) Name of each exchange on which registered
Common Stock, $0.001 par value HAFC Nasdaq Global Select Market

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

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

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

Large accelerated filer ☐ Accelerated filer ☒
Non-accelerated filer ☐ Smaller reporting company ☐
Emerging Growth Company ☐

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

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

As of November 1, 2023, there were 30,394,397 outstanding shares of the Registrant’s Common Stock.

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

Three Months Ended September 30, 2023

Table of Contents

Part I – Financial Information
Item 1. Financial Statements 3
Consolidated Balance Sheets at September 30, 2023 (unaudited) and December 31, 2022 3
Consolidated Statements of Income for the three and nine months ended September 30, 2023 and 2022 (unaudited) 4
Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2023 and 2022 (unaudited) 5
Consolidated Statements of Changes in Stockholders’ Equity for thethree andnine months ended September 30, 2023 and 2022 (unaudited) 6
Consolidated Statements of Cash Flows for thenine months ended September 30, 2023 and 2022 (unaudited) 8
Notes to Consolidated Financial Statements (unaudited) 9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 41
Item 3. Quantitative and Qualitative Disclosures About Market Risk 60
Item 4. Controls and Procedures 60
Part II – Other Information
Item 1. Legal Proceedings 61
Item 1A. Risk Factors 61
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities 61
Item 3. Defaults Upon Senior Securities 61
Item 4. Mine Safety Disclosures 61
Item 5. Other Information 61
Item 6. Exhibits 62
Signatures 63

Item 1. Financial Statements

Hanmi Financial Corporation and Subsidiaries

Consolidated Balance Sheets

(in thousands, except share data)

December 31,
2022
Assets
Cash and due from banks 289,006 $ 352,421
Securities available for sale, at fair value (amortized cost of 957,272 and 978,796 as of September 30, 2023 and December 31, 2022, respectively) 817,242 853,838
Loans held for sale, at the lower of cost or fair value 11,767 8,043
Loans receivable, net of allowance for credit losses of 67,313 and 71,523 as of September 30, 2023 and December 31, 2022, respectively 5,953,472 5,895,610
Accrued interest receivable 20,715 18,537
Premises and equipment, net 20,707 22,850
Customers' liability on acceptances 1,386 328
Servicing assets 7,156 7,176
Goodwill and other intangible assets, net 11,131 11,225
Federal Home Loan Bank ("FHLB") stock, at cost 16,385 16,385
Income tax assets 48,039 51,924
Bank-owned life insurance 56,364 55,544
Prepaid expenses and other assets 96,770 84,381
Total assets 7,350,140 $ 7,378,262
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Noninterest-bearing 2,161,238 $ 2,539,602
Interest-bearing 4,098,834 3,628,470
Total deposits 6,260,072 6,168,072
Accrued interest payable 50,286 7,792
Bank's liability on acceptances 1,386 328
Borrowings 162,500 350,000
Subordinated debentures (136,800 and 136,800 face amount less unamortized discount and debt issuance costs of 6,940 and 7,391 as of September 30, 2023 and December 31, 2022, respectively) 129,860 129,409
Accrued expenses and other liabilities 82,677 85,146
Total liabilities 6,686,781 6,740,747
Stockholders’ equity:
Preferred stock, 0.001 par value; authorized 10,000,000 shares; no shares issued as of September 30, 2023 and December 31, 2022 — —
Common stock, 0.001 par value; authorized 62,500,000 shares; issued 33,909,457 shares (30,410,582 shares outstanding) and 33,708,234 shares (30,485,621 shares outstanding) as of September 30, 2023 and December 31, 2022, respectively 34 33
Additional paid-in capital 586,169 583,410
Accumulated other comprehensive loss, net of tax benefit of 40,608 and 35,973 as of September 30, 2023 and December 31, 2022, respectively (99,422 ) (88,985 )
Retained earnings 308,007 269,542
Less treasury stock; 3,498,875 shares and 3,222,613 shares as of September 30, 2023 and December 31, 2022, respectively (131,429 ) (126,485 )
Total stockholders’ equity 663,359 637,515
Total liabilities and stockholders’ equity 7,350,140 $ 7,378,262

All values are in US Dollars.

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

Hanmi Financial Corporation and Subsidiaries

Consolidated Statements of Income (Unaudited)

(in thousands, except share and per share data)

Three Months Ended Nine Months Ended
September 30, September 30,
2023 2022 2023 2022
Interest and dividend income:
Interest and fees on loans receivable $ 85,398 $ 66,976 $ 249,888 $ 180,755
Interest on securities 4,204 3,271 12,356 8,718
Dividends on FHLB stock 317 245 888 735
Interest on deposits in other banks 4,153 958 9,012 1,366
Total interest and dividend income 94,072 71,450 272,144 191,574
Interest expense:
Interest on deposits 36,818 6,567 94,431 11,038
Interest on borrowings 753 349 4,755 1,056
Interest on subordinated debentures 1,646 1,448 4,828 6,394
Total interest expense 39,217 8,364 104,014 18,488
Net interest income before credit loss expense 54,855 63,086 168,130 173,086
Credit loss expense 5,154 563 7,210 783
Net interest income after credit loss expense 49,701 62,523 160,920 172,303
Noninterest income:
Service charges on deposit accounts 2,605 2,996 7,756 8,745
Trade finance and other service charges and fees 1,155 1,132 3,586 3,690
Gain on sale of Small Business Administration ("SBA") loans 1,172 2,250 4,253 7,545
Other operating income 6,296 2,536 11,904 6,763
Total noninterest income 11,228 8,914 27,499 26,743
Noninterest expense:
Salaries and employee benefits 20,361 19,365 61,336 55,861
Occupancy and equipment 4,825 4,736 13,737 13,979
Data processing 3,490 3,352 10,208 9,702
Professional fees 1,568 1,249 4,278 3,909
Supplies and communications 552 710 1,866 1,956
Advertising and promotion 534 1,186 2,114 2,664
Other operating expenses 2,915 2,677 7,777 8,370
Total noninterest expense 34,245 33,275 101,316 96,441
Income before tax 26,684 38,162 87,103 102,605
Income tax expense 7,888 10,993 25,695 29,690
Net income $ 18,796 $ 27,169 $ 61,408 $ 72,915
Basic earnings per share $ 0.62 $ 0.89 $ 2.01 $ 2.39
Diluted earnings per share $ 0.62 $ 0.89 $ 2.01 $ 2.39
Weighted-average shares outstanding:
Basic 30,251,961 30,314,439 30,296,991 30,289,068
Diluted 30,292,872 30,396,762 30,338,678 30,369,538

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

Hanmi Financial Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

(in thousands)

Three Months Ended Nine Months Ended
September 30, September 30,
2023 2022 2023 2022
Net income $ 18,796 $ 27,169 $ 61,408 $ 72,915
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on securities:
Unrealized holding gain (loss) arising during period (20,820 ) (42,135 ) (16,943 ) (125,368 )
Unrealized gain (loss) on securities (20,820 ) (42,135 ) (16,943 ) (125,368 )
Income tax benefit (expense) related to items of other comprehensive income 6,037 12,641 5,187 37,749
Other comprehensive income (loss), net of tax (14,783 ) (29,494 ) (11,756 ) (87,619 )
Reclassification adjustment for (gains) losses included in net earnings — — 1,871 —
Income tax (benefit) expense related to reclassification adjustment — — (552 ) —
Reclassification adjustment for (gains) losses included in net earnings, net of tax — — 1,319 —
Other comprehensive income (loss), net of tax (14,783 ) (29,494 ) (10,437 ) (87,619 )
Total comprehensive income (loss) $ 4,013 $ (2,325 ) $ 50,971 $ (14,704 )

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

Hanmi Financial Corporation and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

For the Three Months Ended September 30, 2023 and 2022

(in thousands, except share data)

Stockholders' Equity
Accumulated
Additional Other Treasury Total
Treasury Shares Common Paid-in Comprehensive Retained Stock, Stockholders'
Shares Outstanding Stock Capital Loss Earnings at Cost Equity
Balance at July 1, 2022 33,701,784 (3,218,794 ) 30,482,990 $ 33 $ 582,018 $ (66,568 ) $ 229,135 $ (126,322 ) $ 618,296
Stock options exercised — 1,050 1,050 — 13 — — — 13
Issuance of awards pursuant to equity incentive plans 4,189 — 4,189 — — — — — —
Share-based compensation expense — — — — 664 — — — 664
Shares surrendered to satisfy tax liability upon vesting of equity awards — (4,225 ) (4,225 ) — — — — (135 ) (135 )
Cash dividends paid (common stock, 0.25/share) — — — — — — (7,620 ) — (7,620 )
Net income — — — — — — 27,169 — 27,169
Change in unrealized gain (loss) on securities available for sale, net of income taxes — — — — — (29,494 ) — — (29,494 )
Balance at September 30, 2022 33,705,973 (3,221,969 ) 30,484,004 $ 33 $ 582,695 $ (96,062 ) $ 248,684 $ (126,457 ) $ 608,893
Balance at July 1, 2023 33,863,421 (3,377,633 ) 30,485,788 $ 33 $ 585,391 $ (84,639 ) $ 296,901 $ (129,126 ) $ 668,560
Issuance of awards pursuant to equity incentive plans 46,036 — 46,036 1 — — — — 1
Share-based compensation expense — — — — 778 — — — 778
Shares surrendered to satisfy tax liability upon vesting of equity awards — (21,242 ) (21,242 ) — — — — (401 ) (401 )
Repurchase of common stock — (100,000 ) (100,000 ) — — — — (1,902 ) (1,902 )
Cash dividends paid (common stock, 0.25/share) — — — — — — (7,690 ) — (7,690 )
Net income — — — — — — 18,796 — 18,796
Change in unrealized gain (loss) on securities available for sale, net of income taxes — — — — — (14,783 ) — — (14,783 )
Balance at September 30, 2023 33,909,457 (3,498,875 ) 30,410,582 $ 34 $ 586,169 $ (99,422 ) $ 308,007 $ (131,429 ) $ 663,359

All values are in US Dollars.

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

Hanmi Financial Corporation and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

For the Nine Months Ended September 30, 2023 and 2022

(in thousands, except share data)

Stockholders' Equity
Accumulated
Additional Other Treasury Total
Treasury Shares Common Paid-in Comprehensive Retained Stock, Stockholders'
Shares Outstanding Stock Capital Loss Earnings at Cost Equity
Balance at January 1, 2022 33,603,839 (3,196,578 ) 30,407,261 $ 33 $ 580,796 $ (8,443 ) $ 196,784 $ (125,753 ) $ 643,417
Stock options exercised — 1,050 1,050 — 13 — — — 13
Issuance of awards pursuant to equity incentive plans 102,134 — 102,134 — — — — — —
Share-based compensation expense — — — — 1,886 — — — 1,886
Shares surrendered to satisfy tax liability upon vesting of equity awards — (26,441 ) (26,441 ) — — — — (704 ) (704 )
Cash dividends paid (common stock, 0.69/share) — — — — — — (21,015 ) — (21,015 )
Net income — — — — — — 72,915 — 72,915
Change in unrealized gain (loss) on securities available for sale, net of income taxes — — — — — (87,619 ) — — (87,619 )
Balance at September 30, 2022 33,705,973 (3,221,969 ) 30,484,004 $ 33 $ 582,695 $ (96,062 ) $ 248,684 $ (126,457 ) $ 608,893
Balance at January 1, 2023 33,708,234 (3,222,613 ) 30,485,621 $ 33 $ 583,410 $ (88,985 ) $ 269,542 $ (126,485 ) $ 637,515
Stock options exercised 50,000 — 50,000 — 821 — — — 821
Issuance of awards pursuant to equity incentive plans 151,223 — 151,223 1 — — — — 1
Share-based compensation expense — — — — 1,938 — — — 1,938
Shares surrendered to satisfy tax liability upon vesting of equity awards — (76,262 ) (76,262 ) — — — — (1,599 ) (1,599 )
Repurchase of common stock — (200,000 ) (200,000 ) — — — — (3,345 ) (3,345 )
Cash dividends paid (common stock, 0.75/share) — — — — — — (22,943 ) — (22,943 )
Net income — — — — — — 61,408 — 61,408
Change in unrealized gain (loss) on securities available for sale, net of income taxes — — — — — (10,437 ) — — (10,437 )
Balance at September 30, 2023 33,909,457 (3,498,875 ) 30,410,582 $ 34 $ 586,169 $ (99,422 ) $ 308,007 $ (131,429 ) $ 663,359

All values are in US Dollars.

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

Hanmi Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

Nine Months Ended September 30,
2023 2022
Cash flows from operating activities:
Net income $ 61,408 $ 72,915
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 5,152 10,430
Amortization of servicing assets - net 1,815 2,033
Share-based compensation expense 1,938 1,886
Credit loss expense 7,210 783
Loss on sales of securities 1,871 —
Gain on sales of SBA loans (4,253 ) (7,545 )
Origination of SBA loans held for sale (74,888 ) (111,915 )
Proceeds from sales of SBA loans 73,496 122,744
Change in bank-owned life insurance (820 ) (736 )
Change in prepaid expenses and other assets (22,644 ) (21,443 )
Change in income tax assets 8,520 15,592
Valuation adjustment on servicing assets (385 ) —
Change in accrued interest payable and other liabilities 41,187 15,646
Net cash provided by (used in) operating activities 99,607 100,390
Cash flows from investing activities:
Purchases of securities available for sale (64,767 ) (132,966 )
Proceeds from matured, called and repayment of securities 74,046 84,669
Proceeds from sales of securities available for sale 8,149 —
Purchases of loans receivable — (11,130 )
Purchases of premises and equipment (330 ) (1,750 )
Proceeds from disposition of premises and equipment 7,020 —
Change in loans receivable, excluding purchases (64,574 ) (641,619 )
Net cash provided by (used in) investing activities (40,456 ) (702,796 )
Cash flows from financing activities:
Change in deposits 92,000 415,107
Change in borrowings (187,500 ) (37,501 )
Redemption of subordinated debentures, net of treasury debentures — (87,300 )
Proceeds from exercise of stock options — 13
Cash paid for employee vested shares surrendered due to employee tax liability (778 ) (704 )
Repurchase of common stock (3,345 ) —
Cash dividends paid (22,943 ) (21,015 )
Net cash provided by (used in) financing activities (122,566 ) 268,600
Net increase (decrease) in cash and due from banks (63,415 ) (333,806 )
Cash and due from banks at beginning of year 352,421 608,965
Cash and due from banks at end of period $ 289,006 $ 275,159
Supplemental disclosures of cash flow information:
Interest paid $ 61,520 $ 17,469
Income taxes paid $ 16,144 $ 12,725
Non-cash activities:
Transfer of loans receivable to other real estate owned $ — $ 117
Income tax benefit (expense) related to items of other comprehensive income $ 4,635 $ 37,749
Change in right-of-use asset obtained in exchange for lease liability $ 8,936 $ 108
Cashless exercise of stock options $ 821 $ —

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

Hanmi Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 1 — Organization and Basis of Presentation

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

In management’s opinion, the accompanying unaudited consolidated financial statements of Hanmi Financial and its subsidiaries reflect all adjustments of a normal and recurring nature that are necessary for a fair presentation of the results for the interim periods ended September 30, 2023, 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. Operating results for the three-month or nine-month period ended September 30, 2023 are not necessarily indicative of the results that may be expected for the year ended December 31, 2023 or for any other period. The interim information should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 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.

Recently Issued Accounting Standards

FASB ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting: On March 12, 2020, the FASB issued ASU 2020-04 to ease the potential burden in accounting for reference rate reform. The amendments in ASU 2020-04 are elective and apply to all entities that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform.

The new guidance provided several optional expedients that reduce costs and complexity of accounting for reference rate reform, including measures to simplify or modify accounting issues resulting from reference rate reform for contract modifications, hedges, and debt securities.

FASB ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848: In March 2021, it was announced LIBOR would cease on June 30, 2023. Because the current relief in Topic 848 may not cover a period of time during which a significant number of modifications may take place, the amendments in this ASU were deferred to December 31, 2024.

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

Accounting Standards Adopted in 2023

FASB ASU 2022-02, Troubled Debt Restructurings ("TDRs") and Vintage Disclosures (Topic 326): The FASB amended the accounting and disclosure requirements for expected credit losses by removing the recognition and measurement guidance on TDRs and enhancing disclosures pertaining to certain loan refinancings and restructurings by creditors made to borrowers experiencing financial difficulty. Additionally, this standard requires disclosure of current-period gross write-offs by year of origination for financing receivables.

The adoption of this standard did not have a material effect on the Company’s operating results or financial condition. See "Note 3 - Loans" to the consolidated financial statements for more details.

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 2022 Annual Report on Form 10-K.

Note 2 — Securities

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

Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
(in thousands)
September 30, 2023
U.S. Treasury securities $ 72,561 $ — $ (1,639 ) $ 70,922
U.S. government agency and sponsored agency obligations:
Mortgage-backed securities - residential 507,922 — (85,196 ) 422,726
Mortgage-backed securities - commercial 60,407 — (14,441 ) 45,966
Collateralized mortgage obligations 98,595 — (12,337 ) 86,258
Debt securities 140,409 — (10,490 ) 129,919
Total U.S. government agency and sponsored agency obligations 807,333 — (122,464 ) 684,869
Municipal bonds-tax exempt 77,378 — (15,927 ) 61,451
Total securities available for sale $ 957,272 $ — $ (140,030 ) $ 817,242
December 31, 2022
U.S. Treasury securities $ 49,690 $ — $ (1,664 ) $ 48,026
U.S. government agency and sponsored agency obligations:
Mortgage-backed securities - residential 540,590 63 (75,501 ) 465,152
Mortgage-backed securities - commercial 61,799 — (10,507 ) 51,292
Collateralized mortgage obligations 98,236 — (12,751 ) 85,485
Debt securities 150,338 — (11,839 ) 138,499
Total U.S. government agency and sponsored agency obligations 850,963 63 (110,598 ) 740,428
Municipal bonds-tax exempt 78,143 — (12,759 ) 65,384
Total securities available for sale $ 978,796 $ 63 $ (125,021 ) $ 853,838

The amortized cost and estimated fair value of securities as of September 30, 2023 and December 31, 2022, by contractual or expected maturity, are shown below. Collateralized mortgage obligations are included in the table shown below based on their expected maturities. All other securities are included based on their contractual maturities.

September 30, 2023 December 31, 2022
Available for Sale Available for Sale
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
(in thousands)
Within one year $ 51,042 $ 50,491 $ 28,665 $ 28,043
Over one year through five years 171,668 159,474 180,322 167,000
Over five years through ten years 75,866 67,227 39,213 35,318
Over ten years 658,696 540,050 730,596 623,477
Total $ 957,272 $ 817,242 $ 978,796 $ 853,838

10

The following table summarizes debt securities available-for-sale in an unrealized loss position for which an allowance for credit losses has not been recorded at September 30, 2023 and December 31, 2022, aggregated by major security type and length of time in a continuous unrealized loss position:

Holding Period
Less than 12 Months 12 Months or More Total
Gross Estimated Number Gross Estimated Number Gross Estimated Number
Unrealized Fair of Unrealized Fair of Unrealized Fair of
Loss Value Securities Loss Value Securities Loss Value Securities
(in thousands, except number of securities)
September 30, 2023
U.S. Treasury securities $ (212 ) $ 42,415 15 $ (1,427 ) $ 28,507 10 $ (1,639 ) $ 70,922 25
U.S. government agency and sponsored agency obligations:
Mortgage-backed securities - residential (533 ) 19,097 9 (84,663 ) 403,629 118 (85,196 ) 422,726 127
Mortgage-backed securities - commercial — — — (14,441 ) 45,966 15 (14,441 ) 45,966 15
Collateralized mortgage obligations (405 ) 22,488 6 (11,933 ) 63,770 24 (12,337 ) 86,258 30
Debt securities (58 ) 10,381 3 (10,432 ) 119,538 25 (10,490 ) 129,919 28
Total U.S. government agency and sponsored agency obligations (996 ) 51,966 18 (121,469 ) 632,903 182 (122,464 ) 684,869 200
Municipal bonds-tax exempt — — — (15,927 ) 61,451 19 (15,927 ) 61,451 19
Total $ (1,208 ) $ 94,381 33 $ (138,823 ) $ 722,861 211 $ (140,030 ) $ 817,242 244
December 31, 2022
U.S. Treasury securities $ (414 ) $ 33,812 14 $ (1,250 ) $ 14,215 4 $ (1,664 ) $ 48,027 18
U.S. government agency and sponsored agency obligations:
Mortgage-backed securities - residential (1,712 ) 36,009 18 (73,789 ) 424,302 105 (75,501 ) 460,311 123
Mortgage-backed securities - commercial (84 ) 4,069 1 (10,423 ) 47,221 14 (10,507 ) 51,290 15
Collateralized mortgage obligations (1,011 ) 23,606 8 (11,740 ) 61,879 20 (12,751 ) 85,485 28
Debt securities (1,103 ) 31,714 8 (10,736 ) 106,785 22 (11,839 ) 138,499 30
Total U.S. government agency and sponsored agency obligations (3,910 ) 95,398 35 (106,688 ) 640,187 161 (110,598 ) 735,585 196
Municipal bonds-tax exempt — — — (12,759 ) 65,385 19 (12,759 ) 65,385 19
Total $ (4,324 ) $ 129,210 49 $ (120,697 ) $ 719,787 184 $ (125,021 ) $ 848,997 233

The Company evaluates its available-for-sale securities portfolio for impairment on a quarterly basis. The Company did not recognize unrealized losses in income because it has the ability and the intent to hold and does not expect to be required to sell these securities until the recovery of their cost basis. The quarterly impairment assessment takes into account the changes in the credit quality of these debt securities since acquisition and the likelihood of a credit loss occurring over the life of the securities. In the event that a credit loss is expected to occur in the future, an allowance is established and a corresponding credit loss is recognized. Based on this analysis, as of September 30, 2023, the Company determined that no credit losses were expected to be realized on the tax-exempt municipal bond portfolio. The remainder of the portfolio consists of U.S. Treasury obligations, U.S. government agency securities, and U.S. government sponsored agency securities, all of which have the backing of the U.S. government, and are therefore not expected to incur credit losses.

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

Three Months Ended Nine Months Ended
September 30, September 30,
2023 2022 2023 2022
(in thousands)
Gross realized gains on sales of securities $ — $ — $ — $ —
Gross realized losses on sales of securities — — (1,871 ) —
Net realized gains (losses) on sales of securities $ — $ — $ (1,871 ) $ —
Proceeds from sales of securities $ — $ — $ 8,149 $ —

During the nine months ended September 30, 2023, there were $1.9 million in net losses in earnings resulting from the sale of $8.1 million of securities previously recorded with $1.7 million unrealized losses in accumulated other comprehensive income.

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

11

Securities available for sale with market values of $24.7 million and $23.4 million as of September 30, 2023 and December 31, 2022, respectively, were pledged to secure borrowings from the Federal Reserve Bank (“FRB”) Discount Window and the Bank Term Funding Program (“BTFP”).

At September 30, 2023, 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% of shareholders’ equity.

Note 3 — Loans

Loans Receivable

Loans consisted of the following as of the dates indicated:

September 30, 2023 December 31, 2022
(in thousands)
Real estate loans:
Commercial property
Retail $ 1,097,650 $ 1,023,608
Hospitality 705,735 646,893
Office 575,319 499,946
Other (1) 1,309,507 1,553,729
Total commercial property loans 3,688,211 3,724,176
Construction 84,804 109,205
Residential (2) 926,326 734,472
Total real estate loans 4,699,341 4,567,853
Commercial and industrial loans (3) 728,792 804,492
Equipment financing agreements 592,652 594,788
Loans receivable 6,020,785 5,967,133
Allowance for credit losses (67,313 ) (71,523 )
Loans receivable, net $ 5,953,472 $ 5,895,610

(1)

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

(2)

Includes $2.0 million and $2.4 million of home equity loans and lines, and $4.2 million and $4.6 million of personal loans at September 30, 2023 and December 31, 2022, respectively.

(3)

At September 30, 2023 and December 31, 2022, Paycheck Protection Program loans were $0.2 million and $0.9 million, respectively.

Accrued interest on loans was $17.7 million and $16.0 million at September 30, 2023 and December 31, 2022, respectively.

At September 30, 2023 and December 31, 2022, loans of $2.41 billion and $1.99 billion, respectively, were pledged to secure advances from the FHLB.

12

Loans Held for Sale

The following is the activity for loans held for sale for the three months ended September 30, 2023 and 2022:

Real Estate Commercial and Industrial Total
(in thousands)
September 30, 2023
Balance at beginning of period $ 5,544 $ 1,749 $ 7,293
Originations and transfers 12,588 13,398 25,986
Sales (11,520 ) (9,490 ) (21,010 )
Principal paydowns and amortization (75 ) (427 ) (502 )
Balance at end of period $ 6,537 $ 5,230 $ 11,767
September 30, 2022
Balance at beginning of period $ 10,976 $ 7,552 $ 18,528
Originations and transfers 23,013 12,198 35,211
Sales (27,493 ) (16,192 ) (43,685 )
Principal paydowns and amortization (6 ) (4 ) (10 )
Balance at end of period $ 6,490 $ 3,554 $ 10,044

Loans held for sale was comprised of $11.8 million and $8.0 million of the guaranteed portion of SBA 7(a) loans at September 30, 2023 and December 31, 2022, respectively.

The following is the activity for loans held for sale for the nine months ended September 30, 2023 and 2022:

Real Estate Commercial and Industrial Total
(in thousands)
September 30, 2023
Balance at beginning of period $ 3,775 $ 4,268 $ 8,043
Originations and transfers 43,468 31,420 74,888
Sales (40,630 ) (30,022 ) (70,652 )
Principal payoffs and amortization (76 ) (436 ) (512 )
Balance at end of period $ 6,537 $ 5,230 $ 11,767
September 30, 2022
Balance at beginning of period $ 6,954 $ 6,388 $ 13,342
Originations and transfers 72,708 39,207 111,915
Sales (73,166 ) (42,033 ) (115,199 )
Principal payoffs and amortization (6 ) (8 ) (14 )
Balance at end of period $ 6,490 $ 3,554 $ 10,044

13

Allowance for Credit Losses

The following table details the information on the allowance for credit losses by portfolio segment as of and for the three months ended September 30, 2023 and 2022:

Real Estate Commercial and Industrial Equipment Financing Agreements Total
(in thousands)
September 30, 2023
Balance at beginning of period $ 43,054 $ 16,028 $ 11,942 71,024
Charge-offs (216 ) (6,323 ) (2,831 ) (9,370 )
Recoveries 50 141 301 492
Provision (recovery) for credit losses 948 1,396 2,823 5,167
Ending balance $ 43,836 $ 11,242 $ 12,235 $ 67,313
September 30, 2022
Balance at beginning of period $ 46,112 $ 14,275 $ 12,680 $ 73,067
Charge-offs (1,356 ) (8 ) (716 ) (2,080 )
Recoveries 373 228 369 970
Provision (recovery) for credit losses 395 381 (1,149 ) (373 )
Ending balance $ 45,524 $ 14,876 $ 11,184 $ 71,584

The following table details the information on the allowance for credit losses by portfolio segment as of and for the nine months ended September 30, 2023 and 2022:

Real Estate Commercial and Industrial Equipment Financing Agreements Total
(in thousands)
September 30, 2023
Balance at beginning of period $ 44,026 $ 15,267 $ 12,230 71,523
Charge-offs (627 ) (6,635 ) (7,052 ) (14,314 )
Recoveries 180 931 1,131 2,242
Provision (recovery) for credit losses 257 1,679 5,926 7,862
Ending balance $ 43,836 $ 11,242 $ 12,235 $ 67,313
September 30, 2022
Balance at beginning of period $ 48,890 $ 12,418 $ 11,249 $ 72,557
Charge-offs (1,886 ) (87 ) (1,548 ) (3,521 )
Recoveries 632 679 1,117 2,428
Provision (recovery) for credit losses (2,112 ) 1,866 366 120
Ending balance $ 45,524 $ 14,876 $ 11,184 $ 71,584

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

September 30, 2023 December 31, 2022
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 $ 10,083 15.0 % $ 1,097,650 18.3 % $ 7,872 11.0 % $ 1,023,608 17.2 %
Hospitality 15,083 22.4 705,735 11.7 13,407 18.7 646,893 10.8
Office 2,884 4.3 575,319 9.6 2,293 3.2 499,946 8.4
Other 8,321 12.3 1,309,507 21.7 13,056 18.3 1,553,729 26.0
Total commercial property loans 36,371 54.0 3,688,211 61.3 36,628 51.2 3,724,176 62.4
Construction 2,594 3.9 84,804 1.4 4,022 5.7 109,205 1.8
Residential 4,871 7.2 926,326 15.4 3,376 4.7 734,472 12.4
Total real estate loans 43,836 65.1 4,699,341 78.1 44,026 61.6 4,567,853 76.6
Commercial and industrial loans 11,242 16.7 728,792 12.1 15,267 21.3 804,492 13.4
Equipment financing agreements 12,235 18.2 592,652 9.8 12,230 17.1 594,788 10.0
Total $ 67,313 100.0 % $ 6,020,785 100.0 % $ 71,523 100.0 % $ 5,967,133 100.0 %

The following table represents the amortized cost basis of collateral-dependent loans by class of loans as of September 30, 2023 and December 31, 2022, for which repayment is expected to be obtained through the sale of the underlying collateral.

14

September 30, 2023 December 31, 2022
Amortized Cost Amortized Cost
(in thousands)
Real estate loans:
Commercial property
Retail $ 1,637 $ 1,930
Hospitality 333 —
Office — —
Other 22 256
Total commercial property loans 1,992 2,186
Residential 3 508
Total real estate loans 1,995 2,694
Commercial and industrial loans 4,847 —
Total $ 6,842 $ 2,694

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 1 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 (1-4), 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.

15

Loans by Vintage Year and Risk Rating

Term Loans
Amortized Cost Basis by Origination Year (1)
2023 2022 2021 2020 2019 Prior Revolving<br>Loans<br>Amortized<br>Cost Basis Total
(in thousands)
September 30, 2023
Real estate loans:
Commercial property
Risk Rating `
Pass / Pass-Watch $ 511,148 $ 1,013,414 $ 863,200 $ 578,433 $ 384,562 $ 264,284 $ 26,171 $ 3,641,212
Special Mention 5,194 4,032 10,141 4,328 715 1,556 1,700 27,666
Classified 4,430 977 4,936 5,606 3,384 19,333
Total commercial property 520,772 1,018,423 878,277 582,761 390,883 269,224 27,871 3,688,211
YTD gross charge-offs — — — 411 — 216 — 627
YTD net charge-offs — — — 407 — 46 — 453
Construction
Risk Rating
Pass / Pass-Watch 38,129 — 18,375 — — — — 56,504
Special Mention — — 28,300 — — — — 28,300
Classified — — — — — — — —
Total construction 38,129 — 46,675 — — — — 84,804
YTD gross charge-offs — — — — — — — —
YTD net charge-offs — — — — — — — —
Residential
Risk Rating
Pass / Pass-Watch 241,830 381,167 160,856 12,791 221 124,047 4,911 925,823
Special Mention — — — — — — 500 500
Classified — — — — — 3 — 3
Total residential 241,830 381,167 160,856 12,791 221 124,050 5,411 926,326
YTD gross charge-offs — — — — — — — —
YTD net charge-offs — — — — — (6 ) — (6 )
Total real estate loans
Risk Rating
Pass / Pass-Watch 791,107 1,394,581 1,042,431 591,224 384,783 388,331 31,082 4,623,539
Special Mention 5,194 4,032 38,441 4,328 715 1,556 2,200 56,466
Classified 4,430 977 4,936 — 5,606 3,387 — 19,336
Total real estate loans 800,731 1,399,590 1,085,808 595,552 391,104 393,274 33,282 4,699,341
YTD gross charge-offs — — — 411 — 216 — 627
YTD net charge-offs — — — 407 — 40 — 447
Commercial and industrial loans:
Risk Rating
Pass / Pass-Watch 142,240 176,815 88,316 33,403 11,156 10,047 240,951 702,928
Special Mention — 16,128 — 104 — 3,775 — 20,007
Classified 378 — — 84 46 210 5,139 5,857
Total commercial and industrial loans 142,618 192,943 88,316 33,591 11,202 14,032 246,090 728,792
YTD gross charge-offs — 17 — — 110 388 6,120 6,635
YTD net charge-offs — 5 (5 ) — 107 (522 ) 6,119 5,704
Equipment financing agreements:
Risk Rating
Pass / Pass-Watch 174,377 234,753 115,310 29,380 25,457 5,434 — 584,711
Special Mention — — — — — — — —
Classified 329 3,630 2,719 167 830 266 — 7,941
Total equipment financing agreements 174,706 238,383 118,029 29,547 26,287 5,700 — 592,652
YTD gross charge-offs 56 3,030 2,732 294 725 215 — 7,052
YTD net charge-offs 56 2,961 2,455 217 335 (103 ) — 5,921
Total loans receivable:
Risk Rating
Pass / Pass-Watch 1,107,724 1,806,149 1,246,057 654,007 421,396 403,812 272,033 5,911,178
Special Mention 5,194 20,160 38,441 4,432 715 5,331 2,200 76,473
Classified 5,137 4,607 7,655 251 6,482 3,863 5,139 33,134
Total loans receivable $ 1,118,055 $ 1,830,916 $ 1,292,153 $ 658,690 $ 428,593 $ 413,006 $ 279,372 $ 6,020,785
YTD gross charge-offs 56 3,047 2,732 705 835 819 6,120 14,314
YTD net charge-offs 56 2,966 2,450 624 442 (585 ) 6,119 12,072

(1)

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

16

Term Loans
Amortized Cost Basis by Origination Year (1)
2022 2021 2020 2019 2018 Prior Revolving<br>Loans<br>Amortized<br>Cost Basis Total
December 31, 2022
Real estate loans:
Commercial property
Risk Rating
Pass / Pass-Watch $ 1,184,361 $ 901,029 $ 600,740 $ 404,786 $ 301,950 $ 207,861 $ 50,877 $ 3,651,604
Special Mention 847 13,384 5,857 7,115 — 6,080 1,701 34,984
Classified — — 412 4,312 12,304 20,560 — 37,588
Total commercial property 1,185,208 914,413 607,009 416,213 314,254 234,501 52,578 3,724,176
Construction
Risk Rating
Pass / Pass-Watch 41,662 67,543 — — — — — 109,205
Special Mention — — — — — — — —
Classified — — — — — — — —
Total construction 41,662 67,543 — — — — — 109,205
Residential
Risk Rating
Pass / Pass-Watch 405,975 173,236 13,102 232 731 134,766 5,422 733,464
Special Mention — — — — — — 500 500
Classified 12 — — — — 496 — 508
Total residential 405,987 173,236 13,102 232 731 135,262 5,922 734,472
Total real estate loans
Risk Rating
Pass / Pass-Watch 1,631,998 1,141,808 613,842 405,018 302,681 342,627 56,299 4,494,273
Special Mention 847 13,384 5,857 7,115 — 6,080 2,201 35,484
Classified 12 — 412 4,312 12,304 21,056 — 38,096
Total real estate loans 1,632,857 1,155,192 620,111 416,445 314,985 369,763 58,500 4,567,853
Commercial and industrial loans:
Risk Rating
Pass / Pass-Watch 368,778 100,537 39,577 24,117 7,342 12,282 205,951 758,584
Special Mention — 9,285 — — 29 102 34,113 43,529
Classified — — 171 1,097 81 391 639 2,379
Total commercial and industrial loans 368,778 109,822 39,748 25,214 7,452 12,775 240,703 804,492
Equipment financing agreements:
Risk Rating
Pass / Pass-Watch 305,249 165,313 46,970 52,133 17,608 1,798 — 589,071
Special Mention — — — — — — — —
Classified 630 2,542 311 1,581 565 88 — 5,717
Total equipment financing agreements 305,879 167,855 47,281 53,714 18,173 1,886 — 594,788
Total loans receivable:
Risk Rating
Pass / Pass-Watch 2,306,025 1,407,658 700,389 481,268 327,631 356,707 262,250 5,841,928
Special Mention 847 22,669 5,857 7,115 29 6,182 36,314 79,013
Classified 642 2,542 894 6,990 12,950 21,535 639 46,192
Total loans receivable $ 2,307,514 $ 1,432,869 $ 707,140 $ 495,373 $ 340,610 $ 384,424 $ 299,203 $ 5,967,133

(1)

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

17

Loans by Vintage Year and Payment Performance

Term Loans
Amortized Cost Basis by Origination Year (1)
2023 2022 2021 2020 2019 Prior Revolving<br>Loans<br>Amortized<br>Cost Basis Total
(in thousands)
September 30, 2023
Real estate loans:
Commercial property
Payment performance
Performing $ 519,135 $ 1,018,423 $ 878,124 $ 582,761 $ 390,800 $ 268,305 $ 27,871 $ 3,685,419
Nonperforming 1,637 — 153 — 83 919 — 2,792
Total commercial property 520,772 1,018,423 878,277 582,761 390,883 269,224 27,871 3,688,211
YTD gross charge-offs — — — 411 — 216 — 627
YTD net charge-offs — — — 407 — 46 — 453
Construction
Payment performance
Performing 38,129 — 46,675 — — — — 84,804
Nonperforming — — — — — — — —
Total construction 38,129 — 46,675 — — — — 84,804
YTD gross charge-offs — — — — — — — —
YTD net charge-offs — — — — — — — —
Residential
Payment performance
Performing 241,830 381,167 160,856 12,791 221 124,047 5,411 926,323
Nonperforming — — — — — 3 — 3
Total residential 241,830 381,167 160,856 12,791 221 124,050 5,411 926,326
YTD gross charge-offs — — — — — — — —
YTD net charge-offs — — — — — (6 ) — (6 )
Total real estate loans
Payment performance
Performing 799,094 1,399,590 1,085,655 595,552 391,021 392,352 33,282 4,696,546
Nonperforming 1,637 — 153 — 83 922 — 2,795
Total real estate loans 800,731 1,399,590 1,085,808 595,552 391,104 393,274 33,282 4,699,341
YTD gross charge-offs — — — 411 — 216 — 627
YTD net charge-offs — — — 407 — 40 — 447
Commercial and industrial loans:
Payment performance
Performing 142,618 192,943 88,316 33,507 11,202 13,919 241,241 723,746
Nonperforming — — — 84 — 113 4,849 5,046
Total commercial and industrial loans 142,618 192,943 88,316 33,591 11,202 14,032 246,090 728,792
YTD gross charge-offs — 17 — — 110 388 6,120 6,635
YTD net charge-offs — 5 (5 ) — 107 (522 ) 6,119 5,704
Equipment financing agreements:
Payment performance
Performing 174,377 234,753 115,310 29,380 25,456 5,434 — 584,710
Nonperforming 329 3,630 2,719 167 831 266 — 7,942
Total equipment financing agreements 174,706 238,383 118,029 29,547 26,287 5,700 — 592,652
YTD gross charge-offs 56 3,030 2,732 294 725 215 — 7,052
YTD net charge-offs 56 2,961 2,455 217 335 (103 ) — 5,921
Total loans receivable:
Payment performance
Performing 1,116,089 1,827,286 1,289,281 658,439 427,679 411,705 274,523 6,005,002
Nonperforming 1,966 3,630 2,872 251 914 1,301 4,849 15,783
Total loans receivable $ 1,118,055 $ 1,830,916 $ 1,292,153 $ 658,690 $ 428,593 $ 413,006 $ 279,372 $ 6,020,785
YTD gross charge-offs 56 3,047 2,732 705 835 819 6,120 14,314
YTD net charge-offs 56 2,966 2,450 624 442 (585 ) 6,119 12,072

(1)

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

18

Term Loans
Amortized Cost Basis by Origination Year (1)
2022 2021 2020 2019 2018 Prior Revolving<br>Loans<br>Amortized<br>Cost Basis Total
December 31, 2022
Real estate loans:
Commercial property
Payment performance
Performing $ 1,185,208 $ 914,413 $ 606,597 $ 416,213 $ 312,324 $ 233,643 $ 52,578 $ 3,720,976
Nonperforming — — 412 — 1,930 858 — 3,200
Total commercial property 1,185,208 914,413 607,009 416,213 314,254 234,501 52,578 3,724,176
Construction
Payment performance
Performing 41,662 67,543 — — — — — 109,205
Nonperforming — — — — — — — —
Total construction 41,662 67,543 — — — — — 109,205
Residential
Payment performance
Performing 405,975 173,236 13,102 232 731 134,766 5,922 733,964
Nonperforming 12 — — — — 496 — 508
Total residential 405,987 173,236 13,102 232 731 135,262 5,922 734,472
Total real estate loans
Payment performance
Performing 1,632,845 1,155,192 619,699 416,445 313,055 368,409 58,500 4,564,145
Nonperforming 12 — 412 — 1,930 1,354 — 3,708
Total real estate loans 1,632,857 1,155,192 620,111 416,445 314,985 369,763 58,500 4,567,853
Commercial and industrial loans:
Payment performance
Performing 368,778 109,822 39,577 25,199 7,452 12,539 240,703 804,070
Nonperforming — — 171 15 — 236 — 422
Total commercial and industrial loans 368,778 109,822 39,748 25,214 7,452 12,775 240,703 804,492
Equipment financing agreements:
Payment performance
Performing 305,249 165,313 46,970 52,133 17,608 1,798 — 589,071
Nonperforming 630 2,542 311 1,581 565 88 — 5,717
Total equipment financing agreements 305,879 167,855 47,281 53,714 18,173 1,886 — 594,788
Total loans receivable:
Payment performance
Performing 2,306,872 1,430,327 706,246 493,777 338,115 382,746 299,203 5,957,286
Nonperforming 642 2,542 894 1,596 2,495 1,678 — 9,847
Total loans receivable $ 2,307,514 $ 1,432,869 $ 707,140 $ 495,373 $ 340,610 $ 384,424 $ 299,203 $ 5,967,133

(1)

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

19

The following is an aging analysis of loans, including loans on nonaccrual status, disaggregated by loan class, as of the dates indicated:

30-59<br>Days<br>Past Due 60-89<br>Days<br>Past Due 90 Days<br>or More<br>Past Due Total<br>Past Due Current Total
(in thousands)
September 30, 2023
Real estate loans:
Commercial property
Retail $ 260 $ — $ — $ 260 $ 1,097,390 $ 1,097,650
Hospitality 153 33 — 186 705,549 705,735
Office — — — — 575,319 575,319
Other 704 — 22 726 1,308,781 1,309,507
Total commercial property loans 1,117 33 22 1,172 3,687,039 3,688,211
Construction — — — — 84,804 84,804
Residential 935 364 3 1,302 925,024 926,326
Total real estate loans 2,052 397 25 2,474 4,696,867 4,699,341
Commercial and industrial loans 384 151 4,849 5,384 723,408 728,792
Equipment financing agreements 6,527 2,195 3,382 12,104 580,548 592,652
Total loans receivable $ 8,963 $ 2,743 $ 8,256 $ 19,962 $ 6,000,823 $ 6,020,785
December 31, 2022
Real estate loans:
Commercial property
Retail $ — $ — $ — $ — $ 1,023,608 $ 1,023,608
Hospitality — — — — 646,893 646,893
Office — — — — 499,946 499,946
Other — 494 — 494 1,553,235 1,553,729
Total commercial property loans — 494 — 494 3,723,682 3,724,176
Construction — — — — 109,205 109,205
Residential 313 804 7 1,124 733,348 734,472
Total real estate loans 313 1,298 7 1,618 4,566,235 4,567,853
Commercial and industrial loans 77 79 — 156 804,336 804,492
Equipment financing agreements 5,825 1,271 2,949 10,045 584,743 594,788
Total loans receivable $ 6,215 $ 2,648 $ 2,956 $ 11,819 $ 5,955,314 $ 5,967,133

20

Nonaccrual Loans and Nonperforming Assets

The following table represents the amortized cost basis of loans on nonaccrual status and loans past due 90 days and still accruing as of September 30, 2023 and December 31, 2022.

September 30, 2023
Nonaccrual Loans<br>With<br>No Allowance for<br>Credit Losses Nonaccrual Loans<br>With<br>Allowance for<br>Credit Losses Loans<br>Past Due<br>90 Days Still<br>Accruing Total<br>Nonperforming<br>Loans
(in thousands)
Real estate loans:
Commercial property
Retail $ 1,849 $ 402 $ — $ 2,251
Hospitality 333 186 — 519
Office — — — —
Other 22 — — 22
Total commercial property loans 2,204 588 — 2,792
Construction — — — —
Residential 3 — — 3
Total real estate loans 2,207 588 — 2,795
Commercial and industrial loans — 5,046 — 5,046
Equipment financing agreements 848 7,094 — 7,942
Total $ 3,055 $ 12,728 $ — $ 15,783
December 31, 2022
Nonaccrual Loans<br>With<br>No Allowance for<br>Credit Losses Nonaccrual Loans<br>With<br>Allowance for<br>Credit Losses Loans<br>Past Due<br>90 Days Still<br>Accruing Total<br>Nonperforming<br>Loans
(in thousands)
Real estate loans:
Commercial property
Retail $ 1,929 $ — $ — $ 1,929
Hospitality — — — —
Office — — — —
Other 540 731 — 1,271
Total commercial property loans 2,469 731 — 3,200
Construction — — — —
Residential 508 — — 508
Total real estate loans 2,977 731 — 3,708
Commercial and industrial loans — 422 — 422
Equipment financing agreements 215 5,502 — 5,717
Total $ 3,192 $ 6,655 $ — $ 9,847

The Company recognized $26,000 and $5,000 of interest income on nonaccrual loans for the three months ended September 30, 2023 and 2022, respectively. Interest income recognized on nonaccrual loans for the nine months ended September 30, 2023 and 2022 was $160,000 and $40,000, respectively.

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

September 30, 2023 December 31, 2022
(in thousands)
Nonaccrual loans $ 15,783 $ 9,847
Loans receivable 90 days or more past due and still accruing — —
Total nonperforming loans receivable 15,783 9,847
Other real estate owned ("OREO") 117 117
Total nonperforming assets $ 15,900 $ 9,964

21

OREO of $0.1 million is included in prepaid expenses and other assets in the accompanying Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022.

Loan Modifications

No loans were modified during the three and nine months ended September 30, 2023 or 2022.

Note 4 — Servicing Assets

The changes in servicing assets for the three and nine months ended September 30, 2023 and 2022, were as follows:

Three Months Ended September 30,
2023 2022
(in thousands)
Balance at beginning of period $ 7,352 $ 7,354
Addition related to sale of SBA loans 396 828
Amortization (592 ) (758 )
Balance at end of period $ 7,156 $ 7,424
Nine Months Ended September 30,
--- --- --- --- --- --- ---
2023 2022
(in thousands)
Balance at beginning of period $ 7,176 $ 7,080
Addition related to sale of SBA loans 1,410 2,377
Amortization (1,815 ) (2,033 )
Change in valuation allowance 385 —
Balance at end of period $ 7,156 $ 7,424

At September 30, 2023 and December 31, 2022, we serviced loans sold to unaffiliated parties of $531.6 million and $523.6 million, respectively. These represented loans that were sold for which the Bank continues to provide servicing. These loans are maintained off-balance sheet and are not included in the loans receivable balance. All of the loans serviced were SBA loans.

The Company recorded servicing fee income of $1.3 million for the three months ended September 30, 2023 and 2022, and $3.9 million and $3.7 million for the nine months ended September 30, 2023 and 2022, 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 $0.6 million and $0.8 million for the three months ended September 30, 2023 and 2022, respectively, and $1.8 million and $2.0 million for the nine months ended September 30, 2023 and 2022, respectively.

The fair value of servicing rights was $7.6 million at September 30, 2023 and was determined using discount rates ranging from 15.4% to 26.8% and prepayment speeds ranging from 11.9% to 18.8%, depending on the stratification of the specific right. The fair value of servicing rights was $7.1 million at December 31, 2022 and was determined using discount rates ranging from 21.9% to 25.3% and prepayment speeds ranging from 10.8% to 16.7%, depending on the stratification of the specific right.

Note 5 — Income Taxes

The Company’s income tax expense was $7.9 million and $11.0 million, representing an effective income tax rate of 29.6% and 28.8% for the three months ended September 30, 2023 and 2022, respectively. The Company’s income tax expense was $25.7 million and $29.7 million, representing an effective income tax rate of 29.5% and 28.9% for the nine months ended September 30, 2023 and 2022, respectively.

Management concluded that as of September 30, 2023 and December 31, 2022, a valuation allowance of $1.3 million was appropriate against certain state net operating loss carry forwards and certain tax credits. For all other deferred tax assets, management believes it was more likely than not these deferred tax assets will be realized principally through future taxable income and reversal

22

of existing taxable temporary differences. Net income tax assets were $48.0 million and $51.9 million as of September 30, 2023 and December 31, 2022, respectively.

As of September 30, 2023, the Company was subject to examination by various taxing authorities for its federal tax returns for the periods ended after December 31, 2018 and state tax returns for the periods ended after December 31, 2017. During the quarter ended September 30, 2023, there was no material change to the Company’s uncertain tax positions. The Company does not expect its unrecognized tax positions to change significantly over the next twelve months.

Note 6 — Goodwill and other Intangibles

The third-party originator's intangible of $0.5 million and goodwill of $11.0 million were recorded as a result of the acquisition of an equipment financing agreements portfolio in 2016. The core deposit intangible of $2.2 million was recognized for the core deposits acquired in a 2014 acquisition. The Company’s intangible assets were as follows for the periods indicated:

September 30, 2023 December 31, 2022
Amortization<br>Period Gross<br>Carrying<br>Amount Accumulated<br>Amortization Net<br>Carrying<br>Amount Gross<br>Carrying<br>Amount Accumulated<br>Amortization Net<br>Carrying<br>Amount
(in thousands)
Core deposit intangible 10 years $ 2,213 $ (2,116 ) $ 97 $ 2,213 $ (2,031 ) $ 182
Third-party originator's intangible 7 years 483 (480 ) 3 483 (471 ) 12
Goodwill N/A 11,031 — 11,031 11,031 — 11,031
Total intangible assets $ 13,727 $ (2,596 ) $ 11,131 $ 13,727 $ (2,502 ) $ 11,225

The Company performed an impairment analysis on its goodwill and other intangible assets as of September 30, 2023 and determined there was no impairment. No triggering event occurred as of, or subsequent to September 30, 2023, that would require a reassessment of goodwill and other intangible assets.

Note 7 — Deposits

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

At September 30, 2023 TimeDeposits GreaterThan 250,000 Other Time<br>Deposits Total
(in thousands)
2023 $ 540,642 $ 973,003
2024 855,244 1,452,608
2025 4,803 5,069
2026 2,870 3,133
2027 and thereafter 882 882
Total $ 1,404,441 $ 2,434,695
At December 31, 2022
2023 $ 1,185,020 $ 1,881,490
2024 68,037 68,037
2025 3,151 3,417
2026 2,430 2,693
2027 and thereafter 570 570
Total $ 1,259,208 $ 1,956,207

All values are in US Dollars.

Accrued interest payable on deposits was $50.3 million and $7.8 million at September 30, 2023 and December 31, 2022, respectively. Total deposits reclassified to loans due to overdrafts at September 30, 2023 and December 31, 2022 were $1.3 million and $1.2 million, respectively.

Note 8 — Borrowings and Subordinated Debentures

At September 30, 2023, the Bank had $50.0 million of overnight advances and $112.5 million of term advances at the FHLB with a weighted average interest rate of 5.77% and 2.77%, respectively. At December 31, 2022, the Bank had $250.0 million of overnight advances and $100.0 million of term advances at the FHLB with a weighted average rate of 4.65% and 0.87%, respectively. Interest expense on borrowings for the three months ended September 30, 2023 and 2022 was $0.8 million and $0.3 million, respectively. Interest expense on borrowings for the nine months ended September 30, 2023 and 2022 was $4.8 million and $1.1 million, respectively.

September 30, 2023 December 31, 2022
Outstanding<br>Balance Weighted<br>Average Rate Outstanding<br>Balance Weighted<br>Average Rate
(dollars in thousands)
Overnight advances $ 50,000 5.77 % $ 250,000 4.65 %
Advances due within 12 months 37,500 0.40 50,000 0.97
Advances due over 12 months through 24 months 12,500 1.90 37,500 0.40
Advances due over 24 months through 36 months 62,500 4.37 12,500 1.90
Outstanding advances $ 162,500 3.69 % $ 350,000 3.57 %

The following is financial data pertaining to FHLB advances:

September 30, 2023 December 31, 2022
(dollars in thousands)
Weighted-average interest rate at end of period 3.69 % 3.57 %
Weighted-average interest rate during the period 3.27 % 1.52 %
Average balance of FHLB advances $ 194,505 $ 148,027
Maximum amount outstanding at any month-end $ 450,000 $ 350,000

The Bank maintains a secured credit facility with the FHLB, allowing the Bank to borrow on an overnight and term basis. The Bank had $2.41 billion and $1.99 billion of loans pledged as collateral with the FHLB as of September 30, 2023 and December 31, 2022, respectively. The remaining available borrowing capacity was $1.32 billion and $1.07 billion at September 30, 2023 and December 31, 2022, respectively.

The Bank also had securities with market values of $24.7 million and $23.4 million at September 30, 2023 and December 31, 2022, respectively, pledged with the FRB, which provided $23.9 million and $22.0 million in available borrowing capacity through the Fed Discount Window and the BTFP of September 30, 2023 and December 31, 2022, respectively.

On August 20, 2021, the Company issued $110.0 million of Fixed-to-Floating Subordinated Notes (“2031 Notes”) with a maturity date of September 1, 2031. The 2031 Notes have an initial fixed interest rate of 3.75% per annum, payable semiannually in arrears on March 1 and September 1 of each year, up to but excluding September 1, 2026. From and including September 1, 2026 and thereafter, the 2031 Notes will bear interest at a floating rate per annum equal to the Benchmark rate (which is expected to be the Three-Month Term SOFR) plus 310 basis points, payable quarterly in arrears on March 1, June 1, September 1 and December 1 of each year. If the then current three-month term SOFR rate is less than zero, the three-month SOFR will be deemed to be zero. Debt issuance cost was $2.1 million, which is being amortized through the 2031 Notes’ maturity date. At September 30, 2023 and December 31, 2022, the balance of the 2031 Notes included in the Company’s Consolidated Balance Sheet, net of issuance cost, was $108.3 million and $108.2 million, respectively.

The Company issued $100.0 million of Fixed-to-Floating Subordinated Notes (“2027 Notes”) on March 21, 2017, with a maturity on March 30, 2027. The 2027 Notes had an initial fixed interest rate of 5.45% per annum. From and including March 30, 2022 and thereafter, the 2027 Notes would have interest at a floating rate equal to the then current three-month LIBOR, as calculated on each applicable date of determination, plus 3.315% payable quarterly.

On March 30, 2022, the Company redeemed its 2027 Notes. A portion of the redemption was funded with the proceeds from the Company’s 2021 subordinated debt offering. The redemption price for each of the 2027 Notes equaled 100% of the outstanding principal amount redeemed, plus any accrued and unpaid interest thereon. All interest accrued on the 2027 Notes ceased to accrue on and after March 30, 2022. Upon the redemption, the Company recognized a pre-tax charge of $1.1 million for the remaining unamortized debt issuance costs associated with the 2027 Notes.

24

The Company assumed Junior Subordinated Deferrable Interest Debentures (“Subordinated Debentures”) as a result of an acquisition in 2014 with an unpaid principal balance of $26.8 million and an estimated fair value of $18.5 million. The $8.3 million discount is being amortized to interest expense through the debentures’ maturity date of March 15, 2036. A trust was formed in 2005 which issued $26.0 million of Trust Preferred Securities (“TPS”) at a 6.26% fixed rate for the first five years and a variable rate of three-month LIBOR plus 140 basis points thereafter and invested the proceeds in the Subordinated Debentures. The rate on the TPS at September 30, 2023 was 7.07%. Beginning September 15, 2023, the variable rate on the TPS changed to three-month SOFR plus approximately 166 basis points, representing the credit spread of 140 basis points and an approximate 26 basis point adjustment to convert three-month LIBOR to three-month SOFR. The TPS will be subject to mandatory redemption if the Subordinated Debentures are repaid by the Company. Interest is payable quarterly, and the Company has the option to defer interest payments on the Subordinated Debentures from time to time for a period not to exceed five consecutive years. At September 30, 2023 and December 31, 2022, the balance of Subordinated Debentures included in the Company’s Consolidated Balance Sheets, net of discount of $5.2 million and $5.6 million, was $21.6 million and $21.2 million, respectively. The amortization of discount was $106,000 and $104,000 for the three months ended September 30, 2023 and 2022, respectively and $314,000 and $308,000 for the nine months ended September 30, 2023 and 2022, respectively.

Note 9 — Earnings Per Share

Earnings per share (“EPS”) is calculated on both a basic and a diluted basis. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted from the issuance of common stock that then shared in earnings, excluding common shares in treasury. For diluted EPS, the weighted-average number of common shares includes the impact of unvested performance stock units (“PSUs”) under the treasury method.

Unvested restricted stock containing rights to non-forfeitable dividends are considered participating securities prior to vesting and have been included in the earnings allocation in computing basic and diluted EPS under the two-class method.

The following table is a reconciliation of the components used to derive basic and diluted EPS for the periods indicated:

Three Months Ended Nine Months Ended
September 30, September 30,
2023 2022 2023 2022
(dollars in thousands, except per share amounts)
Basic EPS
Net income $ 18,796 $ 27,169 $ 61,408 $ 72,915
Less: income allocated to unvested restricted stock 117 163 381 408
Income allocated to common shares $ 18,679 $ 27,006 $ 61,027 $ 72,507
Weighted-average shares for basic EPS 30,251,961 30,314,439 30,296,991 30,289,068
Basic EPS (1) $ 0.62 $ 0.89 $ 2.01 $ 2.39
Effect of dilutive stock options and unvested performance stock units 40,910 82,323 41,686 80,470
Diluted EPS
Income allocated to common shares $ 18,679 $ 27,006 $ 61,027 $ 72,507
Weighted-average shares for diluted EPS 30,292,872 30,396,762 30,338,678 30,369,538
Diluted EPS (1) $ 0.62 $ 0.89 $ 2.01 $ 2.39

(1)

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

On a weighted-average basis, options to purchase 61,000 shares of common stock were excluded from the calculation of diluted earnings per share for the three and nine months ended September 30, 2023, because their effect would have been anti-dilutive. There were no anti-dilutive stock options for the three and nine months ended September 30, 2022. There were 54,765 and 50,460 anti-dilutive unvested PSUs outstanding for the three and nine months ended September 30, 2023, respectively.

25

During the nine months ended September 30, 2023, the Company issued 53,696 PSUs to executive officers from the 2021 Equity Compensation Plan with a fair value of $1.1 million. During the nine months ended September 30, 2022, the Company issued 38,036 PSUs to executive officers from the 2021 Equity Compensation Plan with a fair value of $1.0 million on the grant date of March 23, 2022. These units have a three-year cliff vesting period and include dividend equivalent rights. During the nine months ended September 30, 2023, 35,906 PSUs vested to an executive officer. Total PSUs outstanding as of September 30, 2023 were 134,358 with an aggregate grant fair value of $2.9 million. Total PSUs outstanding as of September 30, 2022 were 104,599 with an aggregate grant fair value of $2.0 million.

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

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

At September 30, 2023, 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% must be met to avoid limitations on the ability of the Bank and the Company to pay dividends, repurchase shares or pay discretionary bonuses. The Bank's capital conservation buffer was 6.42% and 5.86% and the Company's capital conservation buffer was 6.30% and 5.71% as of September 30, 2023 and December 31, 2022, respectively.

In March 2020, federal banking agencies announced an interim final rule to delay the impact on regulatory capital arising from the implementation of CECL. The interim final rule maintains the three-year transition option in the previous rule and provides banks the option to delay for two years an estimate of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period (five-year transition option). The Company and the Bank adopted the capital transition relief over the permissible five-year period.

The capital ratios of Hanmi Financial and the Bank as of September 30, 2023 and December 31, 2022 were as follows:

Minimum Minimum to Be
Regulatory Categorized as
Actual Requirement “Well Capitalized”
Amount Ratio Amount Ratio Amount Ratio
(dollars in thousands)
September 30, 2023
Total capital (to risk-weighted assets):
Hanmi Financial $ 933,916 15.07 % $ 495,714 8.00 % N/A N/A
Hanmi Bank $ 893,375 14.42 % $ 495,685 8.00 % $ 619,607 10.00 %
Tier 1 capital (to risk-weighted assets):
Hanmi Financial $ 761,969 12.30 % $ 371,786 6.00 % N/A N/A
Hanmi Bank $ 831,428 13.42 % $ 371,764 6.00 % $ 495,685 8.00 %
Common equity Tier 1 capital (to risk-weighted assets)
Hanmi Financial $ 740,411 11.95 % $ 278,839 4.50 % N/A N/A
Hanmi Bank $ 831,428 13.42 % $ 278,823 4.50 % $ 402,744 6.50 %
Tier 1 capital (to average assets):
Hanmi Financial $ 761,969 10.27 % $ 296,662 4.00 % N/A N/A
Hanmi Bank $ 831,428 11.25 % $ 295,515 4.00 % $ 369,394 5.00 %
December 31, 2022
Total capital (to risk-weighted assets):
Hanmi Financial $ 901,239 14.49 % $ 497,508 8.00 % N/A N/A
Hanmi Bank $ 860,503 13.86 % $ 496,607 8.00 % $ 620,758 10.00 %
Tier 1 capital (to risk-weighted assets):
Hanmi Financial $ 728,344 11.71 % $ 373,131 6.00 % N/A N/A
Hanmi Bank $ 797,608 12.85 % $ 372,455 6.00 % $ 496,607 8.00 %
Common equity Tier 1 capital (to risk-weighted assets)
Hanmi Financial $ 707,101 11.37 % $ 279,848 4.50 % N/A N/A
Hanmi Bank $ 797,608 12.85 % $ 279,341 4.50 % $ 403,493 6.50 %
Tier 1 capital (to average assets):
Hanmi Financial $ 728,344 10.07 % $ 289,311 4.00 % N/A N/A
Hanmi Bank $ 797,608 11.07 % $ 288,110 4.00 % $ 360,137 5.00 %

Note 11 — Fair Value Measurements

Fair Value Measurements

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

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

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

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

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

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

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

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

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

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Loans held for sale - Loans held for sale includes the guaranteed portion of SBA 7(a) loans carried at the lower of cost or fair value. Management obtains quotes, bids or pricing indication sheets on all or part of the loans directly from the purchasing financial institutions. Premiums received or to be received on the quotes, bids or pricing indication sheets are indicative of the fact that cost is lower than fair value. At September 30, 2023 and December 31, 2022, the entire balance of loans held for sale was recorded at its cost. We record loans held for sale on a nonrecurring basis with Level 2 inputs.

Nonperforming loans – Nonaccrual loans receivable and loans 90-days past due and still accruing interest are considered nonperforming for reporting purposes and are measured and recorded at fair value on a non-recurring basis. All nonperforming loans with a carrying balance over $250,000 are individually evaluated for the amount of impairment, if any. Nonperforming loans with a carrying balance of $250,000 or less are evaluated collectively. However, from time to time, nonrecurring fair value adjustments to collateral dependent nonperforming loans are recorded based on either the current appraised value of the collateral, or management’s judgment and estimation of value reported on older appraisals that are then adjusted based on recent market trends, and result in a Level 3 measurement.

OREO - Fair value of OREO is based primarily on third party appraisals, less costs to sell and result in a Level 3 classification of the inputs for determining fair value. Appraisals are required annually and may be updated more frequently as circumstances require and the fair value adjustments are made to OREO based on the updated appraised value of the property.

Servicing assets - On a quarterly basis, the Company utilizes a third party service to evaluate servicing assets related to loans sold to unaffiliated parties with servicing retained, and result in a Level 3 classification. Servicing assets are assessed for impairment or increased obligation based on fair value at each reporting date.

Other repossessed assets – Fair value of equipment from equipment financing agreements is based primarily on a third party valuation service, less costs to sell and result in a Level 3 classification of the inputs for determining fair value. Valuations are required at the time the asset is repossessed and may be subsequently updated periodically due to the Company’s short-term possession of the asset prior to sale or as circumstances require and the fair value adjustments are made to the asset based on its value prior to sale.

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Assets and Liabilities Measured at Fair Value on a Recurring Basis

As of September 30, 2023 and December 31, 2022, assets and liabilities measured at fair value on a recurring basis are as follows:

Level 1 Level 2 Level 3
Significant
Observable
Quoted Prices in Inputs with No
Active Markets Active Market Significant
for Identical with Identical Unobservable
Assets Characteristics Inputs Total Fair Value
(in thousands)
September 30, 2023
Assets:
Securities available for sale:
U.S. Treasury securities $ 70,922 $ — $ — $ 70,922
U.S. government agency and sponsored agency obligations:
Mortgage-backed securities - residential — 422,726 — 422,726
Mortgage-backed securities - commercial — 45,966 — 45,966
Collateralized mortgage obligations — 86,258 — 86,258
Debt securities — 129,919 — 129,919
Total U.S. government agency and sponsored agency obligations — 684,869 — 684,869
Municipal bonds-tax exempt — 61,451 — 61,451
Total securities available for sale $ 70,922 $ 746,320 $ — $ 817,242
Derivative financial instruments $ — $ 8,602 $ — $ 8,602
Liabilities:
Derivative financial instruments $ — $ 8,493 $ — $ 8,493
December 31, 2022
Assets:
Securities available for sale:
U.S. Treasury securities $ 48,026 $ — $ — $ 48,026
U.S. government agency and sponsored agency obligations:
Mortgage-backed securities - residential — 465,152 — 465,152
Mortgage-backed securities - commercial — 51,292 — 51,292
Collateralized mortgage obligations — 85,485 — 85,485
Debt securities — 138,499 — 138,499
Total U.S. government agency and sponsored agency obligations — 740,428 — 740,428
Municipal bonds-tax exempt — 65,384 — 65,384
Total securities available for sale $ 48,026 $ 805,812 $ — $ 853,838
Derivative financial instruments $ — $ 7,507 $ — $ 7,507
Liabilities:
Derivative financial instruments $ — $ 7,375 $ — $ 7,375

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

As of September 30, 2023 and December 31, 2022, assets and liabilities measured at fair value on a non-recurring basis are as follows:

Level 1 Level 2 Level 3
Significant
Observable
Quoted Prices in Inputs With No
Active Markets Active Market Significant
for Identical With Identical Unobservable
Total Assets Characteristics Inputs
(in thousands)
September 30, 2023
Assets:
Collateral dependent loans (1) $ 6,842 $ — $ — $ 6,842
Other real estate owned 117 — — 117
Repossessed personal property 1,320 — — 1,320
December 31, 2022
Assets:
Collateral dependent loans (2) $ 2,694 $ — $ — $ 2,694
Other real estate owned 117 — — 117
Repossessed personal property 467 — — 467
Servicing assets 7,176 — — 7,176

(1)

Consisted of real estate loans of $2.0 million and commercial and industrial loans of $4.8 million, which were secured by real estate and business assets.

(2)

Consisted of real estate loans of $2.7 million.

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The following table represents quantitative information about Level 3 fair value assumptions for assets measured at fair value on a non-recurring basis at September 30, 2023 and December 31, 2022:

Fair Value Valuation<br>Techniques Unobservable<br>Input(s) Range (Weighted<br>Average)
(in thousands)
September 30, 2023
Collateral dependent loans:
Real estate loans:
Commercial property
Retail $ 1,637 Market approach Adjustments to market data 5% to 20% / 15% (1)
Hospitality 333 Market approach Adjustments to market data (30)% to 35% / (3)%
Other 22 Market approach Adjustments to market data (25)% to 5% / (10%) (1)
Residential 3 Market approach Adjustments to market data (15)% to 3% / (6)% (1)
Total real estate loans 1,995
Commercial and industrial loans 4,847 Market approach Adjustments to market data (20)% to 55% / (3)% (1)
Total $ 6,842
Other real estate owned $ 117 Market approach Adjustments to market data (10)% to 5% / (2)% (1)
Repossessed personal property 1,320 Market approach Adjustments to market data (2)
December 31, 2022
Collateral dependent loans:
Real estate loans:
Commercial property
Retail $ 1,930 Market approach Adjustments to market data 5% to 25% / 16% (1)
Other 256 Market approach Adjustments to market data (42)% to 3% / (24)% (1)
Residential 508 Market approach Adjustments to market data (15)% to 3% / (1)% (1)
Total real estate loans 2,694
Total $ 2,694
Other real estate owned $ 117 Market approach Adjustments to market data (20)% to 20% / (2)% (1)
Repossessed personal property 467 Market approach Adjustments to market data (2)
Servicing assets 7,176 Market approach Prepayment rate<br>Discount rate 11% to 17% / 16%<br>22% to 25% / 22% (3)

(1)

Appraisal reports utilize a combination of valuation techniques including a market approach, where prices and other relevant information generated by market transactions involving similar or comparable properties are used to determine the appraised value. Appraisals may include an ‘as is’ and ‘upon completion’ valuation scenarios. Adjustments are routinely made in the appraisal process by third-party appraisers to adjust for differences between the comparable sales and income data. Adjustments also result from the consideration of relevant economic and demographic factors with the potential to affect property values. Also, prospective values are based on the market conditions which exist at the date of inspection combined with informed forecasts based on current trends in supply and demand for the property types under appraisal. Positive adjustments disclosed in this table represent increases to the sales comparison and negative adjustments represent decreases.

(2)

The equipment is usually too small in value to use a professional appraisal service. The values are determined internally using a combination of auction values, vendor recommendations and sales comparisons depending on the equipment type. Some highly commoditized equipment, such as commercial trucks have services that provide industry values.

(3)

Fair value is based on a valuation model using the present value of estimated future cash flows, prepayment speeds, default rates, and discount rates. Servicing assets are subsequently measured using the amortization method which requires servicing rights to be amortized into income over the period of the estimated future net servicing income of the underlying loans.

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

32

basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured on a recurring basis or non-recurring basis are discussed above.

The estimated fair value of financial instruments has been determined by using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data in order to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that we could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

Recognition and Measurement of Financial Assets and Financial Liabilities (Topic 825), among other provisions, requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. Other than certain financial instruments for which we had concluded that the carrying amounts approximate fair value, the fair value estimates shown below were based on an exit price notion as of September 30, 2023, as required by ASU 2016-01. The financial instruments for which we had concluded that the carrying amounts approximate fair value include, cash and due from banks, accrued interest receivable and payable, and noninterest-bearing deposits.

The estimated fair values of financial instruments were as follows:

September 30, 2023
Carrying Fair Value
Amount Level 1 Level 2 Level 3
(in thousands)
Financial assets:
Cash and due from banks $ 289,006 $ 289,006 $ — $ —
Securities available for sale 817,242 70,922 746,320 —
Loans held for sale 11,767 — 11,721 —
Loans receivable, net of allowance for credit losses 5,953,472 — — 5,784,828
Accrued interest receivable 20,715 20,715 — —
Financial liabilities:
Noninterest-bearing deposits 2,161,238 — 2,161,238 —
Interest-bearing deposits 4,098,834 — — 4,098,244
Borrowings and subordinated debentures 292,360 — 159,632 127,334
Accrued interest payable 50,286 50,286 — —
December 31, 2022
--- --- --- --- --- --- --- --- ---
Carrying Fair Value
Amount Level 1 Level 2 Level 3
(in thousands)
Financial assets:
Cash and due from banks $ 352,421 $ 352,421 $ — $ —
Securities available for sale 853,838 48,026 805,812 —
Loans held for sale 8,043 — 8,423 —
Loans receivable, net of allowance for credit losses 5,895,610 — — 5,808,190
Accrued interest receivable 18,537 18,537 — —
Financial liabilities:
Noninterest-bearing deposits 2,539,602 — 2,539,602 —
Interest-bearing deposits 3,628,470 — — 3,623,827
Borrowings and subordinated debentures 479,409 — 345,867 126,828
Accrued interest payable 7,792 7,792 — —

The methods and assumptions used to estimate the fair value of each class of financial instruments for which it was practicable to estimate that value are explained below:

Cash and due from banks – The carrying amounts of cash and due from banks approximate fair value due to the short-term nature of these instruments (Level 1).

Securities – The fair value of securities, consisting of securities available for sale, is generally obtained from market bids

33

for similar or identical securities, from independent securities brokers or dealers, or from other model-based valuation techniques described above (Level 1 and 2).

Loans held for sale – Loans held for sale, representing the guaranteed portion of SBA loans, are carried at the lower of aggregate cost or fair market value, as determined based upon quotes, bids or sales contract prices (Level 2).

Loans receivable, net of allowance for credit losses – The fair value of loans receivable is estimated based on the discounted cash flow approach. To estimate the fair value of the loans, certain loan characteristics such as account types, remaining terms, annual interest rates or coupons, interest types, past delinquencies, timing of principal and interest payments, current market rates, loan-to-value ratios, loss exposures, and remaining balances are considered. Additionally, the Company’s prior charge-off rates and loss ratios as well as various other assumptions relating to credit, interest, and prepayment risks are used as part of valuing the loan portfolio. Subsequently, the loans were individually evaluated by sorting and pooling them based on loan types, credit risk grades, and payment types. Consistent with the requirements of ASU 2016-01, the fair value of the Company's loans receivable is considered to be an exit price notion as of September 30, 2023 (Level 3).

The fair value of collateral dependent loans is estimated based on the net realizable fair value of the collateral or the observable market price of the most recent sale or quoted price from loans held for sale. The Company does not record loans at fair value on a recurring basis. Nonrecurring fair value adjustments to collateral dependent loans are recorded based on the current appraised value of the collateral (Level 3).

Accrued interest receivable – The carrying amount of accrued interest receivable approximates its fair value (Level 1).

Noninterest-bearing deposits – The fair value of noninterest-bearing deposits is the amount payable on demand at the reporting date (Level 2).

Interest-bearing deposits – The fair value of interest-bearing deposits, such as savings accounts, money market checking, and certificates of deposit, is estimated based on discounted cash flows. The cash flows for non-maturity deposits, including savings accounts and money market checking, are estimated based on their historical decaying experiences. The discount rate used for fair valuation is based on interest rates currently being offered by the Bank on comparable deposits as to amount and term (Level 3).

Borrowings and subordinated debentures – Borrowings consist of FHLB advances, subordinated debentures and other borrowings. Discounted cash flows based on current market rates for borrowings with similar remaining maturities are used to estimate the fair value of borrowings (Level 2 and 3).

Accrued interest payable – The carrying amount of accrued interest payable approximates its fair value (Level 1).

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 its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk similar to the risk involved with on-balance sheet items.

The Bank’s exposure to losses in the event of non-performance by the other party to commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for extending loan facilities to customers. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, was based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, premises and equipment, and income-producing or borrower-occupied properties.

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

September 30, December 31,
2023 2022
(in thousands)
Unused commitments to extend credit $ 848,886 $ 780,543
Standby letters of credit 77,381 71,829
Commercial letters of credit 19,524 19,945
Total commitments $ 945,791 $ 872,317

The allowance for credit losses related to off-balance sheet items was maintained at a level believed to be sufficient to absorb current expected lifetime losses related to these unfunded credit facilities. The determination of the allowance adequacy was based on periodic evaluations of the unfunded credit facilities including an assessment of the probability of commitment usage, credit risk factors for loans outstanding to these same customers, and the terms and expiration dates of the unfunded credit facilities.

Activity in the allowance for credit losses related to off-balance sheet items was as follows for the periods indicated:

Three Months Ended September 30, Nine Months Ended September 30,
2023 2022 2023 2022
(in thousands)
Balance at beginning of period $ 2,475 $ 2,313 $ 3,114 $ 2,586
Provision expense (recovery) for credit losses (13 ) 936 (652 ) 663
Balance at end of period $ 2,462 $ 3,249 $ 2,462 $ 3,249

Note 13 — Leases

The Company enters into leases in the normal course of business primarily for bank branch offices, back-office operations locations, business development offices, information technology data centers and information technology equipment. The Company’s leases have remaining terms ranging from one to thirteen years, some of which include renewal or termination options to extend the lease for up to five years.

The Company includes lease extension and termination options in the lease term if, after considering relevant economic factors, it is reasonably certain the Company will exercise the option. In addition, the Company has elected to account for any non-lease components in its real estate leases as part of the associated lease component. The Company has also elected not to recognize leases with original lease terms of 12 months or less (short-term leases) on the Company’s balance sheet.

Leases are classified as operating or finance leases at the lease commencement date. Lease expense for operating leases and short-term leases is recognized on a straight-line basis over the term of the lease. Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of the lease payments over the lease term.

As of September 30, 2023, the outstanding balances for our right-of-use asset and lease liability were $43.0 million and $47.0 million, respectively. The outstanding balances of the right-of-use asset and lease liability were $40.4 million and $44.2 million,

35

respectively, as of December 31, 2022. The right-of-use asset is reported in prepaid expenses and other assets line item and lease liability is reported in accrued expenses and other liabilities line item on the Consolidated Balance Sheets.

In determining the discount rates, since most of our leases do not provide an implicit rate, we used our incremental borrowing rate provided by the FHLB of San Francisco based on the information available at the commencement date to calculate the present value of lease payments.

At September 30, 2023, future minimum rental commitments under these non-cancelable operating leases, with initial or remaining terms of one year or more, were as follows:

Amount
(in thousands)
2023 $ 8,659
2024 7,988
2025 6,885
2026 6,248
2027 6,038
Thereafter 16,326
Remaining lease commitments 52,144
Interest (5,184 )
Present value of lease liability $ 46,960

Weighted average remaining lease terms for the Company's operating leases were

7.05

years and

7.12

years as of September 30, 2023 and December 31, 2022, respectively. Weighted average discount rates used for the Company's operating leases were 2.92% and 2.42% as of September 30, 2023 and December 31, 2022, respectively. Net lease expense recognized for the three months ended September 30, 2023 and 2022 was $2.4 million and $2.1 million, respectively. Net lease expense recognized for the nine months ended September 30, 2023 and 2022 was $6.6 million and $6.2 million, respectively. This included operating lease costs of $2.3 million and $2.0 million for the three months ended September 30, 2023 and 2022, respectively. Operating lease costs were $6.5 million and $5.9 million for the nine months ended September 30, 2023 and 2022, respectively. Sublease income for operating leases was immaterial for both the nine months ended September 30, 2023 and 2022. 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 $2.3 million and $1.9 million for the three months ended September 30, 2023 and 2022, respectively, and $6.4 million and $5.9 million for the nine months ended September 30, 2023 and 2022, respectively.

During the third quarter of 2023, the Company consummated a sale-leaseback transaction pursuant to which it sold a branch building for an aggregate cash purchase price of $7.8 million and concurrently agreed to separately lease the property for an initial term of 10 years, with two five year renewal options that the Company may exercise to extend the term of the lease. The pre-tax, net gain recorded associated with the sale of the building was $4.0 million, after deducting transaction-related expenses and after removing the branch building from "Premises and equipment, net" on the Balance Sheet. The aggregate annual lease expense associated with this building will be $0.4 million for the first 12 months of the lease term.

Note 14 — Liquidity

Hanmi Financial

As of September 30, 2023, Hanmi Financial had $8.7 million in cash on deposit with its bank subsidiary and $27.1 million of U.S. Treasury securities at fair value. As of December 31, 2022, the Company had $10.6 million in cash on deposit with its bank subsidiary and $17.7 million of U.S. Treasury securities at fair value. 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 its customers who wish either to withdraw funds or to draw upon credit facilities to meet their cash needs. Management believes that the Bank, on a stand-alone basis, has adequate liquid assets to meet its current obligations. The Bank’s primary funding source will continue to be deposits originating from its branch platform. The Bank’s wholesale funds historically consisted of FHLB advances and brokered deposits. As of September 30, 2023 and December 31, 2022, the Bank had $162.5 million and $350.0 million, respectively, of FHLB advances, and $73.1 million and $83.3 million, respectively, of brokered deposits.

36

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% of its assets. As of September 30, 2023 and December 31, 2022, the total borrowing capacity available, based on pledged collateral was $1.61 and $1.54 billion, respectively. The remaining available borrowing capacity was $1.32 billion and $1.07 billion as of September 30, 2023 and December 31, 2022, respectively.

The amount that the FHLB is willing to advance differs based on the quality and character of qualifying collateral pledged by the Bank, and the FHLB may adjust the advance rates for qualifying collateral upwards or downwards from time to time. To the extent deposit renewals and deposit growth are not sufficient to fund maturing and withdrawable deposits, repay maturing borrowings, fund existing and future loans, equipment financing agreements and securities, and otherwise fund working capital needs and capital expenditures, the Bank may utilize the remaining borrowing capacity from its FHLB borrowing arrangement.

As a means of augmenting its liquidity, the Bank had an available borrowing source of $23.9 million from the Federal Reserve Discount Window and the BTFP, to which the Bank pledged securities with a carrying value of $24.7 million, with no borrowings as of September 30, 2023. The Bank also maintains a line of credit for repurchase agreements up to $100.0 million. The Bank also had three unsecured federal funds lines of credit totaling $115.0 million with no outstanding balances as of September 30, 2023.

Note 15 — Derivatives and Hedging Activities

The Company’s derivative financial instruments consist entirely of interest rate swap agreements between the Company and its customers and other third party counterparties. The Company enters into “back-to-back swap” arrangements whereby the Company executes interest rate swap agreements with its customers and acquires an offsetting swap position from a third party counterparty. These derivative financial statements are accounted for at fair value, with changes in fair value recognized in the Company’s Consolidated Statements of Income.

The table below presents the fair value of the Company’s derivative financial instruments as well as their location on the Balance Sheet as of September 30, 2023 and December 31, 2022.

As of September 30, 2023 Derivative Assets Derivative Liabilities
Notional Amount Balance Sheet Location Fair Value Notional Amount Balance Sheet Location Fair Value
(in thousands)
Derivatives not designated as hedging instruments
Interest rate products $ 105,209 Other Assets $ 8,602 $ 105,209 Other Liabilities $ 8,493
Total derivatives not designated as hedging instruments $ 8,602 $ 8,493
As of December 31, 2022 Derivative Assets Derivative Liabilities
Notional Amount Balance Sheet Location Fair Value Notional Amount Balance Sheet Location Fair Value
(in thousands)
Derivatives not designated as hedging instruments
Interest rate products $ 61,460 Other Assets $ 7,507 $ 61,460 Other Liabilities $ 7,375
Total derivatives not designated as hedging instruments $ 7,507 $ 7,375

The table below presents the effect of the Company’s derivative financial instruments that are not designated as hedging instruments on the Income Statement for the nine months ended September 30, 2023 and 2022.

Derivatives Not Designated as Hedging<br>Instruments under Subtopic 815-20 Location of Gain or (Loss) Recognized in Income on Derivative Amount of Gain or (Loss)<br>Recognized in Income on Derivative
Three Months Ended September 30, Nine Months Ended September 30,
2023 2022 2023 2022
(in thousands)
Interest rate products Other income $ 62 $ 35 $ (23 ) $ 148
Total $ 62 $ 35 $ (23 ) $ 148

37

The Company recognized $0.6 million of fee income from its derivative financial instruments for the nine months ended September 30, 2023. No fee income was earned for the three and nine months ended September 30, 2022.

38

The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives as of September 30, 2023 and December 31, 2022. The net amounts of derivative assets or liabilities can be reconciled to the tabular disclosure of fair value. The derivative assets are located within the prepaid and other assets line item on the Consolidated Balance Sheets and the derivative liabilities are located within the accrued expenses and other liabilities line item on the Consolidated Balance Sheets.

Offsetting of Derivative Assets
As of September 30, 2023
Gross Amounts Not Offset in the Consolidated Balance Sheets
Gross Amounts of Recognized Assets Gross Amounts Offset in the Consolidated Balance Sheets Net Amounts of Assets presented in the Consolidated Balance Sheets Financial Instruments Cash Collateral Received Net Amount
(in thousands)
Derivatives $ 8,602 $ — $ 8,602 $ 8,493 $ 110 $ —
Offsetting of Derivative Liabilities
As of September 30, 2023
Gross Amounts Not Offset in the Consolidated Balance Sheets
Gross Amounts of Recognized Liabilities Gross Amounts Offset in the Consolidated Balance Sheets Net Amounts of Liabilities presented in the Consolidated Balance Sheets Financial Instruments Cash Collateral Provided Net Amount
(in thousands)
Derivatives $ 8,493 $ — $ 8,493 $ 8,493 $ — $ —
Offsetting of Derivative Assets
As of December 31, 2022
Gross Amounts Not Offset in the Consolidated Balance Sheets
Gross Amounts of Recognized Assets Gross Amounts Offset in the Consolidated Balance Sheets Net Amounts of Assets presented in the Consolidated Balance Sheets Financial Instruments Cash Collateral Received Net Amount
(in thousands)
Derivatives $ 7,507 $ — $ 7,507 $ 7,375 $ 132 $ —
Offsetting of Derivative Liabilities
As of December 31, 2022
Gross Amounts Not Offset in the Consolidated Balance Sheets
Gross Amounts of Recognized Liabilities Gross Amounts Offset in the Consolidated Balance Sheets Net Amounts of Liabilities presented in the Consolidated Balance Sheets Financial Instruments Cash Collateral Provided Net Amount
(in thousands)
Derivatives $ 7,375 $ — $ 7,375 $ 7,375 $ — $ —

39

The Company has agreements with each of its derivative counterparties that contain a provision stating if the Company either defaults or is capable of being declared in default on any of its indebtedness, then the Company could also be declared in default on its derivative obligations. In addition, these agreements may also require the Company to post additional collateral should it fail to maintain its status as a well- or adequately- capitalized institution.

As of September 30, 2023 and December 31, 2022, the fair value of derivatives in a net asset position for counterparty transactions, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $8.6 million and $7.4 million, respectively. As of September 30, 2023, the Company had not posted any collateral with its counterparties related to these agreements and is adequately collateralized since its net asset position was $110,000 ($8.6 million of fair value of assets less $8.5 million of fair value of liabilities) as of September 30, 2023. As of December 31, 2022, the Company had not posted collateral related to these agreements and was adequately collateralized since its net asset position was $132,000 ($7.5 million of fair value of assets less $7.4 million of fair value of liabilities).

Note 16 — Subsequent Events

Cash Dividend

On October 26, 2023, the Company announced that the Board of Directors of the Company declared a quarterly cash dividend of $0.25 per share to be paid on November 22, 2023 to stockholders of record as of the close of business on November 6, 2023.

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

The following is management’s discussion and analysis of our results of operations and financial condition as of and for the three and nine months ended September 30, 2023. This analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Annual Report on Form 10-K”) and with the unaudited consolidated financial statements and notes thereto set forth in this Quarterly Report on Form 10-Q for the period ended September 30, 2023 (this “Report”).

Forward-Looking Statements

Some of the statements contained in this Report are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements in this Report other than statements of historical fact are “forward–looking statements” for purposes of federal and state securities laws, including, but not limited to, statements about anticipated future operating and financial performance, financial condition and liquidity, business strategies, regulatory and competitive outlook, investment and expenditure plans, capital and financing needs and availability, plans and objectives of management for future operations, developments regarding our capital and strategic plans and other similar forecasts and statements of expectation and statements of assumptions underlying any of the foregoing. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue,” or the negative of such terms and other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.

Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, financial condition, levels of activity, performance or achievements to differ from those expressed or implied by the forward-looking statements. These factors include the following: failure to maintain adequate levels of capital and liquidity to support our operations; the effect of potential future supervisory action against us or Hanmi and our ability to address any issues raised in our regulatory exams; general economic and business conditions internationally, nationally and in those areas in which we operate; volatility and deterioration in the credit and equity markets; changes in consumer spending, borrowing and savings habits; our ability to enter into new markets successfully and capitalize on growth opportunities; availability of capital from private and government sources; demographic changes; competition for loans and deposits and failure to attract or retain loans and deposits; fluctuations in interest rates and a decline in the level of our interest rate spread; inflation; potential recessionary conditions; risks of natural disasters; the current or anticipated impact of military conflict, terrorism or other geopolitical events; the impact of a potential government shutdown; a failure in or breach of our operational or security systems or infrastructure, including cyber-attacks; the failure to maintain current technologies; the inability to successfully implement future information technology enhancements; difficult business and economic conditions that can adversely affect our industry and business, including competition, fraudulent activity and negative publicity; risks associated with Small Business Administration loans; failure to attract or retain key employees; our ability to access cost-effective funding; changes in liquidity, including the size and composition of our deposit portfolio, including the percentage of uninsured deposits in the portfolio; fluctuations in real estate values; changes in accounting policies and practices; the continuing impact of the COVID-19 pandemic on our business and results of operation; changes in governmental regulation, including, but not limited to, any increase in Federal Deposit Insurance Corporation insurance premiums; changes in the fiscal and monetary policies of the Board of Governors of the Federal Reserve System; the ability of Hanmi Bank to make distributions to Hanmi Financial Corporation, which is restricted by certain factors, including Hanmi Bank’s retained earnings, net income, prior distributions made, and certain other financial tests; the ability to identify a suitable strategic partner or to consummate a strategic transaction; the adequacy of our allowance for credit losses; our credit quality and the effect of credit quality on our credit losses expense and allowance for credit losses; changes in the financial performance and/or condition of our borrowers and the ability of our borrowers to perform under the terms of their loans and other terms of credit agreements; our ability to control expenses; changes in securities markets; and risks as it relates to cyber security against our information technology infrastructure and those of our third party providers and vendors.

For additional information concerning risks we face, see “Part II, Item 1A. Risk Factors” in this Report and “Item 1A. Risk Factors” in Part I of the 2022 Annual Report on Form 10-K. We undertake no obligation to update these forward-looking statements to reflect events or circumstances that occur after the date on which such statements were made, except as required by law.

Critical Accounting Policies

We have established various accounting policies that govern the application of GAAP in the preparation of our financial statements. Our significant accounting policies are described in the Notes to the consolidated financial statements in our 2022 Annual Report on Form 10-K. We had no significant changes in our accounting policies since the filing of our 2022 Annual Report on Form 10-K.

Certain accounting policies require us to make significant estimates and assumptions that have a material impact on the carrying value of certain assets and liabilities, and we consider these critical accounting policies. For a description of these critical accounting policies, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies” in our 2022 Annual Report on Form 10-K. Actual results could differ significantly from these estimates and assumptions, which could have a material impact on the carrying value of assets and liabilities at the balance sheet dates and our results of operations for the reporting periods. Management has discussed the development and selection of these critical accounting policies with the Audit Committee of the Company’s Board of Directors.

Executive Overview

Net income was $18.8 million, or $0.62 per diluted share, for the three months ended September 30, 2023 compared with $27.2 million, or $0.89 per diluted share, for the same period a year ago. The decrease in net income was primarily driven by a decrease in net interest income of $8.2 million, a $1.0 million increase in noninterest expense primarily attributable to higher salaries and employee benefits, and an increase in credit loss expense of $4.6 million, offset partially by a $2.3 million increase in noninterest income and a $3.1 million decrease in income tax expense. Credit loss expense for the third quarter of 2023 included a $5.2 million provision for loan losses, compared to a $0.6 million in credit loss expense in the third quarter of 2022. Credit loss expense for the third quarter of 2022 included a $0.9 million provision for off-balance sheet items, offset partially by a $0.4 million recovery for loan losses.

For the nine months ended September 30, 2023, net income was $61.4 million, or $2.01 per diluted share, compared with $72.9 million in net income, or $2.39 per diluted share, for the same period a year ago. The decrease in net income was primarily driven by a decrease in net interest income of $5.0 million, a $4.9 million increase in noninterest expense primarily attributable to higher salaries and employee benefits, and an increase of $6.4 million in credit loss expense, offset partially by increase in noninterest income of $0.8 million and a $4.0 million decrease in income tax expense. Credit loss expense for the nine months of 2023 included a $7.9 million provision for loan losses and a $0.7 million recovery for off-balance sheet items compared with a $0.1 million provision for loan losses and a $0.7 million provision for off-balance sheet items for the nine months of 2022.

Other financial highlights include the following:

• Cash and due from banks decreased $63.4 million to $289.0 million as of September 30, 2023 from $352.4 million at December 31, 2022.

• Securities decreased $36.6 million to $817.2 million at September 30, 2023 from $853.8 million at December 31, 2022.

• Loans receivable, before the allowance for credit losses, were $6.02 billion at September 30, 2023 compared with $5.97 billion at December 31, 2022.

• Deposits were $6.26 billion at September 30, 2023 compared with $6.17 billion at December 31, 2022.

• Stockholders’ equity at September 30, 2023 was $663.4 million, compared with $637.5 million at December 31, 2022.

• Return on average assets and return on average stockholders’ equity for the quarter ended September 30, 2023 were 1.00% and 9.88%, respectively. For the nine months of 2023, return on average assets and return on average stockholders’ equity were 1.11% and 11.05%, respectively.

Results of Operations

Net Interest Income

Our primary source of revenue is net interest income, which is the difference between interest derived from earning assets, and interest paid on liabilities obtained to fund those assets. Our net interest income is affected by changes in the level and mix of interest-earning assets and interest-bearing liabilities, referred to as volume changes. Net interest income is also affected by changes in the yields earned on assets and rates paid on liabilities, referred to as rate changes. Interest rates charged on loans receivable are affected principally by changes to market interest rates, the demand for loans receivable, the supply of money available for lending purposes, and other competitive factors. Those factors are, in turn, affected by general economic conditions and other factors beyond our control, such as federal economic policies, the general supply of money in the economy, legislative tax policies, governmental budgetary matters, and the actions of the Federal Reserve.

The following table shows the average balance of assets, liabilities and stockholders’ equity; the amount of interest income, on a tax-equivalent basis, and interest expense; the average yield or rate for each category of interest-earning assets and interest-bearing liabilities; and the net interest spread and the net interest margin for the periods indicated. All average balances are daily average balances.

Three Months Ended
September 30, 2023 September 30, 2022
Interest Average Interest Average
Average Income / Yield / Average Income / Yield /
Balance Expense Rate Balance Expense Rate
Assets (dollars in thousands)
Interest-earning assets:
Loans receivable (1) $ 5,915,423 $ 85,398 5.73 % $ 5,696,587 $ 66,976 4.67 %
Securities (2) 955,473 4,204 1.79 % 956,989 3,271 1.40 %
FHLB stock 16,385 317 7.67 % 16,385 245 5.93 %
Interest-bearing deposits in other banks 317,498 4,153 5.19 % 181,401 958 2.09 %
Total interest-earning assets 7,204,779 94,072 5.19 % 6,851,362 71,450 4.15 %
Noninterest-earning assets:
Cash and due from banks 59,994 66,865
Allowance for credit losses (70,173 ) (73,338 )
Other assets 240,145 250,500
Total assets $ 7,434,745 $ 7,095,389
Liabilities and Stockholders’ Equity
Interest-bearing liabilities:
Deposits:
Demand: interest-bearing $ 94,703 $ 32 0.13 % $ 121,269 $ 32 0.10 %
Money market and savings 1,601,826 12,485 3.09 % 2,079,490 3,807 0.73 %
Time deposits 2,438,112 24,301 3.95 % 1,120,149 2,728 0.97 %
Total interest-bearing deposits 4,134,641 36,818 3.53 % 3,320,908 6,567 0.78 %
Borrowings 120,381 753 2.48 % 123,370 349 1.24 %
Subordinated debentures 129,780 1,646 5.07 % 129,176 1,448 4.37 %
Total interest-bearing liabilities 4,384,802 39,217 3.55 % 3,573,454 8,364 0.93 %
Noninterest-bearing liabilities and equity:
Demand deposits: noninterest-bearing 2,136,156 2,717,810
Other liabilities 159,127 112,336
Stockholders’ equity 754,660 691,789
Total liabilities and stockholders’ equity $ 7,434,745 $ 7,095,389
Net interest income $ 54,855 $ 63,086
Cost of deposits (3) 2.33 % 0.43 %
Net interest spread (taxable equivalent basis) (4) 1.64 % 3.22 %
Net interest margin (taxable equivalent basis) (5) 3.03 % 3.66 %

(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)

Securities average yield is calculated on a fully taxable equivalent basis using the current statutory federal tax rate of 21%.

(3)

Represents interest expense on deposits as a percentage of all interest-bearing and noninterest-bearing deposits.

(4)

Represents the average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities.

(5)

Represents net interest income as a percentage of average interest-earning assets.

The table below shows changes in interest income and interest expense and the amounts attributable to variations in interest rates and volumes for the periods indicated. The variances attributable to simultaneous volume and rate changes have been allocated to the change due to volume and the change due to rate categories in proportion to the relationship of the absolute dollar amount attributable solely to the change in volume and to the change in rate.

Three Months Ended
September 30, 2023 vs September 30, 2022
Increases (Decreases) Due to Change In
Volume Rate Total
(in thousands)
Interest and dividend income:
Loans receivable (1) $ 2,565 $ 15,857 $ 18,422
Securities (2) (5 ) 938 933
FHLB stock — 72 72
Interest-bearing deposits in other banks 718 2,477 3,195
Total interest and dividend income 3,278 19,344 22,622
Interest expense:
Demand: interest-bearing $ (7 ) $ 7 $ —
Money market and savings (743 ) 9,421 8,678
Time deposits 3,868 17,705 21,573
Borrowings (46 ) 450 404
Subordinated debentures 7 191 198
Total interest expense 3,079 27,774 30,853
Change in net interest income $ 199 $ (8,430 ) $ (8,231 )

(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)

Securities average yield is calculated on a fully taxable equivalent basis using the current statutory federal tax rate of 21%.

For the three months ended September 30, 2023 and 2022, net interest income was $54.9 million and $63.1 million, respectively. The net interest spread and net interest margin, on a taxable equivalent basis, for the quarter ended September 30, 2023, were 1.64% and 3.03%, respectively, compared with 3.22% and 3.66%, respectively, for the same period in 2022. Interest and dividend income increased $22.6 million, or 31.7%, to $94.1 million for the three months ended September 30, 2023 from $71.5 million for the same period in 2022, primarily due to higher average interest-earning asset yields and, to a lesser extent, higher loan average balances. Interest expense increased $30.9 million, or 368.9%, to $39.2 million for the three months ended September 30, 2023 from $8.4 million for the same period in 2022 primarily due to higher deposit and borrowing rates due to the rising interest rate environment and due to a higher average balance of deposits.

The average balance of interest earning assets increased $353.4 million, or 5.2%, to $7.20 billion for the three months ended September 30, 2023 from $6.85 billion for the three months ended September 30, 2022. The average balance of loans increased $218.8 million, or 3.8%, to $5.92 billion for the three months ended September 30, 2023 from $5.70 billion for the three months ended September 30, 2022. The average balance of securities decreased $1.5 million, or 0.2%, to $955.5 million for the three months ended September 30, 2023 from $957.0 million for the three months ended September 30, 2022. The average balance of interest-bearing deposits at other banks increased $136.1 million to $317.5 million for the three months ended September 30, 2023 from $181.4 million for the three months ended September 30, 2022.

The average yield on interest-earning assets, on a taxable equivalent basis, increased 104 basis points to 5.19% for the three months ended September 30, 2023, from 4.15% for the three months ended September 30, 2022. The average yield on loans increased to 5.73% for the three months ended September 30, 2023, from 4.67% for the three months ended September 30, 2022. The average yield on securities, on a taxable equivalent basis, increased to 1.79% for the three months ended September 30, 2023, from 1.40% for the three months ended September 30, 2022. The average yield on interest-bearing deposits in other banks increased 310 basis points to 5.19% for the three months ended September 30, 2023, from 2.09% for the three months ended September 30, 2022. The increased yields were primarily due to increases in market interest rates.

The average balance of interest-bearing liabilities increased $811.3 million, or 22.7%, to $4.38 billion for the three months ended September 30, 2023 compared to $3.57 billion for the three months ended September 30, 2022. The average balance of time deposits increased $1.32 billion, offset by decreases in the average balance of money market and savings accounts, interest-bearing demand deposits, and borrowings of $477.7 million, $26.6 million, and $3.0 million, respectively.

The average cost of interest-bearing liabilities was 3.55% and 0.93% for the three months ended September 30, 2023 and 2022, respectively. The average cost of interest-bearing deposits increased 275 basis points to 3.53% for the three months ended September 30, 2023, compared to 0.78% for the three months ended September 30, 2022. The average cost of time deposits increased 298 basis points to 3.95% for the three months ended September 30, 2023 compared to 0.97% for the three months ended September 30, 2022. The average cost of money market and savings accounts increased 236 basis points to 3.09% for the three months ended September 30, 2023 compared to 0.73% for the three months ended September 30, 2022.The average cost of subordinated debentures increased 70 basis points to 5.07% for the three months ended September 30, 2023 compared to 4.37% for the three months ended September 30, 2022. The average cost of borrowings increased 124 basis points to 2.48% for the three months ended September 30, 2023 compared to 1.24% for the three months ended September 30, 2022. The increased costs were primarily due to increases in market interest rates.

The following table shows: the average balance of assets, liabilities and stockholders’ equity; the amount of interest income, on a tax-equivalent basis, and net interest expense; the average yield or rate for each category of interest-earning assets and interest-bearing liabilities; and the net interest spread and the net interest margin for the periods indicated. All average balances are daily average balances.

Nine Months Ended
September 30, 2023 September 30, 2022
Interest Average Interest Average
Average Income / Yield / Average Income / Yield /
Balance Expense Rate Balance Expense Rate
Assets (dollars in thousands)
Interest-earning assets:
Loans receivable (1) $ 5,933,525 $ 249,888 5.63 % $ 5,501,957 $ 180,755 4.39 %
Securities (2) 969,146 12,356 1.73 % 944,359 8,718 1.89 %
FHLB stock 16,385 888 7.25 % 16,385 735 6.00 %
Interest-bearing deposits in other banks 247,581 9,012 4.87 % 269,772 1,366 0.68 %
Total interest-earning assets 7,166,637 272,144 5.08 % 6,732,473 191,574 3.81 %
Noninterest-earning assets:
Cash and due from banks 62,354 65,911
Allowance for credit losses (71,236 ) (73,471 )
Other assets 237,111 245,259
Total assets $ 7,394,866 $ 6,970,172
Liabilities and Stockholders’ Equity
Interest-bearing liabilities:
Deposits:
Demand: interest-bearing $ 100,997 $ 88 0.12 % $ 122,964 $ 68 0.07 %
Money market and savings 1,506,776 29,687 2.63 % 2,108,232 6,566 0.42 %
Time deposits 2,355,923 64,656 3.67 % 984,517 4,404 0.60 %
Total interest-bearing deposits 3,963,696 94,431 3.19 % 3,215,713 11,038 0.46 %
Borrowings 194,530 4,755 3.27 % 131,364 1,056 1.13 %
Subordinated debentures 129,632 4,828 4.97 % 156,817 6,394 5.39 %
Total interest-bearing liabilities 4,287,858 104,014 3.24 % 3,503,894 18,488 0.70 %
Noninterest-bearing liabilities and equity:
Demand deposits: noninterest-bearing 2,223,891 2,689,807
Other liabilities 140,070 101,685
Stockholders’ equity 743,047 674,786
Total liabilities and stockholders’ equity $ 7,394,866 $ 6,970,172
Net interest income $ 168,130 $ 173,086
Cost of deposits (3) 2.04 % 0.25 %
Net interest spread (taxable equivalent basis) (4) 1.84 % 3.10 %
Net interest margin (taxable equivalent basis) (5) 3.14 % 3.44 %

(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)

Securities average yield is calculated on a fully taxable equivalent basis using the current statutory federal tax rate of 21%.

(3)

Represents interest expense on deposits as a percentage of all interest-bearing and noninterest-bearing deposits.

(4)

Represents the average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities.

(5)

Represents net interest income as a percentage of average interest-earning assets.

The table below shows changes in interest income and interest expense and the amounts attributable to variations in interest rates and volumes for the periods indicated. The variances attributable to simultaneous volume and rate changes have been allocated to the change due to volume and the change due to rate categories in proportion to the relationship of the absolute dollar amount attributable solely to the change in volume and to the change in rate.

Nine Months Ended
September 30, 2023 vs September 30, 2022
Increases (Decreases) Due to Change In
Volume Rate Total
(in thousands)
Interest and dividend income:
Loans receivable (1) $ 14,087 $ 55,046 $ 69,133
Securities (2) 229 3,409 3,638
FHLB stock — 153 153
Interest-bearing deposits in other banks (112 ) 7,758 7,646
Total interest and dividend income 14,204 66,366 80,570
Interest expense:
Demand: interest-bearing $ (12 ) $ 32 $ 20
Money market and savings (1,719 ) 24,840 23,121
Time deposits 6,943 53,309 60,252
Borrowings 508 3,191 3,699
Subordinated debentures (1,157 ) (409 ) (1,566 )
Total interest expense 4,563 80,963 85,526
Change in net interest income $ 9,641 $ (14,597 ) $ (4,956 )

(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)

Securities average yield is calculated on a fully taxable equivalent basis using the current statutory federal tax rate of 21%.

For the nine months ended September 30, 2023 and 2022, net interest income was $168.1 million and $173.1 million, respectively. The net interest spread and net interest margin, on a taxable equivalent basis, for the nine months ended September 30, 2023, were 1.84% and 3.14%, respectively, compared with 3.10% and 3.44%, respectively, for the same period in 2022. Interest and dividend income increased $80.6 million, or 42.1%, to $272.1 million for the nine months ended September 30, 2023 from $191.6 million for the same period in 2022 due to higher average interest-earning asset yields and higher loan average balances. Interest expense increased $85.5 million, or 462.6%, to $104.0 million for the nine months ended September 30, 2023 from $18.5 million for the same period in 2022 primarily due to higher deposit and borrowing rates due to the rising interest rate environment and higher average deposit balances.

The average balance of interest earning assets increased $434.2 million, or 6.4%, to $7.17 billion for the nine months ended September 30, 2023 from $6.73 billion for the nine months ended September 30, 2022. The average balance of loans increased $431.6 million, or 7.8%, to $5.93 billion for the nine months ended September 30, 2023 from $5.50 billion for the nine months ended September 30, 2022. The average balance of securities increased $24.8 million, or 2.6%, to $969.1 million for the nine months ended September 30, 2023 from $944.4 million for the nine months ended September 30, 2022. The average balance of interest-bearing deposits at other banks decreased $22.2 million to $247.6 million for the nine months ended September 30, 2023 from $269.8 million for the nine months ended September 30, 2022.

The average yield on interest-earning assets, on a taxable equivalent basis, increased 127 basis points to 5.08% for the nine months ended September 30, 2023 from 3.81% for the nine months ended September 30, 2022. The average yield on loans increased to 5.63% for the nine months ended September 30, 2023 from 4.39% for the nine months ended September 30, 2022. The average yield on securities, on a taxable equivalent basis, decreased to 1.73% for the nine months ended September 30, 2023 from 1.89% for the nine months ended September 30, 2022. The average yield on interest-bearing deposits in other banks increased 419 basis points to 4.87% for the nine months ended September 30, 2023, from 0.68% for the nine months ended September 30, 2022. The increased yields were primarily due to increases in market interest rates.

The average balance of interest-bearing liabilities increased $784.0 million, or 22.4%, to $4.29 billion for the nine months ended September 30, 2023 compared to $3.50 billion for the nine months ended September 30, 2022. The average balance of time deposits and borrowings increased $1.40 billion and $63.2 million, respectively, offset by decreases in the average balance of money

market and savings accounts, subordinated debentures, and interest-bearing demand deposits of $601.5 million, $27.2 million, and $22.0 million, respectively.

The average cost of interest-bearing liabilities was 3.24% and 0.70% for the nine months ended September 30, 2023 and 2022, respectively. The average cost of interest-bearing deposits increased 273 basis points to 3.19% for the nine months ended September 30, 2023, compared to 0.46% for the nine months ended September 30, 2022. The average cost of time deposits increased 307 basis points to 3.67% for the nine months ended September 30, 2023 compared to 0.60% for the nine months ended September 30, 2022. The average cost of money market and savings accounts increased 221 basis points to 2.63% for the nine months ended September 30, 2023 compared to 0.42% for the nine months ended September 30, 2022. The average cost of subordinated debentures decreased 42 basis points to 4.97% for the nine months ended September 30, 2023 compared to 5.39% for the nine months ended September 30, 2022, due to a pre-tax charge of $1.1 million for the nine months ended September 30, 2022 for the remaining debt issuance costs due upon redemption on the 2027 Notes. The average cost of borrowings increased 214 basis points to 3.27% for the nine months ended September 30, 2023 compared to 1.13% for the nine months ended September 30, 2022. The increased costs were primarily due to increases in market interest rates.

Credit Loss Expense

For the third quarter of 2023, the Company recorded $5.2 million of credit loss expense, comprised of a $5.2 million provision for loan losses. For the same period in 2022, the Company recorded $0.6 million of credit loss expense, comprised of a $0.4 million recovery of credit loss expense for loan losses, and a $0.9 million provision for off-balance sheet items. The credit loss expense for the three months ended September 30, 2023 was mainly attributable to $6.1 million of charge-offs, for which there were specific reserve allocations of $4.3 million in the first six months in 2023. The credit loss expense for the three months ended September 30, 2022 resulted from strong loan growth, offset by a combination of overall improvements in asset quality and economic forecasts.

For the nine months ended September 30, 2023, the Company recorded $7.2 million of credit loss expense, comprised of a $7.9 million provision for loan losses, and a $0.7 million negative provision for off-balance sheet items. For the same period in 2022, the Company recorded a $0.8 million of credit loss expense, comprised of a $0.1 million provision for loan losses, and a $0.7 million provision for off-balance sheet items. The credit loss expense for the nine months ended September 30, 2023 was mainly attributable to a $5.2 million charge-off, of which there was a specific reserve allocation of $3.3 million in the first six months in 2023, on a $10.0 million nonperforming commercial and industrial loan in the health-care industry, and a $1.0 million charge-off, of which there was a specific reserve allocation of $1.0 million in the first six months in 2023, on a nonperforming commercial and industrial loan. The credit loss expense for the nine months ended September 30, 2022 resulted from a combination of overall improvements in asset quality and economic forecasts.

See also “Allowance for Credit Losses and Allowance for Credit Losses Related to Off-Balance Sheet Items” for further details.

Noninterest Income

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

Three Months Ended September 30, Increase<br>(Decrease) Increase<br>(Decrease)
2023 2022 Amount Percent
(in thousands)
Service charges on deposit accounts $ 2,605 $ 2,996 $ (391 ) (13.05 )%
Trade finance and other service charges and fees 1,155 1,132 23 2.03
Servicing income 838 635 203 31.97
Bank-owned life insurance income 280 245 35 14.29
All other operating income 1,178 1,656 (478 ) (28.86 )
Service charges, fees & other 6,056 6,664 (608 ) (9.12 )
Gain on sale of SBA loans 1,172 2,250 (1,078 ) (47.91 )
Gain on sale of bank premises 4,000 — 4,000 100.00 %
Total noninterest income $ 11,228 $ 8,914 $ 2,314 25.96 %

For the three months ended September 30, 2023, noninterest income was $11.2 million, an increase of $2.3 million, or 26.0%, compared with $8.9 million for the same period in 2022. The increase was attributable to a $4.0 million gain on the sale-leaseback of a branch property (see "Note 13 - Leases" to the consolidated financial statements for more details), partially offset by

a $1.1 million decrease in the gain on loan sales resulting from lower volume and net trade premiums, and a $0.4 million decrease in service charges on deposit accounts.

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

Nine Months Ended September 30, Increase<br>(Decrease) Increase<br>(Decrease)
2023 2022 Amount Percent
(in thousands)
Service charges on deposit accounts $ 7,756 $ 8,745 $ (989 ) (11.31 )%
Trade finance and other service charges and fees 3,586 3,690 (104 ) (2.82 )
Servicing income 2,405 2,032 373 18.36
Bank-owned life insurance income 821 735 86 11.70
All other operating income 4,606 3,996 610 15.27
Service charges, fees & other 19,174 19,198 (24 ) (0.13 )
Gain on sale of SBA loans 4,253 7,545 (3,292 ) (43.63 )
Net gain (loss) on sales of securities (1,871 ) — (1,871 ) (100.00 )%
Gain on sale of bank premises 4,000 — 4,000 100.00 %
Legal settlement 1,943 — 1,943 100.00 %
Total noninterest income $ 27,499 $ 26,743 $ 756 2.83 %

For the nine months ended September 30, 2023, noninterest income was $27.5 million, an increase of $0.8 million, or 2.8%, compared with $26.7 million for the same period in 2022. The increase was attributable to a $4.0 million gain on the sale-leaseback of a branch property (see "Note 13 - Leases" to the consolidated financial statements for more details) and a $1.9 million legal settlement, offset by a $3.3 million decrease in gain on loan sales resulting from lower volume and net trade premiums, and a $1.9 million net loss on sales of $8.1 million of securities.

Noninterest Expense

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

Three Months Ended September 30, Increase<br>(Decrease) Increase<br>(Decrease)
2023 2022 Amount Percent
(in thousands)
Salaries and employee benefits $ 20,361 $ 19,365 $ 996 5.14 %
Occupancy and equipment 4,825 4,736 89 1.88
Data processing 3,490 3,352 138 4.12
Professional fees 1,568 1,249 319 25.54
Supplies and communications 552 710 (158 ) (22.25 )
Advertising and promotion 534 1,186 (652 ) (54.97 )
All other operating expenses 2,852 2,698 154 5.71
Subtotal 34,182 33,296 886 2.66
Other real estate owned expense 16 2 14 700.00
Repossessed personal property expense (income) 47 (23 ) 70 (304.35 )
Total noninterest expense $ 34,245 $ 33,275 $ 970 2.92 %

For the three months ended September 30, 2023, noninterest expense was $34.2 million, an increase of $1.0 million, or 2.9%, compared with $33.3 million for the same period in 2022. Salaries and employee benefits increased due to annual merit increases and a decrease in capitalized loan origination costs from lower loan originations.

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

Nine Months Ended September 30, Increase<br>(Decrease) Increase<br>(Decrease)
2023 2022 Amount Percent
(in thousands)
Salaries and employee benefits $ 61,336 $ 55,861 $ 5,475 9.80 %
Occupancy and equipment 13,737 13,979 (242 ) (1.73 )
Data processing 10,208 9,702 506 5.22
Professional fees 4,278 3,909 369 9.44
Supplies and communications 1,866 1,956 (90 ) (4.60 )
Advertising and promotion 2,114 2,664 (550 ) (20.65 )
All other operating expenses 8,054 8,346 (292 ) (3.50 )
Subtotal 101,593 96,417 5,176 5.37
Other real estate owned expense (income) (181 ) 64 (245 ) (382.81 )
Repossessed personal property expense (income) (96 ) (40 ) (56 ) 140.00
Total noninterest expense $ 101,316 $ 96,441 $ 4,875 5.05 %

For the nine months ended September 30, 2023, noninterest expense was $101.3 million, an increase of $4.9 million, or 5.1%, compared with $96.4 million for the same period in 2022, primarily due to a $5.5 million increase in salaries and employee benefits. Salaries and employee benefits increased due to annual merit and bonus increases and a decrease in capitalized loan origination costs resulting from lower loan originations.

Income Tax Expense

Income tax expense was $7.9 million and $11.0 million representing an effective income tax rate of 29.6% and 28.8% for the three months ended September 30, 2023 and 2022, respectively. The increase in the effective tax rate for the three months ended September 30, 2023, compared to the same period in 2022 was principally due to an increase in permanently non-deductible expenses.

Income tax expense was $25.7 million and $29.7 million representing an effective income tax rate of 29.5% and 28.9% for the nine months ended September 30, 2023 and 2022, respectively. The increase in the effective tax rate for the nine months ended September 30, 2023, compared to the same period in 2022 was principally due to an increase in permanently non-deductible expenses.

Financial Condition

Securities

As of September 30, 2023, our securities portfolio consisted of U.S. government agency and sponsored agency mortgage-backed securities, collateralized mortgage obligations and debt securities, tax-exempt municipal bonds and 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% of stockholders’ equity as of September 30, 2023 or December 31, 2022. Securities decreased $36.6 million to $817.2 million at September 30, 2023 from $853.8 million at December 31, 2022, mainly attributed to $74.0 million in paydowns and maturities and $8.1 million in securities sales, offset partially by $64.8 million in securities purchases.

The following table summarizes the contractual maturity schedule for securities, at amortized cost, and their cost weighted average yield, which is calculated using amortized cost as the weight, as of September 30, 2023:

After One<br>Year But After Five<br>Years But
Within One<br>Year Within Five<br>Years Within Ten<br>Years After Ten<br>Years Total
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
(dollars in thousands)
Securities available for sale:
U.S. Treasury securities $ 30,588 3.86 % $ 41,973 3.48 % $ — 0.00 % $ — 0.00 % $ 72,561 3.64 %
U.S. government agency and sponsored agency obligations:
Mortgage-backed securities - residential 15 2.85 53 2.97 14,059 4.19 493,795 1.56 507,922 1.63
Mortgage-backed securities - commercial — — 8,672 2.22 — — 51,735 1.55 60,407 1.65
Collateralized mortgage obligations — — 209 1.28 533 2.43 97,853 2.65 98,595 2.65
Debt securities 20,439 2.44 119,970 1.24 — — — — 140,409 1.41
Total U.S. government agency and sponsored agency obligations 20,454 2.44 128,904 1.31 14,592 4.13 643,383 1.72 807,333 1.72
Municipal bonds-tax exempt 23,105 1.38 54,273 1.32 77,378 1.34
Total securities available for sale $ 51,042 3.29 % $ 170,877 1.84 % $ 37,697 2.44 % $ 697,656 1.69 % $ 957,272 1.84 %

Loans Receivable

As of September 30, 2023 and December 31, 2022, loans receivable (excluding loans held for sale), net of deferred loan fees and costs, discounts and allowance for credit losses, were $5.95 billion and $5.90 billion, respectively. The increase primarily reflected $899.1 million in new loan production, offset partially by $381.2 million in loan sales and payoffs, and amortization and other reductions of $460.7 million. Loan production primarily consisted of residential mortgages of $252.4 million, commercial real estate of $222.7 million, equipment financing agreements of $191.3 million, SBA loans of $101.5 million and commercial and industrial loans of $131.3 million.

The table below shows the maturity distribution of outstanding loans, before the allowance for credit losses as of September 30, 2023. In addition, the table shows the distribution of such loans between those with floating or variable interest rates and those with fixed or predetermined interest rates.

Within One<br>Year After One<br>Year but<br>Within<br>Three<br>Years After Three<br>Years but<br>Within<br>Five<br>Years After Five<br>Years but<br>Within<br>Fifteen<br>Years After<br>Fifteen<br>Years Total
(in thousands)
Real estate loans:
Commercial property
Retail $ 106,850 $ 309,381 $ 326,972 $ 304,862 $ 49,585 $ 1,097,650
Hospitality 112,762 221,180 203,189 150,096 18,508 705,735
Office 47,098 224,249 260,424 36,986 6,562 575,319
Other 115,740 455,935 413,306 272,611 51,915 1,309,507
Total commercial property loans 382,450 1,210,745 1,203,891 764,555 126,570 3,688,211
Construction 54,417 28,300 2,087 — — 84,804
Residential 4,146 87 13 4,748 917,332 926,326
Total real estate loans 441,013 1,239,132 1,205,991 769,303 1,043,902 4,699,341
Commercial and industrial loans 261,849 208,382 146,895 111,666 — 728,792
Equipment financing agreements 27,961 187,771 351,805 25,115 — 592,652
Loans receivable $ 730,823 $ 1,635,285 $ 1,704,691 $ 906,084 $ 1,043,902 $ 6,020,785
Loans with predetermined interest rates 340,129 1,127,237 1,240,803 142,827 267,051 3,118,047
Loans with variable interest rates 390,694 508,048 463,888 763,257 776,851 2,902,738

The table below shows the maturity distribution of outstanding loans, before the allowance for credit losses, with fixed or predetermined interest rates due after one year, as of September 30, 2023.

After One<br>Year but<br>Within Three<br>Years After Three<br>Years but<br>Within Five<br>Years After Five<br>Years but<br>Within<br>Fifteen<br>Years After<br>Fifteen<br>Years Total
(in thousands)
Real estate loans:
Commercial property
Retail $ 281,108 $ 229,594 $ 44,492 $ 247 $ 555,441
Hospitality 77,037 171,531 5,583 — 254,151
Office 162,339 200,159 2,579 — 365,077
Other 388,010 281,785 52,671 7,342 729,808
Total commercial property loans 908,494 883,069 105,325 7,589 1,904,477
Construction 28,300 — — — 28,300
Residential 87 13 2,624 259,462 262,186
Total real estate loans 936,881 883,082 107,949 267,051 2,194,963
Commercial and industrial loans 2,585 5,917 9,763 — 18,265
Equipment financing agreements 187,771 351,804 25,115 — 564,690
Loans receivable $ 1,127,237 $ 1,240,803 $ 142,827 $ 267,051 $ 2,777,918

The table below shows the maturity distribution of outstanding loans, before the allowance for credit losses, with floating or variable interest rates (including hybrids) due after one year, as of September 30, 2023.

After One<br>Year but<br>Within Three<br>Years After Three<br>Years but<br>Within Five<br>Years After Five<br>Years but<br>Within<br>Fifteen<br>Years After<br>Fifteen<br>Years Total
(in thousands)
Real estate loans:
Commercial property
Retail $ 28,273 $ 97,378 $ 260,370 $ 49,339 $ 435,360
Hospitality 144,143 31,658 144,513 18,508 338,822
Office 61,910 60,265 34,407 6,562 163,144
Other 67,925 131,522 219,941 44,571 463,959
Total commercial property loans 302,251 320,823 659,231 118,980 1,401,285
Construction — 2,087 — — 2,087
Residential — — 2,124 657,871 659,995
Total real estate loans 302,251 322,910 661,355 776,851 2,063,367
Commercial and industrial loans 205,797 140,978 101,902 — 448,677
Loans receivable $ 508,048 $ 463,888 $ 763,257 $ 776,851 $ 2,512,044

Industry

As of September 30, 2023, the loan portfolio included the following concentrations of loans to one type of industry that were greater than 10.0% of loans receivable outstanding:

Percentage of
Balance as of Loans Receivable
September 30, 2023 Outstanding
(in thousands)
Lessor of nonresidential buildings $ 1,740,544 28.9 %
Hospitality 709,757 11.8 %

Loan Quality Indicators

Loans 30 to 89 days past due and still accruing were $9.5 million at September 30, 2023, compared with $7.5 million at December 31, 2022, attributable mainly to an increase of $1.3 million in past due residential loans and a $0.7 million multifamily commercial real estate relationship.

At September 30, 2023 and December 31, 2022, there were no loans 90 days or more past due and still accruing interest.

Special mention loans were $76.5 million at September 30, 2023 compared with $79.0 million at December 31, 2022. The $2.5 million decrease in special mention loans included upgrades to pass loans of $51.3 million, downgrades to classified loans of $10.2 million, and pay downs and payoffs of $1.8 million, offset by downgrades from pass loans of $60.8 million.

Classified loans were $33.1 million at September 30, 2023 compared with $46.2 million at December 31, 2022. The $13.1 million decrease was primarily driven by loan upgrades of $18.4 million, pay downs and payoffs of $5.9 million, and charge-offs of $13.1 million, offset by the downgrade of one previously mentioned nonperforming commercial and industrial health-care industry loan in the amount of $10.0 million, downgrades of $4.5 million in equipment financing agreements, and $11.2 million in other loan downgrades.

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

Special Mention Classified
(in thousands)
September 30, 2023
Balance at January 1, 2023 $ 79,013 $ 46,192
Additions 60,814 14,226
Reductions (63,355 ) (27,284 )
Balance at September 30, 2023 $ 76,473 $ 33,134
December 31, 2022
Balance at January 1, 2022 $ 95,294 $ 60,633
Additions 133,134 15,808
Reductions (149,415 ) (30,249 )
Balance at December 31, 2022 $ 79,013 $ 46,192

Nonperforming Assets

Nonperforming loans consist of loans receivable on nonaccrual status and loans 90 days or more past due and still accruing interest. Nonperforming assets consist of nonperforming loans and OREO. Loans are placed on nonaccrual status when, in the opinion of management, the full timely collection of principal or interest is in doubt. Generally, the accrual of interest is discontinued when principal or interest payments become more than 90 days past due, unless we believe the loan is adequately collateralized and in the process of collection. However, in certain instances, we may place a particular loan on nonaccrual status earlier, depending upon the individual circumstances surrounding the loan’s delinquency. When a loan is placed on nonaccrual status, previously accrued but unpaid interest is reversed against current income. Subsequent collections of cash are applied as principal reductions when received, except when the ultimate collectability of principal is probable, in which case interest payments are credited to income. Nonaccrual loans may be restored to accrual status when principal and interest become current and full repayment is expected. Interest income is recognized on the accrual basis for impaired loans not meeting the criteria for nonaccrual. OREO consists of properties acquired by foreclosure or similar means, or vacant bank properties for which their usage for operations has ceased and management intends to offer them for sale.

Except for nonaccrual loans, management is not aware of any other loans as of September 30, 2023 for which known credit problems of the borrower would cause serious doubts as to the ability of such borrowers to comply with their present loan or equipment financing agreement repayment terms, or any known events that would result in a loan or equipment financing agreement being designated as nonperforming at some future date. Management cannot, however, predict the extent to which a deterioration in general economic conditions, real estate values, increases in general rates of interest, inflation or changes in the financial condition or business of borrowers may adversely affect a borrower’s ability to pay.

Nonperforming loans were $15.8 million at September 30, 2023, or 0.26% of loans, compared with $9.8 million at December 31, 2022, or 0.17% of the portfolio. The increase primarily reflects the addition of a $10.0 million nonperforming commercial and industrial loan in the health-care industry, on which a charge-off of $5.1 million occurred in the three months ended September 30, 2023.

Nonperforming assets were $15.9 million at September 30, 2023, or 0.22% of total assets, compared with $10.0 million, or 0.14%, at December 31, 2022. Additionally, not included in nonperforming assets were repossessed personal property assets associated with equipment finance agreements of $1.3 million and $0.5 million at September 30, 2023 and December 31, 2022, respectively.

Individually Evaluated Loans

The Company reviews loans on an individual basis when the loan does not share similar risk characteristics with loan pools.

Individually evaluated loans were $15.8 million and $9.8 million as of September 30, 2023 and December 31, 2022, respectively, representing an increase of $5.9 million, or 60.3%. The increase primarily reflects the addition of a $10.0 million nonperforming commercial and industrial loan in the health-care industry, of which $5.2 million was charged off in the nine months ended September 30, 2023. Specific allowances associated with individually evaluated loans decreased $0.4 million to $2.9 million as of September 30, 2023 compared with $3.3 million as of December 31, 2022.

No loans were modified to borrowers with financial difficulties during the three and nine months ended September 30, 2023 or 2022.

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

The Company’s estimate of the allowance for credit losses at September 30, 2023 and December 31, 2022 reflected losses expected over the remaining contractual life of assets based on historical, current, and forward-looking information. The contractual term does not consider extensions, renewals or modifications.

Management utilized three loss methodologies for its collective allowance estimation. At September 30, 2023, the Company used the discounted cash flow (“DCF”) method to estimate allowances for credit losses for the commercial and industrial loan portfolio, the Probability of Default/Loss Given Default (“PD/LGD”) method for the commercial real estate, construction, SBA and residential real estate portfolios, and the Weighted Average Remaining Maturity (“WARM”) method to estimate expected credit losses for the equipment financing agreements portfolio. Loans that do not share similar risk characteristics are individually evaluated for allowances.

For the loans utilizing the DCF method, the Company determined that four quarters represented a reasonable and supportable forecast period and reverted to a historical loss rate over twelve quarters on a straight-line basis. Reasonable and supportable forecasts of economic conditions are embedded in the DCF model.

For each of the loan segments identified above, the Company applied an annualized historical PD/LGD using all available historical periods. The PD/LGD method incorporates a forecast of economic conditions into loss estimates using a qualitative adjustment.

The Company applied an expected loss ratio based on internal historical losses adjusted as appropriate for qualitative factors when applying the WARM method.

As of September 30, 2023 and December 31, 2022, the Company relied on the economic projections from Moody’s to inform its loss driver forecasts over the four-quarter forecast period. For all loan pools, the Company utilizes and forecasts the national unemployment rate as the primary loss driver.

To adjust the historical and forecast periods to current conditions under the PD/LGD and WARM methods, the Company applies various qualitative factors derived from market, industry or business specific data, changes in the underlying portfolio composition, trends relating to credit quality, delinquency, nonperforming and adversely rated equipment financing agreements, and reasonable and supportable forecasts of economic conditions.

The allowance for credit losses was $67.3 million at September 30, 2023 compared with $71.5 million at December 31, 2022. The allowance attributed to individually evaluated loans was $2.9 million at September 30, 2023 compared with $3.3 million at December 31, 2022. The allowance attributed to collectively evaluated loans was $64.5 million at September 30, 2023 compared with $68.2 million at December 31, 2022, and considered the impact of changes in macroeconomic assumptions, normalized interest rate forecasts for the subsequent four quarters, and a net reduction in specific qualitative factors allocated to criticized hospitality loans impacted by the pandemic.

The following table reflects our allocation of the allowance for credit losses by loan category as well as the amount of loans in each loan category, including related percentages:

September 30, 2023 December 31, 2022
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 $ 10,083 15.0 % $ 1,097,650 18.3 % $ 7,872 11.0 % $ 1,023,608 17.2 %
Hospitality 15,083 22.4 705,735 11.7 13,407 18.7 646,893 10.8
Office 2,884 4.3 575,319 9.6 2,293 3.2 499,946 8.4
Other 8,321 12.3 1,309,507 21.7 13,056 18.3 1,553,729 26.0
Total commercial property loans 36,371 54.0 3,688,211 61.3 36,628 51.2 3,724,176 62.4
Construction 2,594 3.9 84,804 1.4 4,022 5.7 109,205 1.8
Residential 4,871 7.2 926,326 15.4 3,376 4.7 734,472 12.4
Total real estate loans 43,836 65.1 4,699,341 78.1 44,026 61.6 4,567,853 76.6
Commercial and industrial loans 11,242 16.7 728,792 12.1 15,267 21.3 804,492 13.4
Equipment financing agreements 12,235 18.2 592,652 9.8 12,230 17.1 594,788 10.0
Total $ 67,313 100.0 % $ 6,020,785 100.0 % $ 71,523 100.0 % $ 5,967,133 100.0 %

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

As of
September 30, 2023 December 31, 2022
(dollars in thousands)
Ratios:
Allowance for credit losses to loans receivable 1.12 % 1.20 %
Nonaccrual loans to loans 0.26 % 0.17 %
Allowance for credit losses to nonaccrual loans 426.49 % 726.34 %
Balance:
Nonaccrual loans at end of period $ 15,783 $ 9,847
Nonperforming loans at end of period $ 15,783 $ 9,847

As of September 30, 2023 and December 31, 2022, the allowance for credit losses related to off-balance sheet items, primarily unfunded loan commitments, was $2.5 million and $3.1 million, respectively. The Bank closely monitors the borrower’s repayment capabilities, while funding existing commitments to ensure losses are minimized. Based on management’s evaluation and analysis of portfolio credit quality and prevailing economic conditions, we believe these allowances were adequate for current expected lifetime losses in the loan portfolio and off-balance sheet exposure as of September 30, 2023.

The following table presents a summary of net (charge-offs) recoveries for the loan portfolio:

Three Months Ended Nine Months Ended
Average Loans Net (Charge-Offs) Recoveries Net (Charge-Offs) Recoveries to Average Loans (1) Average Loans Net (Charge-Offs) Recoveries Net (Charge-Offs) Recoveries to Average Loans (1)
(dollars in thousands)
September 30, 2023
Commercial real estate loans $ 3,719,876 $ (166 ) (0.02 )% $ 3,759,932 $ (453 ) (0.02 )%
Residential loans 906,977 — — 847,633 6 0.00
Commercial and industrial loans 697,454 (6,182 ) (3.55 ) 729,893 (5,704 ) (1.04 )
Equipment financing agreements 591,116 (2,530 ) (1.71 ) 596,067 (5,921 ) (1.32 )
Total $ 5,915,423 $ (8,878 ) (0.60 )% $ 5,933,525 $ (12,072 ) (0.27 )%
September 30, 2022
Commercial real estate loans $ 3,845,616 $ 984 0.10 % $ 3,825,584 $ 1,256 0.04 %
Residential loans 583,190 (1,967 ) (1.35 ) 488,420 (2,510 ) (0.69 )
Commercial and industrial loans 713,746 220 0.12 666,911 592 0.12
Equipment financing agreements 554,035 (347 ) (0.25 ) 521,042 (431 ) (0.11 )
Total $ 5,696,587 $ (1,110 ) (0.08 )% $ 5,501,957 $ (1,093 ) (0.03 )%

(1)

Annualized

For the three months ended September 30, 2023, gross charge-offs were $9.4 million, an increase of $7.3 million, from $2.1 million for the same period in 2022 and gross recoveries were $0.5 million, a decrease of $0.5 million, from $1.0 million for the three months ended September 30, 2022. Net loan charge-offs were $8.9 million, or 0.60% of average loans, compared with net loan charge-offs of $1.1 million, or 0.08% of average loans, for the three months ended September 30, 2023 and 2022, respectively. Gross charge-offs for the three months ended September 30, 2023 primarily consisted of the $5.1 million charge-off on a nonperforming commercial and industrial loan in the health-care industry, the $1.0 million charge-off on a nonperforming commercial and industrial loan, and equipment financing arrangement charge-offs of $2.8 million.

For the nine months ended September 30, 2023, gross charge-offs were $14.3 million, an increase of $10.8 million, from $3.5 million for the same period in 2022 and gross recoveries were $2.2 million, a decrease of $0.2 million, from $2.4 million for the nine months ended September 30, 2022. Net loan charge-offs were $12.1 million, or 0.27% of average loans, compared with net loan charge-offs of $1.1 million, or 0.03% of average loans, for the nine months ended September 30, 2023 and 2022, respectively. Gross charge-offs for the nine months ended September 30, 2023 primarily consisted of the $5.1 million charge-off on a nonperforming commercial and industrial loan in the health-care industry, the $1.0 million charge-off on a nonperforming commercial and industrial loan, and $7.1 million of charge-offs of equipment financing arrangements.

Deposits

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

December 31, 2022
Percent Balance Percent
Demand – noninterest-bearing 2,161,238 34.5 % $ 2,539,602 41.3 %
Interest-bearing:
Demand 88,133 1.4 115,573 1.9
Money market and savings 1,576,006 25.2 1,556,690 25.2
Uninsured amount of time deposits more than 250,000:
Three months or less 148,401 2.4 44,828 0.7
Over three months through six months 338,893 5.4 123,471 2.0
Over six months through twelve months 200,456 3.2 191,248 3.1
Over twelve months 4,254 0.1 138,451 2.2
All other insured time deposits 1,742,691 27.8 1,458,209 23.6
Total deposits 6,260,072 100.0 % $ 6,168,072 100.0 %

All values are in US Dollars.

Total deposits were $6.26 billion and $6.17 billion as of September 30, 2023 and December 31, 2022, respectively, representing an increase of $92.0 million, or 1.5%. The increase in deposits was primarily driven by an increase of $478.5 million in time deposits, offset by a decrease of $386.5 million in demand deposits due to rising market rates and the shift to time deposits. At September 30, 2023, the loan-to-deposit ratio was 96.2% compared with 96.7% at December 31, 2022.

As of September 30, 2023, the aggregate amount of uninsured deposits (deposits in amounts greater than $250,000, which is the maximum amount for federal deposit insurance) was $2.49 billion, of which $1.80 billion were demand, money market and savings deposits and $692.0 million were time deposits. As of December 31, 2022, the aggregate amount of uninsured deposits was $2.65 billion, consisting of $2.15 billion in demand, money market and savings deposits and $498.0 million in time deposits.

Borrowings and Subordinated Debentures

Borrowings mostly take the form of advances from the FHLB. At September 30, 2023 and December 31, 2022, total advances from the FHLB were $162.5 million and $350.0 million, respectively. The Bank had $50.0 million and $250.0 million of overnight advances from the FHLB at September 30, 2023 and December 31, 2022, respectively. Excess funds from deposit growth were used to pay off borrowings.

The weighted-average interest rate of all FHLB advances at September 30, 2023 and December 31, 2022 was 3.69% and 3.57%, respectively.

The FHLB maximum amount outstanding at any month end during each of the year-to-date periods ended September 30, 2023 and December 31, 2022 was $450.0 million and $350.0 million, respectively.

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

September 30, 2023 December 31, 2022
FHLB of San Francisco Outstanding<br>Balance Weighted<br>Average<br>Rate Outstanding<br>Balance Weighted<br>Average<br>Rate
(dollars in thousands)
Advances due over 12 months through 24 months $ 12,500 1.90 % $ 37,500 0.40 %
Advances due over 24 months through 36 months 62,500 4.37 12,500 1.90
Outstanding advances over 12 months $ 75,000 3.96 % $ 50,000 0.78 %

Subordinated debentures were $129.9 million and $129.4 million as of September 30, 2023 and December 31, 2022, respectively. Subordinated debentures are comprised of fixed-to-floating subordinated notes of $108.3 million and $108.2 million as of September 30, 2023 and December 31, 2022, respectively, and junior subordinated deferrable interest debentures of $21.6 million and $21.2 million as of September 30, 2023 and December 31, 2022, respectively. See “Note 8 – Borrowings and Subordinated Debentures” to the consolidated financial statements for more details.

Stockholders' Equity

Stockholders’ equity at September 30, 2023 was $663.4 million, compared with $637.5 million at December 31, 2022. The increase was primarily due to $61.4 million of net income for the nine months ended September 30, 2023, offset by $22.9 million of cash dividends, a $10.4 million unrealized after-tax loss due to changes in the value of the securities portfolio, and $3.3 million to repurchase 200,000 shares of Company stock.

Interest Rate Risk Management

The spread between interest income on interest-earning assets and interest expense on interest-bearing liabilities is the principal component of net interest income, and interest rate changes substantially affect our financial performance. We emphasize capital protection through stable earnings. In order to achieve stable earnings, we prudently manage our assets and liabilities and closely monitor the percentage changes in net interest income and equity value in relation to limits established within our guidelines.

The Company performs simulation modeling to estimate the potential effects of interest rate changes. The following table summarizes one of the stress simulations performed to forecast the impact of changing interest rates on net interest income and the value of interest-earning assets and interest-bearing liabilities reflected on our balance sheet (i.e., an instantaneous parallel shift in the yield curve of the magnitude indicated below) as of September 30, 2023. 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
1- to 12-Month Horizon 13- to 24-Month Horizon
Change in Interest Dollar Percentage Dollar Percentage
Rates (Basis Points) Change Change Change Change
(dollars in thousands)
300 $ (2,959 ) (1.29 %) $ 7,690 2.98 %
200 $ (2,880 ) (1.25 %) $ 2,768 1.07 %
100 $ (518 ) (0.23 %) $ 3,524 1.37 %
-100 $ (1,272 ) (0.55 %) $ (7,326 ) (2.84 %)
-200 $ (4,316 ) (1.88 %) $ (18,706 ) (7.25 %)
-300 $ (8,856 ) (3.85 %) $ (34,055 ) (13.20 %)
Economic Value of Equity (EVE)
--- --- --- --- --- --- ---
Change in Interest Dollar Percentage
Rates (Basis Points) Change Change
(dollars in thousands)
300 $ (65,578 ) (8.56 %)
200 $ (46,754 ) (6.10 %)
100 $ (13,809 ) (1.80 %)
-100 $ (4,035 ) (0.53 %)
-200 $ (29,532 ) (3.85 %)
-300 $ (75,957 ) (9.91 %)

The estimated sensitivity does not necessarily represent our forecast, and the results may not be indicative of actual changes to our net interest income. These estimates are based upon a number of assumptions, including the timing and magnitude of interest rate changes, prepayments on loans receivable and securities, pricing strategies on loans receivable and deposits, and replacement of asset and liability cash flows.

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

Conditional prepayment rates*:
Loans receivable 15 %
Securities 6 %
Deposit rate betas*:
NOW, savings, money market demand 47 %
Time deposits, retail and wholesale 76 %
* Balance-weighted average

While the assumptions used are based on current economic and local market conditions, there is no assurance as to the predictive nature of these conditions, including how customer preferences or competitor influences might change.

Capital Resources and Liquidity

Capital Resources

Historically, our primary source of capital has been the retention of operating earnings. In order to ensure adequate capital levels, the Board regularly assesses projected sources and uses of capital, expected loan growth, anticipated strategic actions (such as stock repurchases and dividends), and projected capital thresholds under adverse and severely adverse economic conditions. In addition, the Board considers the Company’s access to capital from financial markets through the issuance of additional debt and securities, including common stock or notes, to meet its capital needs.

In response to the uncertainty surrounding the COVID-19 pandemic, the Board reduced the quarterly cash dividends paid on common stock beginning in the second quarter of 2020. Due to the continued stabilization of Company results and financial condition, the Board authorized an increase in the quarterly cash dividend for the second quarter of 2021. As the effects of the pandemic continued to subside and the Company’s results and financial condition improved, the Board again increased the dividend from $0.20 per share for the fourth quarter of 2021, to $0.22 per share for the first and second quarters of 2022, and then to $0.25 per share for the third and fourth quarters of 2022. The dividend continued at $0.25 per share for each quarter of 2023.

The Company’s ability to pay dividends to shareholders depends in part upon dividends it receives from the Bank. California law restricts the amount available for cash dividends to the lesser of a bank’s retained earnings or net income for its last three fiscal years (less any distributions to shareholders made during such period). Where the above test is not met, cash dividends may still be paid, with the prior approval of the Department of Financial Protection and Innovation (“DFPI”), in an amount not exceeding the greater of: (1) retained earnings of the bank; (2) net income of the bank for its last fiscal year; or (3) the net income of the bank for its current fiscal year. As of October 1, 2023, the Bank has the ability to pay dividends of approximately $130.1 million, after giving effect to the $0.25 dividend declared for the fourth quarter of 2023, without the prior approval of the Commissioner of the DFPI.

At September 30, 2023, the Bank’s total risk-based capital ratio of 14.42%, Tier 1 risk-based capital ratio of 13.42%, common equity Tier 1 capital ratio of 13.42% and Tier 1 leverage capital ratio of 11.25%, 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%,

Tier 1 risk-based capital ratio equal to or greater than 8.00%, common equity Tier 1 capital ratios equal to or greater than 6.50%, and Tier 1 leverage capital ratio equal to or greater than 5.00%.

At September 30, 2023, the Company's total risk-based capital ratio was 15.07%, Tier 1 risk-based capital ratio was 12.30%, common equity Tier 1 capital ratio was 11.95% and Tier 1 leverage capital ratio was 10.27%.

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 2022 Annual Report on Form 10-K.

Liquidity

For a discussion of liquidity for the Company, see Note 14 - Liquidity included in the notes to unaudited consolidated financial statements in this Report and Note 22 – Liquidity in our 2022 Annual Report on Form 10-K.

Off-Balance Sheet Arrangements

For a discussion of off-balance sheet arrangements, see Note 12 - Off-Balance Sheet Commitments included in the notes to unaudited consolidated financial statements in this Report and “Item 1. Business - Off-Balance Sheet Commitments” in our 2022 Annual Report on Form 10-K.

Contractual Obligations

There have been no material changes to the contractual obligations described in our 2022 Annual Report on Form 10-K.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Management is responsible for the disclosure controls and procedures of the Corporation. Disclosure controls and procedures are controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods required by the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of the Corporation’s management, including the Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures. Based on that evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of September 30, 2023.

Changes in Internal Control over Financial Reporting

There were no changes in the Corporation's internal control over financial reporting (as defined in Rule 13a-15(f)) during the quarter ended September 30, 2023 that materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

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

Except as provided below, there have been no material changes in risk factors applicable to the Corporation from those described in “Risk Factors” in Part I, Item 1A of the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022 and in “Risk Factors” in Part I, Item 1A of the Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023.

Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities

On January 24, 2019, the Company announced a stock repurchase program that authorized the repurchase of up to 5% of its outstanding shares or approximately 1.5 million shares of common stock. As of September 30, 2023, 459,972 shares remained available for future purchases under that stock repurchase program.

The following table represents information with respect to repurchases of common stock made by the Company during the three months ended September 30, 2023:

Purchase Date: Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Program Maximum Shares That May Yet Be Purchased Under the Program
July 1, 2023 - July 31, 2023 $ — — 559,972
August 1, 2023 - August 31, 2023 19.02 100,000 459,972
September 1, 2023 - September 30, 2023 — — 459,972
Total $ 19.02 100,000 459,972

The Company acquired 76,262 shares from employees in connection with the satisfaction of employee tax withholding obligations incurred through vesting of Company stock awards for the nine months ended September 30, 2023. Shares withheld to cover income taxes upon the vesting of stock awards are repurchased pursuant to the terms of the applicable plan and not under the Company's repurchase program.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Securities Trading Plans of Directors and Executive Officers

During the three months ended September 30, 2023, none of our directors or executive officers adopted or terminated any contract, instruction or written plan for the purchase or sale of Hanmi securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement.”

Item 6. Exhibits

Exhibit<br><br>Number Document
31.1 Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS Inline XBRL Instance Document *
101.SCH Inline XBRL Taxonomy Extension Schema Document *
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document *
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document *
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document *
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document *
104 The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, 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.

Hanmi Financial Corporation
Date: November 8, 2023 By: /s/ Bonita I. Lee
Bonita I. Lee
President and Chief Executive Officer (Principal Executive Officer)
Date: November 8, 2023 By: /s/ Romolo C. Santarosa
--- --- --- ---
Romolo C. Santarosa
Senior Executive Vice President and Chief Financial Officer (Principal Financial Officer)

EX-31.1

Exhibit 31.1

Certification of Principal Executive Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Bonita I. Lee, President and Chief Executive Officer, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Hanmi Financial Corporation;

2. Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Report;

3. Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Report;

4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report is being prepared;

(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Report based on such evaluation; and

(d) disclosed in this Report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the Audit Committee of the Registrant’s Board of Directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Date: November 8, 2023 /s/ Bonita I. Lee
Bonita I. Lee
President and Chief Executive Officer<br><br>(Principal Executive Officer)

EX-31.2

Exhibit 31.2

Certification of Principal Financial Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Romolo C. Santarosa, Senior Executive Vice President and Chief Financial Officer, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Hanmi Financial Corporation;

2. Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Report;

3. Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Report;

4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report is being prepared;

(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Report based on such evaluation; and

(d) disclosed in this Report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the Audit Committee of the Registrant’s Board of Directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Date: November 8, 2023 /s/ Romolo C. Santarosa
Romolo C. Santarosa
Senior Executive Vice President and Chief Financial Officer<br><br>(Principal Financial Officer)

EX-32.1

Exhibit 32.1

Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To

Section 906 of The Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of Hanmi Financial Corporation (the “Company”) on Form 10-Q for the period ended September 30, 2023, as filed with the Securities and Exchange Commission (the “SEC”) on the date hereof (the “Report”), I, Bonita I. Lee, President and Chief Executive Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge that:

(1) The Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of, and for, the period presented.

Date: November 8, 2023 /s/ Bonita I. Lee
Bonita I. Lee
President and Chief Executive Officer

The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure statement. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the SEC or its staff upon request.

EX-32.2

Exhibit 32.2

Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To

Section 906 of The Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of Hanmi Financial Corporation (the “Company”) on Form 10-Q for the period ended September 30, 2023, as filed with the Securities and Exchange Commission (the “SEC”) on the date hereof (the “Report”), I, Romolo C. Santarosa, Senior Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge that:

(1) The Report fully complies with the requirements of Section13(a) or Section 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of, and for, the periods presented.

Date: November 8, 2023 /s/ Romolo C. Santarosa
Romolo C. Santarosa
Senior Executive Vice President and Chief Financial Officer

The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure statement. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the SEC or its staff upon request.

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