Equibles

10-Q

HANMI FINANCIAL CORP (HAFC)

10-Q 2022-05-09 For: 2022-03-31
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 March 31, 2022

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><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 May 2, 2022, there were 30,467,022 outstanding shares of the Registrant’s Common Stock.

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

Three Months Ended March 31, 2022

Table of Contents

Part I – Financial Information
Item 1. Financial Statements 3
Consolidated Balance Sheets at March 31, 2022 (unaudited) and December 31, 2021 3
Consolidated Statements of Income for the three months ended March 31, 2022 and 2021 (unaudited) 4
Consolidated Statements of Comprehensive Income for the three months ended March 31, 2022 and 2021 (unaudited) 5
Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2022 and 2021 (unaudited) 6
Consolidated Statements of Cash Flows for the three months ended March 31, 2022 and 2021 (unaudited) 7
Notes to Consolidated Financial Statements (unaudited) 8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 38
Item 3. Quantitative and Qualitative Disclosures About Market Risk 54
Item 4. Controls and Procedures 54
Part II – Other Information
Item 1. Legal Proceedings 55
Item 1A. Risk Factors 55
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 55
Item 3. Defaults Upon Senior Securities 55
Item 4. Mine Safety Disclosures 55
Item 5. Other Information 55
Item 6. Exhibits 56
Signatures 57

Item 1. Financial Statements

Hanmi Financial Corporation and Subsidiaries

Consolidated Balance Sheets

(in thousands, except share data)

December 31,
2021
Assets
Cash and due from banks 312,491 $ 608,965
Securities available for sale, at fair value (amortized cost of 941,007 and 922,654 as of March 31, 2022 and December 31, 2021, respectively) 876,980 910,790
Loans held for sale, at the lower of cost or fair value 15,617 13,342
Loans receivable, net of allowance for credit losses of 71,512 and 72,557 as of March 31, 2022 and December 31, 2021, respectively 5,265,988 5,078,984
Accrued interest receivable 12,289 11,976
Premises and equipment, net 24,410 24,788
Customers' liability on acceptances 182 —
Servicing assets 7,202 7,080
Goodwill and other intangible assets, net 11,353 11,395
Federal Home Loan Bank ("FHLB") stock, at cost 16,385 16,385
Income tax assets 51,939 44,060
Bank-owned life insurance 55,149 54,905
Prepaid expenses and other assets 87,067 75,917
Total assets 6,737,052 $ 6,858,587
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing 2,678,726 $ 2,574,517
Interest-bearing 3,104,444 3,211,752
Total deposits 5,783,170 5,786,269
Accrued interest payable 966 1,161
Bank's liability on acceptances 182 —
Borrowings 125,000 137,500
Subordinated debentures (136,800 and 224,100 face amount less unamortized discount and debt issuance costs of 7,833 and 9,094 as of March 31, 2022 and December 31, 2021, respectively) 128,967 215,006
Accrued expenses and other liabilities 77,315 75,234
Total liabilities 6,115,600 6,215,170
Stockholders' equity:
Preferred stock, 0.001 par value; authorized 10,000,000 shares; no shares issued as of March 31, 2022 and December 31, 2021 — —
Common stock, 0.001 par value; authorized 62,500,000 shares; issued 33,670,197 shares (30,468,458 shares outstanding) and 33,603,839 shares (30,407,261 shares outstanding) as of March 31, 2022 and December 31, 2021, respectively 33 33
Additional paid-in capital 581,337 580,796
Accumulated other comprehensive (loss) income, net of tax benefit of 19,208 and 3,421 as of March 31, 2022 and December 31, 2021, respectively (44,819 ) (8,443 )
Retained earnings 210,788 196,784
Less treasury stock; 3,201,739 shares and 3,196,578 shares as of March 31, 2022 and December 31, 2021, respectively (125,887 ) (125,753 )
Total stockholders' equity 621,452 643,417
Total liabilities and stockholders' equity 6,737,052 $ 6,858,587

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 March 31,
2022 2021
Interest and dividend income:
Interest and fees on loans receivable $ 53,924 $ 50,614
Interest on securities 2,516 1,140
Dividends on FHLB stock 248 206
Interest on deposits in other banks 216 96
Total interest and dividend income 56,904 52,056
Interest expense:
Interest on deposits 2,013 3,958
Interest on borrowings 337 478
Interest on subordinated debentures 3,598 1,619
Total interest expense 5,948 6,055
Net interest income before credit loss expense 50,956 46,001
Credit loss (recovery) expense (1,375 ) 2,109
Net interest income after credit loss (recovery) expense 52,331 43,892
Noninterest income:
Service charges on deposit accounts 2,875 2,357
Trade finance and other service charges and fees 1,142 1,034
Gain on sale of Small Business Administration ("SBA") loans 2,521 4,125
Net gain on sales of securities — 99
Other operating income 1,982 2,193
Total noninterest income 8,520 9,808
Noninterest expense:
Salaries and employee benefits 17,717 16,820
Occupancy and equipment 4,646 4,595
Data processing 3,236 2,926
Professional fees 1,430 1,447
Supplies and communications 665 757
Advertising and promotion 817 359
Other operating expenses 3,181 2,631
Total noninterest expense 31,692 29,535
Income before tax 29,159 24,165
Income tax expense 8,464 7,506
Net income $ 20,695 $ 16,659
Basic earnings per share $ 0.68 $ 0.54
Diluted earnings per share $ 0.68 $ 0.54
Weighted-average shares outstanding:
Basic 30,254,212 30,461,681
Diluted 30,377,580 30,473,970

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

Hanmi Financial Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Unaudited)

(in thousands)

Three Months Ended March 31,
2022 2021
Net income $ 20,695 $ 16,659
Other comprehensive income (loss), net of tax:
Unrealized gain on securities:
Unrealized holding (loss) gain arising during period (52,163 ) (11,785 )
Less: reclassification adjustment for net gain included in net income — (99 )
Income tax benefit (expense) related to items of other comprehensive income 15,787 3,515
Other comprehensive income (loss), net of tax (36,376 ) (8,369 )
Comprehensive income (loss) $ (15,681 ) $ 8,290

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 March 31, 2022 and March 31, 2021

(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 Income (Loss) Earnings at Cost Equity
Balance at January 1, 2021 33,560,801 (2,842,966 ) 30,717,835 $ 33 $ 578,360 $ 3,076 $ 114,621 $ (119,046 ) $ 577,044
Restricted stock awards, net of forfeitures 24,380 — 24,380 — — — — — —
Share-based compensation expense — — — — 598 — — — 598
Restricted stock surrendered due to employee tax liability — (4,682 ) (4,682 ) — — — — (95 ) (95 )
Repurchase of common stock — (55,000 ) (55,000 ) — — — — (946 ) (946 )
Cash dividends paid (common stock, 0.10/share) — — — — — — (3,069 ) — (3,069 )
Net income — — — — — — 16,659 — 16,659
Change in unrealized gain (loss) on securities available for sale, net of income taxes — — — — — (8,369 ) — — (8,369 )
Balance at March 31, 2021 33,585,181 (2,902,648 ) 30,682,533 $ 33 $ 578,958 $ (5,293 ) $ 128,211 $ (120,087 ) $ 581,822
Balance at January 1, 2022 33,603,839 (3,196,578 ) 30,407,261 $ 33 $ 580,796 $ (8,443 ) $ 196,784 $ (125,753 ) $ 643,417
Restricted stock awards, net of forfeitures 66,358 — 66,358 — — — — — —
Share-based compensation expense — — — — 541 — — — 541
Restricted stock surrendered due to employee tax liability — (5,161 ) (5,161 ) — — — — (134 ) (134 )
Cash dividends paid (common stock, 0.22/share) — — — — — — (6,691 ) — (6,691 )
Net income — — — — — — 20,695 — 20,695
Change in unrealized gain (loss) on securities available for sale, net of income taxes — — — — — (36,376 ) — — (36,376 )
Balance at March 31, 2022 33,670,197 (3,201,739 ) 30,468,458 $ 33 $ 581,337 $ (44,819 ) $ 210,788 $ (125,887 ) $ 621,452

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)

Three Months Ended March 31,
2022 2021
Cash flows from operating activities:
Net income $ 20,695 $ 16,659
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 6,568 3,850
Share-based compensation expense 541 598
Credit loss (recovery) expense (1,375 ) 2,109
Gain on sales of securities — (99 )
Gain on sales of SBA loans (2,521 ) (4,125 )
Origination of SBA loans held for sale (31,853 ) (146,670 )
Proceeds from sales of SBA loans 32,098 126,690
Change in bank-owned life insurance (244 ) (256 )
Change in prepaid expenses and other assets (13,745 ) 4,945
Change in income tax assets 7,908 3,554
Change in accrued expenses and other liabilities 2,062 (652 )
Net cash provided by (used in) operating activities 20,134 6,602
Cash flows from investing activities:
Purchases of securities available for sale (52,475 ) (116,026 )
Proceeds from matured, called and repayment of securities 32,730 67,729
Proceeds from sales of securities available for sale — 8,035
Purchases of loans receivable (11,000 ) (298 )
Purchases of premises and equipment (617 ) (1,011 )
Proceeds from sales of other real estate owned ("OREO") — 589
Change in loans receivable, excluding purchases (175,522 ) 58,271
Net cash provided by (used in) investing activities (206,884 ) 17,289
Cash flows from financing activities:
Change in deposits (3,099 ) 234,815
Repayment of borrowings (12,500 ) —
Proceeds from repurchased subordinated debentures 12,700 —
Redemption of subordinated debentures (100,000 ) —
Cash paid for surrender of vested shares due to employee tax liability (134 ) (95 )
Repurchase of common stock — (946 )
Cash dividends paid (6,691 ) (3,069 )
Net cash provided by (used in) financing activities (109,724 ) 230,705
Net increase (decrease) in cash and due from banks (296,474 ) 254,596
Cash and due from banks at beginning of year 608,965 391,849
Cash and due from banks at end of period $ 312,491 $ 646,445
Supplemental disclosures of cash flow information:
Interest paid $ 6,143 $ 8,267
Income taxes paid $ 129 $ 125
Non-cash activities:
Transfer of loans receivable to other real estate owned $ — $ 1
Income tax benefit related to items of other comprehensive income $ 15,787 $ 3,515
Change in right-of-use asset obtained in exchange for lease liability $ — $ —

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 March 31, 2022, but are not necessarily indicative of the results that will be reported for the entire year or any other interim period. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted. The unaudited consolidated financial statements are prepared in conformity with GAAP and in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission. The interim information should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Annual Report on Form 10-K”).

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

The COVID-19 pandemic resulted in restrictions on travel and business activities which have yet to return to pre-pandemic levels. As a result, the operations and business results of the Company could be materially adversely affected. The extent to which the COVID-19 crisis may impact business activity or financial results will depend on future developments, including new information which may emerge concerning the severity of the coronavirus and the actions required to contain the coronavirus or treat its impact, among others, which are highly uncertain and cannot be predicted. This uncertainty may impact the accuracy of our significant estimates, which includes the allowance for credit losses, the allowance for credit losses related to off-balance sheet items, and the valuation of intangible assets including deferred tax assets, goodwill, and servicing assets.

Descriptions of our significant accounting policies are included in Note 1 - Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements in the 2021 Annual Report on Form 10-K.

Note 2 — Securities

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

Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
(in thousands)
March 31, 2022
U.S. Treasury securities $ 18,953 $ — $ (739 ) $ 18,214
U.S. government agency and sponsored agency obligations:
Mortgage-backed securities 618,459 5 (41,588 ) 576,876
Collateralized mortgage obligations 93,324 4 (6,164 ) 87,164
Debt securities 131,370 — (6,746 ) 124,624
Total U.S. government agency and sponsored agency obligations 843,153 9 (54,498 ) 788,664
Municipal bonds-tax exempt 78,901 — (8,799 ) 70,102
Total securities available for sale $ 941,007 $ 9 $ (64,036 ) $ 876,980
December 31, 2021
U.S. Treasury securities $ 15,457 $ 1 $ (61 ) $ 15,397
U.S. government agency and sponsored agency obligations:
Mortgage-backed securities 615,393 18 (7,906 ) 607,505
Collateralized mortgage obligations 95,153 41 (1,590 ) 93,604
Debt securities 117,499 — (1,603 ) 115,896
Total U.S. government agency and sponsored agency obligations 828,045 59 (11,099 ) 817,005
Municipal bonds-tax exempt 79,152 117 (881 ) 78,388
Total securities available for sale $ 922,654 $ 177 $ (12,041 ) $ 910,790

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

March 31, 2022 December 31, 2021
Available for Sale Available for Sale
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
(in thousands)
Within one year $ 586 $ 587 $ 1,103 $ 1,108
Over one year through five years 150,937 143,638 126,483 125,069
Over five years through ten years 37,129 35,043 51,338 50,770
Over ten years 752,355 697,712 743,730 733,843
Total $ 941,007 $ 876,980 $ 922,654 $ 910,790

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

Holding Period
Less than 12 Months 12 Months or More Total
Gross Estimated Number Gross Estimated Number Gross Estimated Number
Unrealized Fair of Unrealized Fair of Unrealized Fair of
Loss Value Securities Loss Value Securities Loss Value Securities
(in thousands, except number of securities)
March 31, 2022
U.S. Treasury securities $ (739 ) $ 18,215 5 $ — $ — — $ (739 ) $ 18,215 5
U.S. government agency and sponsored agency obligations:
Mortgage-backed securities (27,111 ) 409,085 86 (14,477 ) 167,229 35 $ (41,588 ) $ 576,314 121
Collateralized mortgage obligations (4,544 ) 69,210 19 (1,620 ) 16,966 5 (6,164 ) 86,176 24
Debt securities (5,057 ) 97,814 20 (1,689 ) 26,811 5 (6,746 ) 124,625 25
Total U.S. government agency and sponsored agency obligations (36,712 ) 576,109 125 (17,786 ) 211,006 45 (54,498 ) 787,115 170
Municipal bonds-tax exempt (8,799 ) 70,102 19 — — — (8,799 ) 70,102 19
Total $ (46,250 ) $ 664,426 149 $ (17,786 ) $ 211,006 45 $ (64,036 ) $ 875,432 194
December 31, 2021
U.S. Treasury securities $ (61 ) $ 8,391 2 $ — $ — — $ (61 ) $ 8,391 2
U.S. government agency and sponsored agency obligations:
Mortgage-backed securities (6,252 ) 535,610 102 (1,654 ) 59,457 11 $ (7,906 ) $ 595,067 113
Collateralized mortgage obligations (1,256 ) 76,894 16 (334 ) 12,548 3 (1,590 ) 89,442 19
Debt securities (1,503 ) 110,996 21 (100 ) 4,900 1 (1,603 ) 115,896 22
Total U.S. government agency and sponsored agency obligations (9,011 ) 723,500 139 (2,088 ) 76,905 15 (11,099 ) 800,405 154
Municipal bonds-tax exempt (881 ) 68,548 17 — — (881 ) 68,548 17
Total $ (9,953 ) $ 800,439 158 $ (2,088 ) $ 76,905 15 $ (12,041 ) $ 877,344 173

The Company evaluates its available-for-sale securities portfolio for impairment on a quarterly basis. This assessment takes into account the changes in the credit quality of these debt securities since acquisition and the likelihood of a credit loss occurring over the life of the securities. In the event that a credit loss is expected to occur in the future, an allowance is established and a corresponding credit loss is recognized. Based on this analysis, as of March 31, 2022, the Company determined that no credit losses are expected to be realized on the tax-exempt municipal bond portfolio. The remainder of the portfolio consists of U.S. Treasury obligations, U.S. government agency securities, and U.S. government sponsored agency securities, all of which have the backing of the U.S. government, and are therefore not expected to incur credit losses.

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

Three Months Ended March 31,
2022 2021
(in thousands)
Gross realized gains on sales of securities $ — $ 99
Gross realized losses on sales of securities — —
Net realized gains on sales of securities $ — $ 99
Proceeds from sales of securities $ — $ 8,035

During the three months ended March 31, 2022, there were no sale of securities. During the three months ended March 31, 2021, there were $0.1 million in net gains in earnings resulting from the sale of $8.0 million of securities previously recorded with $0.1 million unrealized gains in accumulated other comprehensive income.

Securities available for sale with market values of $30.1 million and $34.7 million as of March 31, 2022 and December 31, 2021, respectively, were pledged to secure borrowings from the Federal Reserve Bank (“FRB”) Discount Window.

At March 31, 2022, there were no holdings of securities of any one issuer, other than the U.S. government and its agencies in an amount greater than 10 percent of shareholders’ equity.

Note 3 — Loans

Loans Receivable

Loans consisted of the following as of the dates indicated:

March 31, 2022 December 31, 2021
(in thousands)
Real estate loans:
Commercial property
Retail $ 990,716 $ 970,134
Hospitality 718,721 717,692
Other ^(1)^ 1,974,091 1,919,033
Total commercial property loans 3,683,528 3,606,859
Construction 87,925 95,006
Residential/consumer loans 432,805 400,546
Total real estate loans 4,204,258 4,102,411
Commercial and industrial loans 633,107 561,831
Leases receivable 500,135 487,299
Loans receivable 5,337,500 5,151,541
Allowance for credit losses (71,512 ) (72,557 )
Loans receivable, net $ 5,265,988 $ 5,078,984
^(^^1)^ Includes, among other types, mixed-use, apartment, office, industrial, gas stations, faith-based facilities and warehouse; all other property types represent less than one percent of total loans receivable.
--- ---

At March 31, 2022 and December 31, 2021, PPP loans totaling $1.5 million and $3.0 million, respectively, were included in commercial and industrial loans in the table above.

Accrued interest on loans was $10.5 million and $10.1 million at March 31, 2022 and December 31, 2021, respectively. Accrued interest at March 31, 2022 and December 31, 2021 included unpaid deferred interest receivable for loans currently or previously modified under the CARES Act of $2.7 million and $3.4 million, net of a $0 and $1.7 million valuation allowance, respectively.

At March 31, 2022 and December 31, 2021, loans of $2.32 billion and $2.30 billion, respectively, were pledged to secure advances from the FHLB.

Loans Held for Sale

The following is the activity for loans held for sale for the three months ended March 31, 2022 and 2021:

Real Estate Commercial and<br><br><br>Industrial Total
(in thousands)
March 31, 2022
Balance at beginning of period $ 6,954 $ 6,388 $ 13,342
Originations and transfers 20,164 11,689 31,853
Sales (15,293 ) (14,284 ) (29,577 )
Principal paydowns and amortization — (1 ) (1 )
Balance at end of period $ 11,825 $ 3,792 $ 15,617
March 31, 2021
Balance at beginning of period $ 8,042 $ 526 $ 8,568
Originations 16,283 130,387 146,670
Sales (13,395 ) (109,169 ) (122,564 )
Principal paydowns and amortization — — —
Balance at end of period $ 10,930 $ 21,744 $ 32,674

Loans held for sale was comprised of $15.6 million and $13.3 million of the guaranteed portion of SBA 7(a) loans at March 31, 2022 and December 31, 2021, respectively. All second draw PPP loans were sold by the third quarter of 2021. For the three months ended March 31, 2021, the Company recognized $2.5 million of gains on the sale of $108.5 million second draw PPP loans.

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 March 31, 2022 and 2021:

Real Estate Commercial and<br><br><br>Industrial Leases<br><br><br>Receivable Total
(in thousands)
March 31, 2022
Balance at beginning of period $ 48,890 $ 12,418 $ 11,249 $ 72,557
Less loans charged off 530 58 247 835
Recoveries on loans receivable previously charged off (197 ) (317 ) (423 ) (937 )
Provision (recovery) for credit losses (2,202 ) 267 788 (1,147 )
Ending balance $ 46,355 $ 12,944 $ 12,213 $ 71,512
March 31, 2021
Balance at beginning of period $ 51,877 $ 21,410 $ 17,139 $ 90,426
Less loans charged off 1,509 93 1,903 3,505
Recoveries on loans receivable previously charged off (273 ) (99 ) (135 ) (507 )
Provision (recovery) for credit losses 7,121 (5,029 ) (1,128 ) 964
Ending balance $ 57,762 $ 16,387 $ 14,243 $ 88,392

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

March 31, 2022 December 31, 2021
Allowance Amount Percentage<br><br><br>of Total<br><br><br>Allowance Total Loans Percentage of Total Loans Allowance Amount Percentage<br><br><br>of Total<br><br><br>Allowance Total Loans Percentage of Total Loans
(dollars in thousands)
Real estate loans:
Commercial property
Retail $ 6,827 9.5 % $ 990,716 18.6 % $ 6,579 9.1 % $ 970,134 18.8 %
Hospitality 19,625 27.5 % 718,721 13.5 % 22,670 31.2 % 717,692 13.9 %
Other 15,904 22.2 % 1,974,091 36.9 % 15,065 20.8 % 1,919,033 37.3 %
Total commercial property loans 42,356 59.2 % 3,683,528 69.0 % 44,314 61.1 % 3,606,859 70.0 %
Construction 3,531 4.9 % 87,925 1.6 % 4,078 5.6 % 95,006 1.8 %
Residential/consumer loans 468 0.7 % 432,805 8.1 % 498 0.7 % 400,546 7.8 %
Total real estate loans 46,355 64.8 % 4,204,258 78.7 % 48,890 67.4 % 4,102,411 79.6 %
Commercial and industrial loans 12,944 18.1 % 633,107 11.9 % 12,418 17.1 % 561,831 10.9 %
Leases receivable 12,213 17.1 % 500,135 9.4 % 11,249 15.5 % 487,299 9.5 %
Total $ 71,512 100.0 % $ 5,337,500 100.0 % $ 72,557 100.0 % $ 5,151,541 100.0 %

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

March 31, 2022 December 31, 2021
Amortized Cost Amortized Cost
(in thousands)
Real estate loans:
Commercial property
Retail $ 1,708 $ 1,917
Hospitality — —
Other ^(1)^ 482 499
Total commercial property loans 2,190 2,416
Residential/consumer loans 951 982
Total real estate loans 3,141 3,398
Total $ 3,141 $ 3,398
^(1)^ Includes, among other types, mixed-use, apartment, office, industrial, gas stations, faith-based facilities and warehouse; all other property types represent less than one percent of total loans receivable.
--- ---

Loan Quality Indicators

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

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

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

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

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

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

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

Loans by Vintage Year and Risk Rating

Term Loans
Amortized Cost Basis by Origination Year ^(1)^
2022 2021 2020 2019 2018 Prior Revolving<br><br><br>Loans<br><br><br>Amortized<br><br><br>Cost Basis Total
(in thousands)
March 31, 2022
Real estate loans:
Commercial property
Risk Rating
Pass / Pass-Watch $ 459,277 $ 1,036,000 $ 664,427 $ 462,571 $ 365,194 $ 517,843 $ 44,192 $ 3,549,504
Special Mention — 19,530 16,932 9,720 21,746 18,266 1,702 87,896
Classified 858 — — 5,875 17,228 22,167 — 46,128
Total commercial property 460,135 1,055,530 681,359 478,166 404,168 558,276 45,894 3,683,528
Construction
Risk Rating
Pass / Pass Watch 1,147 63,764 602 — — — — 65,513
Special Mention — — — — — 22,412 — 22,412
Classified — — — — — — — —
Total construction 1,147 63,764 602 — — 22,412 — 87,925
Residential/consumer loans
Risk Rating
Pass / Pass-Watch 60,512 189,043 15,420 243 17,446 141,405 7,483 431,552
Special Mention — — — — — 289 — 289
Classified — — — — — 964 — 964
Total residential/consumer loans 60,512 189,043 15,420 243 17,446 142,658 7,483 432,805
Total real estate loans
Risk Rating
Pass / Pass-Watch 520,936 1,288,807 680,449 462,814 382,640 659,248 51,675 4,046,569
Special Mention — 19,530 16,932 9,720 21,746 40,967 1,702 110,597
Classified 858 — — 5,875 17,228 23,131 — 47,092
Total real estate loans 521,794 1,308,337 697,381 478,409 421,614 723,346 53,377 4,204,258
Commercial and industrial loans:
Risk Rating
Pass / Pass-Watch 198,803 152,230 51,415 34,109 14,216 12,567 135,207 598,547
Special Mention — 8,808 — 13,853 — 4,703 2,997 30,361
Classified — — — 283 129 738 3,049 4,199
Total commercial and industrial loans 198,803 161,038 51,415 48,245 14,345 18,008 141,253 633,107
Leases receivable:
Risk Rating
Pass / Pass-Watch 68,511 222,018 69,739 86,682 38,946 8,126 — 494,022
Special Mention — — — — — — — —
Classified — 1,050 492 3,175 1,123 273 — 6,113
Total leases receivable 68,511 223,068 70,231 89,857 40,069 8,399 — 500,135
Total loans receivable:
Risk Rating
Pass / Pass-Watch 788,250 1,663,055 801,603 583,605 435,802 679,941 186,882 5,139,138
Special Mention — 28,338 16,932 23,573 21,746 45,670 4,699 140,958
Classified 858 1,050 492 9,333 18,480 24,142 3,049 57,404
Total loans receivable $ 789,108 $ 1,692,443 $ 819,027 $ 616,511 $ 476,028 $ 749,753 $ 194,630 $ 5,337,500
^(1)^ Includes extensions, renewals, or modifications of credit contracts, which consist of a new credit decision. Certain prior period amounts have been reclassified to conform to current period presentation.
--- ---
Term Loans
--- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
Amortized Cost Basis by Origination Year ^(1)^
2021 2020 2019 2018 2017 Prior Revolving<br><br><br>Loans<br><br><br>Amortized<br><br><br>Cost Basis Total
December 31, 2021
Real estate loans:
Commercial property
Risk Rating
Pass / Pass-Watch $ 1,203,197 $ 706,470 $ 488,250 $ 406,288 $ 277,680 $ 384,064 $ 41,413 $ 3,507,362
Special Mention — 18,869 7,593 — 6,999 16,879 1,703 52,043
Classified — — 5,450 17,247 2,965 21,792 — 47,454
Total commercial property 1,203,197 725,339 501,293 423,535 287,644 422,735 43,116 3,606,859
Construction
Risk Rating
Pass / Pass-Watch 73,808 631 — — — — — 74,439
Special Mention — — — — — 20,567 — 20,567
Classified — — — — — — — —
Total construction 73,808 631 — — — 20,567 — 95,006
Residential/consumer loans
Risk Rating
Pass / Pass-Watch 194,948 16,975 247 19,813 73,567 82,076 8,381 396,007
Special Mention — — — 930 406 2,221 — 3,557
Classified — — — — 965 17 — 982
Total residential/consumer loans 194,948 16,975 247 20,743 74,938 84,314 8,381 400,546
Total real estate loans
Risk Rating
Pass / Pass-Watch 1,471,953 724,076 488,497 426,101 351,247 466,140 49,794 3,977,808
Special Mention — 18,869 7,593 930 7,405 39,667 1,703 76,167
Classified — — 5,450 17,247 3,930 21,809 — 48,436
Total real estate loans 1,471,953 742,945 501,540 444,278 362,582 527,616 51,497 4,102,411
Commercial and industrial loans:
Risk Rating
Pass / Pass-Watch 264,762 55,135 36,937 15,780 10,874 6,016 148,148 537,652
Special Mention — 274 13,989 — 67 4,802 (5 ) 19,127
Classified — 3 708 145 19 886 3,291 5,052
Total commercial and industrial loans 264,762 55,412 51,634 15,925 10,960 11,704 151,434 561,831
Leases receivable:
Risk Rating
Pass / Pass-Watch 239,738 79,400 101,460 47,485 10,683 1,388 — 480,154
Special Mention — — — — — — — —
Classified 716 981 3,575 1,328 347 198 — 7,145
Total leases receivable 240,454 80,381 105,035 48,813 11,030 1,586 — 487,299
Total loans receivable:
Risk Rating
Pass / Pass-Watch 1,976,453 858,611 626,894 489,366 372,804 473,544 197,942 4,995,614
Special Mention — 19,143 21,582 930 7,472 44,469 1,698 95,294
Classified 716 984 9,733 18,720 4,296 22,893 3,291 60,633
Total loans receivable $ 1,977,169 $ 878,738 $ 658,209 $ 509,016 $ 384,572 $ 540,906 $ 202,931 $ 5,151,541
^(1)^ Includes extensions, renewals, or modifications of credit contracts, which consist of a new credit decision. Certain prior period amounts have been reclassified to conform to current period presentation.
--- ---

Loans by Vintage Year and Payment Performance

Term Loans
Amortized Cost Basis by Origination Year ^(1)^
2022 2021 2020 2019 2018 Prior Revolving<br><br><br>Loans<br><br><br>Amortized<br><br><br>Cost Basis Total
(in thousands)
March 31, 2022
Real estate loans:
Commercial property
Payment performance
Performing $ 460,135 $ 1,055,530 $ 681,359 $ 478,166 $ 404,168 $ 554,596 $ 45,894 $ 3,679,848
Nonperforming — — — — — 3,680 — 3,680
Total commercial property 460,135 1,055,530 681,359 478,166 404,168 558,276 45,894 3,683,528
Construction
Payment performance
Performing 1,147 63,764 602 — — 22,412 — 87,925
Nonperforming — — — — — — — —
Total construction 1,147 63,764 602 — — 22,412 — 87,925
Residential/consumer loans
Payment performance
Performing 60,512 189,043 15,420 243 17,446 141,457 7,483 431,604
Nonperforming — — — — — 1,201 — 1,201
Total residential/consumer loans 60,512 189,043 15,420 243 17,446 142,658 7,483 432,805
Total real estate loans
Payment performance
Performing 521,794 1,308,337 697,381 478,409 421,614 718,465 53,377 4,199,377
Nonperforming — — — — — 4,881 — 4,881
Total real estate loans 521,794 1,308,337 697,381 478,409 421,614 723,346 53,377 4,204,258
Commercial and industrial loans:
Payment performance
Performing 198,803 161,038 51,415 48,014 14,345 17,763 141,253 632,631
Nonperforming — — — 231 — 245 476
Total commercial and industrial loans 198,803 161,038 51,415 48,245 14,345 18,008 141,253 633,107
Leases receivable:
Payment performance
Performing 68,511 222,018 69,739 86,682 38,946 8,126 — 494,022
Nonperforming — 1,050 492 3,175 1,123 273 — 6,113
Total leases receivable 68,511 223,068 70,231 89,857 40,069 8,399 — 500,135
Total loans receivable:
Payment performance
Performing 789,108 1,691,393 818,535 613,105 474,905 744,354 194,630 5,326,030
Nonperforming — 1,050 492 3,406 1,123 5,399 — 11,470
Total loans receivable $ 789,108 $ 1,692,443 $ 819,027 $ 616,511 $ 476,028 $ 749,753 $ 194,630 $ 5,337,500
^(1)^ Includes extensions, renewals, or modifications of credit contracts, which consist of a new credit decision. Certain prior period amounts have been reclassified to conform to current period presentation.
--- ---
Term Loans
--- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
Amortized Cost Basis by Origination Year ^(1)^
2021 2020 2019 2018 2017 Prior Revolving<br><br><br>Loans<br><br><br>Amortized<br><br><br>Cost Basis Total
December 31, 2021
Real estate loans:
Commercial property
Payment performance
Performing $ 1,203,197 $ 725,339 $ 501,293 $ 423,515 $ 286,935 $ 419,464 $ 43,116 $ 3,602,859
Nonperforming — — — 20 709 3,271 — 4,000
Total commercial property 1,203,197 725,339 501,293 423,535 287,644 422,735 43,116 3,606,859
Construction
Payment performance
Performing 73,808 631 — — — 20,567 — 95,006
Nonperforming — — — — — — — —
Total construction 73,808 631 — — — 20,567 — 95,006
Residential/consumer loans
Payment performance
Performing 194,948 16,975 247 20,743 73,973 84,052 8,381 399,319
Nonperforming — — — — 965 262 — 1,227
Total residential/consumer loans 194,948 16,975 247 20,743 74,938 84,314 8,381 400,546
Total real estate loans
Payment performance
Performing 1,471,953 742,945 501,540 444,258 360,908 524,083 51,497 4,097,184
Nonperforming — — — 20 1,674 3,533 — 5,227
Total real estate loans 1,471,953 742,945 501,540 444,278 362,582 527,616 51,497 4,102,411
Commercial and industrial loans:
Payment performance
Performing 264,762 55,409 50,926 15,925 10,956 11,431 151,434 560,843
Nonperforming — 3 708 — 4 273 — 988
Total commercial and industrial loans 264,762 55,412 51,634 15,925 10,960 11,704 151,434 561,831
Leases receivable:
Payment performance
Performing 239,738 79,400 101,460 47,484 10,684 1,388 — 480,154
Nonperforming 716 981 3,575 1,329 346 198 — 7,145
Total leases receivable 240,454 80,381 105,035 48,813 11,030 1,586 — 487,299
Total loans receivable:
Payment performance
Performing 1,976,453 877,754 653,926 507,667 382,548 536,902 202,931 5,138,181
Nonperforming 716 984 4,283 1,349 2,024 4,004 — 13,360
Total loans receivable $ 1,977,169 $ 878,738 $ 658,209 $ 509,016 $ 384,572 $ 540,906 $ 202,931 $ 5,151,541
^(1)^ Includes extensions, renewals, or modifications of credit contracts, which consist of a new credit decision. Certain prior period amounts have been reclassified to conform to current period presentation.
--- ---

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

30-59<br><br><br>Days<br><br><br>Past Due 60-89<br><br><br>Days<br><br><br>Past Due 90 Days<br><br><br>or More<br><br><br>Past Due Total<br><br><br>Past Due Current Total Accruing<br><br><br>90 Days<br><br><br>or More<br><br><br>Past Due
(in thousands)
March 31, 2022
Real estate loans:
Commercial property
Retail $ — $ — $ — $ — $ 990,716 $ 990,716 $ —
Hospitality — — — — 718,721 718,721 —
Other 120 — 482 602 1,973,489 1,974,091 —
Total commercial property loans 120 — 482 602 3,682,926 3,683,528 —
Construction — — — — 87,925 87,925 —
Residential/consumer loans 1,871 — 534 2,405 430,400 432,805 —
Total real estate loans 1,991 — 1,016 3,007 4,201,251 4,204,258 —
Commercial and industrial loans 64 — — 64 633,043 633,107 —
Leases receivable 3,414 1,099 1,748 6,261 493,874 500,135 —
Total loans receivable $ 5,469 $ 1,099 $ 2,764 $ 9,332 $ 5,328,168 $ 5,337,500 $ —
December 31, 2021
Real estate loans:
Commercial property
Retail $ — $ — $ — $ — $ 970,134 $ 970,134 $ —
Hospitality 556 — — 556 717,136 717,692 —
Other 92 691 499 1,282 1,917,751 1,919,033 —
Total commercial property loans 648 691 499 1,838 3,605,021 3,606,859 —
Construction — — — — 95,006 95,006 —
Residential/consumer loans 570 750 556 1,876 398,670 400,546 —
Total real estate loans 1,218 1,441 1,055 3,714 4,098,697 4,102,411 —
Commercial and industrial loans 56 9 — 65 561,766 561,831 —
Leases receivable 3,764 1,992 1,181 6,937 480,362 487,299 —
Total loans receivable $ 5,038 $ 3,442 $ 2,236 $ 10,716 $ 5,140,825 $ 5,151,541 $ —

Individually Evaluated Loans

The Company reviews all loans on an individual basis when they do not share similar risk characteristics with loan pools.

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 March 31, 2022 and December 31, 2021.

March 31, 2022
Nonaccrual Loans<br><br><br>With<br><br><br>No Allowance for<br><br><br>Credit Losses Nonaccrual Loans<br><br><br>With<br><br><br>Allowance for<br><br><br>Credit Losses Loans<br><br><br>Past Due<br><br><br>90 Days Still<br><br><br>Accruing Total<br><br><br>Nonperforming<br><br><br>Loans
(in thousands)
Real estate loans:
Commercial property
Retail $ 1,708 $ — $ — $ 1,708
Other 1,676 296 — 1,972
Total commercial property loans 3,384 296 — 3,680
Residential/consumer loans 950 251 — 1,201
Total real estate loans 4,334 547 — 4,881
Commercial and industrial loans 6 470 — 476
Leases receivable 1,188 4,925 — 6,113
Total $ 5,528 $ 5,942 $ — $ 11,470
December 31, 2021
Nonaccrual Loans<br><br><br>With<br><br><br>No Allowance for<br><br><br>Credit Losses Nonaccrual Loans<br><br><br>With<br><br><br>Allowance for<br><br><br>Credit Losses Loans<br><br><br>Past Due<br><br><br>90 Days Still<br><br><br>Accruing Total<br><br><br>Nonperforming<br><br><br>Loans
(in thousands)
Real estate loans:
Commercial property
Retail $ 1,918 $ — $ — $ 1,918
Other 1,745 337 — 2,082
Total commercial property loans 3,663 337 — 4,000
Residential/consumer loans 982 245 — 1,227
Total real estate loans 4,645 582 — 5,227
Commercial and industrial loans 8 980 — 988
Leases receivable 1,172 5,973 — 7,145
Total $ 5,825 $ 7,535 $ — $ 13,360

The Company recognized $27,000 and $177,000 of interest income on nonaccrual loans for the three months ended March 31, 2022 and 2021, respectively.

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

March 31, 2022 December 31, 2021
(in thousands)
Nonaccrual loans $ 11,470 $ 13,360
Loans receivable 90 days or more past due and still accruing — —
Total nonperforming loans receivable 11,470 13,360
Other real estate owned ("OREO") 675 675
Total nonperforming assets $ 12,145 $ 14,035

OREO is included in prepaid expenses and other assets in the accompanying Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021.

Troubled Debt Restructurings

As of March 31, 2022 and December 31, 2021, TDRs were $2.7 million and $2.9 million, respectively. A debt restructuring is considered a TDR if we grant a concession that we would not have otherwise considered to a borrower for economic or legal reasons related to the borrower’s financial difficulties.

The following table details TDRs as of March 31, 2022 and December 31, 2021:

Nonaccrual TDRs Accrual TDRs
Deferral of<br><br><br>Principal Deferral of<br><br><br>Principal<br><br><br>and Interest Reduction<br><br><br>of Principal<br><br><br>and Interest Extension<br><br><br>of Maturity Total Deferral of<br><br><br>Principal Deferral of<br><br><br>Principal<br><br><br>and Interest Reduction<br><br><br>of Principal<br><br><br>and Interest Extension<br><br><br>of Maturity Total
(in thousands)
March 31, 2022
Real estate loans $ 323 $ 1,824 $ 353 $ — $ 2,500 $ — $ — $ 92 $ — $ 92
Commercial and industrial loans — 120 — — 120 — — — — —
Total $ 323 $ 1,944 $ 353 $ — $ 2,620 $ — $ — $ 92 $ — $ 92
December 31, 2021
Real estate loans $ 346 $ 2,046 $ 372 $ — $ 2,764 $ — $ — $ — $ — $ —
Commercial and industrial loans — 124 — — 124 — — — — —
Total $ 346 $ 2,170 $ 372 $ — $ 2,888 $ — $ — $ — $ — $ —

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

Three Months ended Twelve Months ended
March 31, 2022 December 31, 2021
Number of<br><br><br>Loans Pre-<br><br><br>Modification<br><br><br>Outstanding<br><br><br>Recorded<br><br><br>Investment Post-<br><br><br>Modification<br><br><br>Outstanding<br><br><br>Recorded<br><br><br>Investment Number of<br><br><br>Loans Pre-<br><br><br>Modification<br><br><br>Outstanding<br><br><br>Recorded<br><br><br>Investment Post-<br><br><br>Modification<br><br><br>Outstanding<br><br><br>Recorded<br><br><br>Investment
(in thousands except for number of loans)
Real estate loans 1 $ 92 $ 92 — $ — $ —
Total 1 $ 92 $ 92 — $ — $ —

All TDRs are individually analyzed using one of three criteria: (1) the present value of expected future cash flows discounted at the loan’s effective interest rate; (2) the loan’s observable market price; or (3) the fair value of the collateral if the loan is collateral dependent. At March 31, 2022 and December 31, 2021, the allowance resulting from the individual evaluation of TDRs was inconsequential.

A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms. No loans defaulted during the three months ended March 31, 2022 following modification. During the year ended December 31, 2021, no loans defaulted within the twelve-month period following modification.

Note 4 — Servicing Assets

The changes in servicing assets for the three months ended March 31, 2022 and 2021 were as follows:

Three Months Ended March 31,
2022 2021
(in thousands)
Servicing assets:
Balance at beginning of period $ 7,080 $ 6,212
Addition related to sale of SBA loans 667 450
Amortization (545 ) (512 )
Balance at end of period $ 7,202 $ 6,150

At March 31, 2022 and December 31, 2021, we serviced loans sold to unaffiliated parties in the amounts of $483.6 million and $473.5 million, respectively. These represented loans that have been sold for which the Bank continues to provide servicing. These loans are maintained off-balance sheet and are not included in the loans receivable balance. All of the loans serviced were SBA loans.

The Company recorded servicing fee income of $1.2 million and $1.3 million for the three months ended March 31, 2022 and 2021, respectively. Servicing fee income, net of the amortization of servicing assets, is included in other operating income in the consolidated statements of income. Amortization expense was $545,000 and $512,000 for the three months ended March 31, 2022 and 2021, respectively.

The fair value of servicing rights was $8.1 million at March 31, 2022. The fair value at March 31, 2022 was determined using discount rates ranging from 9.0 percent to 10.6 percent and prepayment speeds ranging from 11.0 percent to 16.9 percent, depending on the stratification of the specific right. The fair value of servicing rights was $8.1 million at December 31, 2021. The fair value at December 31, 2021 was determined using discount rates ranging from 10.4 percent to 16.7 percent and prepayment speeds ranging from 10.2 percent to 12.8 percent, depending on the stratification of the specific right.

Note 5 — Income Taxes

The Company’s income tax expense was $8.5 million and $7.5 million, representing an effective income tax rate of 29.0 percent and 31.1 percent for the three months ended March 31, 2022 and 2021, respectively.

Management concluded that as of March 31, 2022 and December 31, 2021, a valuation allowance of $1.6 million was appropriate against certain state net operating loss carry forwards and certain tax credits. For all other deferred tax assets, management believes it was more likely than not that these deferred tax assets will be realized principally through future taxable income and reversal of existing taxable temporary differences. Net income tax assets were $51.9 million and $44.1 million as of March 31, 2022 and December 31, 2021, respectively.

As of March 31, 2022, the Company was subject to examination by various taxing authorities for its federal tax returns for the periods ending on or after December 31, 2018 through 2020 and state tax returns for the periods ending on or after December 31, 2017 through 2020. During the quarter ended March 31, 2022, there was no material change to the Company’s uncertain tax positions. The Company does not expect its unrecognized tax positions to change significantly over the next twelve months.

Note 6 — Goodwill and other Intangibles

The third-party originators intangible of $483,000 and goodwill of $11.0 million were recorded as a result of the acquisition of a leasing portfolio in 2016. The core deposit intangible of $2.2 million was recognized for the core deposits acquired in a 2014 acquisition. The Company’s intangible assets were as follows for the periods indicated:

March 31, 2022 December 31, 2021
Amortization<br><br><br>Period Gross<br><br><br>Carrying<br><br><br>Amount Accumulated<br><br><br>Amortization Net<br><br><br>Carrying<br><br><br>Amount Gross<br><br><br>Carrying<br><br><br>Amount Accumulated<br><br><br>Amortization Net<br><br><br>Carrying<br><br><br>Amount
(in thousands)
Core deposit intangible 10 years $ 2,213 $ (1,932 ) $ 281 $ 2,213 $ (1,900 ) $ 313
Third-party originators intangible 7 years 483 (442 ) 41 483 (432 ) 51
Goodwill N/A 11,031 — 11,031 11,031 — 11,031
Total intangible assets $ 13,727 $ (2,374 ) $ 11,353 $ 13,727 $ (2,332 ) $ 11,395

The Company performed an impairment analysis on its goodwill and other intangible assets as of December 31, 2021 and determined there was no impairment. No triggering event has occurred subsequent to December 31, 2021 that would require a reassessment of goodwill and other intangible assets.

Note 7 — Deposits

Uninsured time deposits at or exceeding the FDIC insurance limit of $250,000 as of March 31, 2022 and December 31, 2021 were $167.5 million and $173.5 million, respectively.

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

At March 31, 2022 Time<br>Deposits of<br>250,000<br>or More Other Time<br><br><br>Deposits Total
(in thousands)
2022 $ 485,205 $ 644,431
2023 144,555 184,277
2024 62,438 62,438
2025 2,084 2,349
2026 and thereafter 2,811 3,073
Total $ 697,093 $ 896,568
At December 31, 2021
2022 $ 672,821 $ 879,299
2023 40,564 42,086
2024 60,854 60,854
2025 1,919 2,184
2026 and thereafter 2,503 2,765
Total $ 778,661 $ 987,188

All values are in US Dollars.

Accrued interest payable on deposits was $1.0 million and $1.2 million at March 31, 2022 and December 31, 2021, respectively. Total deposits reclassified to loans due to overdrafts at March 31, 2022 and December 31, 2021 were $257,000 and $277,000, respectively.

Note 8 — Borrowings and Subordinated Debentures

At March 31, 2022, the Bank had no overnight advances and $125.0 million of term advances outstanding with the FHLB with a weighted average interest rate of 1.04 percent. At December 31, 2021, the Bank had no overnight advances and $137.5 million of term advances with the FHLB with a weighted average rate of 1.05 percent. Interest expense on borrowings for the three months ended March 31, 2022 and 2021 was $337,000 and $478,000, respectively.

March 31, 2022 December 31, 2021
Outstanding<br><br><br>Balance Weighted<br><br><br>Average Rate Outstanding<br><br><br>Balance Weighted<br><br><br>Average Rate
(dollars in thousands)
Overnight advances $ — 0.00 % $ — 0.00 %
Advances due within 12 months 50,000 1.63 % 50,000 1.62 %
Advances due over 12 months through 24 months 50,000 0.37 % 50,000 0.97 %
Advances due over 24 months through 36 months 25,000 1.22 % 37,500 0.40 %
Outstanding advances $ 125,000 1.04 % $ 137,500 1.05 %

The following is financial data pertaining to FHLB advances:

March 31, 2022 December 31, 2021
(dollars in thousands)
Weighted-average interest rate at end of period 1.04 % 1.05 %
Weighted-average interest rate during the period 1.05 % 1.17 %
Average balance of FHLB advances $ 130,556 $ 145,277
Maximum amount outstanding at any month-end $ 137,500 $ 162,500

The Bank maintains a secured credit facility with the FHLB, allowing the Bank to borrow on an overnight and term basis. The Bank had $2.32 billion and $2.30 billion of loans pledged as collateral with the FHLB as of March 31, 2022 and December 31, 2021, respectively. Remaining available borrowing capacity was $1.45 billion, subject to the FHLB statutory lending limit of $1.84 billion, and $1.61 billion at March 31, 2022 and December 31, 2021, respectively.

The Bank also had securities with market values of $30.1 million and $34.7 million at March 31, 2022 and December 31, 2021, respectively, pledged with the FRB, which provided $28.2 million and $32.8 million in available borrowing capacity through the Fed Discount Window as of March 31, 2022 and December 31, 2021, respectively.

On August 20, 2021, the Company issued $110.0 million of Fixed-to-Floating Subordinated Notes (“2021 Notes”) with a maturity date of September 1, 2031. The 2021 Notes have an initial fixed interest rate of 3.75 percent per annum, payable semiannually in arrears on March 1 and September 1 of each year, up to but excluding September 1, 2026. From and including September 1, 2026 and thereafter, the 2021 Notes will bear interest at a floating rate per annum equal to the Benchmark rate (which is expected to be the Three-Month Term SOFR) plus 310 basis points, payable quarterly in arrears on March 1, June 1, September 1 and December 1 of each year. If the then current three-month term SOFR rate is less than zero, the three-month SOFR will be deemed to be zero. Debt issuance cost was $2.1 million, which is being amortized through the 2021 Notes’ maturity date. At both March 31, 2022 and December 31, 2021, the balance of the 2021 Notes included in the Company’s Consolidated Balance Sheet, net of issuance cost, was $108.0 million.

The Company issued $100.0 million of Fixed-to-Floating Subordinated Notes (“2017 Notes”) on March 21, 2017, with a maturity on March 30, 2027. The 2017 Notes have an initial fixed interest rate of 5.45 percent per annum, payable semiannually on March 30 and September 30 of each year. From and including March 30, 2022 and thereafter, the 2017 Notes bear interest at a floating rate equal to the then current three-month LIBOR, as calculated on each applicable date of determination, plus 3.315 percent payable quarterly. If the then current three-month LIBOR is less than zero, three-month LIBOR will be deemed to be zero. Debt issuance cost was $2.3 million, which is being amortized through the 2017 Notes’ maturity date.

On March 30, 2022, the Company redeemed its 2017 Notes. A portion of the redemption was funded with the proceeds from the Company’s August 20, 2021 subordinated debt offering. The redemption price for each of the 2017 Notes equaled 100 percent of the outstanding principal amount redeemed, plus any accrued and unpaid interest thereon. All interest accrued on the 2017 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 2017 Notes.

At March 31, 2022 and December 31, 2021, the balance of 2017 Notes included in the Company’s Consolidated Balance Sheet, net of debt issuance cost, was $0 and $86.2 million, respectively.

The Company assumed Junior Subordinated Deferrable Interest Debentures (“Subordinated Debentures”) as a result of an acquisition in 2014 with an unpaid principal balance of $26.8 million and an estimated fair value of $18.5 million. The $8.3 million discount is being amortized to interest expense through the debentures’ maturity date of March 15, 2036. A trust was formed in 2005 which issued $26.0 million of Trust Preferred Securities (“TPS”) at a 6.26 percent fixed rate for the first five years and a variable rate of three-month LIBOR plus 140 basis points thereafter. The TPS will be subject to mandatory redemption if the Subordinated Debentures are repaid by the Company. Interest is payable quarterly, and the Company has the option to defer interest payments on the Subordinated Debentures from time to time for a period not to exceed five consecutive years. At March 31, 2022 and December 31, 2021, the balance of Subordinated Debentures included in the Company’s Consolidated Balance Sheets, net of discount of $5.9 million and $6.0 million, was $20.9 million and $20.8 million, respectively. The amortization of discount was $102,000 and $99,000 for the three months ended March 31, 2022 and 2021, respectively.

Note 9 — Earnings Per Share

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

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

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

Three Months Ended March 31,
2022 2021
(dollars in thousands, except per share amounts)
Basic EPS
Net income $ 20,695 $ 16,659
Less: income allocated to unvested restricted stock 124 100
Income allocated to common shares $ 20,571 $ 16,559
Weighted-average shares for basic EPS 30,254,212 30,461,681
Basic EPS ^(1)^ $ 0.68 $ 0.54
Effect of dilutive stock options and unvested performance restricted stock 123,368 12,289
Diluted EPS
Income allocated to common shares $ 20,571 $ 16,559
Weighted-average shares for diluted EPS 30,377,580 30,473,970
Diluted EPS ^(1)^ $ 0.68 $ 0.54
^(1)^ Per share amounts may not be able to be recalculated using net income and weighted-average shares presented above due to rounding.
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There were no anti-dilutive stock options outstanding for the three months ended March 31, 2022 or 2021.

During the three months ended March 31, 2022, the Company issued 38,036 performance stock units to executive officers from the 2021 Equity Compensation plan fair valued at $955,000 on the grant date of March 23, 2022. During the three months ended March 31, 2021, the Company issued 42,626 performance stock units to executive officers from the 2013 Equity Compensation Plan fair valued at $784,000 on the grant date of March 24, 2021. These units have a three-year cliff vesting period and include dividend equivalent rights. Total performance stock units outstanding as of March 31, 2022 were 104,599 with an aggregate grant fair value of $2.0 million. As of March 31, 2022 and 2021, there were 104,599 and 66,563 performance stock units outstanding, respectively. In accordance with the treasury method, unvested performance stock units were included in the weighted average number of common shares for the diluted EPS calculation in the table above.

Note 10 — Regulatory Matters

Federal bank regulatory agencies require bank holding companies and banks to maintain a minimum ratio of qualifying total capital to risk-weighted assets of 8.0 percent and a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0 percent. In addition to the risk-based guidelines, federal bank regulatory agencies require bank holding companies and banks to maintain a minimum ratio of Tier 1 capital to average assets, referred to as the leverage ratio, of 4.0 percent.

In order for banks to be considered “well capitalized,” federal bank regulatory agencies require a minimum ratio of qualifying total capital to risk-weighted assets of 10.0 percent and a minimum ratio of Tier 1 capital to risk-weighted assets of 8.0 percent. In addition to the risk-based guidelines, federal bank regulatory agencies require depository institutions to maintain a minimum ratio of Tier 1 capital to average assets, referred to as the leverage ratio, of 5.0 percent.

At March 31, 2022, the Bank’s capital ratios exceeded the minimum requirements for the Bank to be considered “well capitalized” and the Company exceeded all of its applicable minimum regulatory capital ratio requirements.

A capital conservation buffer of 2.5 percent must be met to avoid limitations on the ability of the Bank and the Company to pay dividends, repurchase shares or pay discretionary bonuses. The Bank's capital conservation buffer was 6.19 percent and 6.70 percent and the Company's capital conservation buffer was 5.71 percent and 5.93 percent as of March 31, 2022 and December 31, 2021, respectively.

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

The capital ratios of Hanmi Financial and the Bank as of March 31, 2022 and December 31, 2021 were as follows:

Minimum Minimum to Be
Regulatory Categorized as
Actual Requirement “Well Capitalized”
Amount Ratio Amount Ratio Amount Ratio
(dollars in thousands)
March 31, 2022
Total capital (to risk-weighted assets):
Hanmi Financial $ 839,015 14.73 % $ 455,784 8.00 % N/A N/A
Hanmi Bank $ 806,922 14.19 % $ 455,023 8.00 % $ 568,778 10.00 %
Tier 1 capital (to risk-weighted assets):
Hanmi Financial $ 666,887 11.71 % $ 341,838 6.00 % N/A N/A
Hanmi Bank $ 744,794 13.09 % $ 341,267 6.00 % $ 455,023 8.00 %
Common equity Tier 1 capital (to risk-weighted assets)
Hanmi Financial $ 645,954 11.34 % $ 256,378 4.50 % N/A N/A
Hanmi Bank $ 744,794 13.09 % $ 255,950 4.50 % $ 369,706 6.50 %
Tier 1 capital (to average assets):
Hanmi Financial $ 666,887 9.70 % $ 274,915 4.00 % N/A N/A
Hanmi Bank $ 744,794 10.84 % $ 274,835 4.00 % $ 343,544 5.00 %
December 31, 2021
Total capital (to risk-weighted assets):
Hanmi Financial $ 912,527 16.57 % $ 440,639 8.00 % N/A N/A
Hanmi Bank $ 809,279 14.70 % $ 440,493 8.00 % $ 550,616 10.00 %
Tier 1 capital (to risk-weighted assets):
Hanmi Financial $ 657,250 11.93 % $ 330,479 6.00 % N/A N/A
Hanmi Bank $ 748,177 13.59 % $ 330,369 6.00 % $ 440,493 8.00 %
Common equity Tier 1 capital (to risk-weighted assets)
Hanmi Financial $ 636,419 11.55 % $ 247,859 4.50 % N/A N/A
Hanmi Bank $ 748,177 13.59 % $ 247,777 4.50 % $ 357,900 6.50 %
Tier 1 capital (to average assets):
Hanmi Financial $ 657,250 9.63 % $ 273,133 4.00 % N/A N/A
Hanmi Bank $ 748,177 10.96 % $ 273,101 4.00 % $ 341,376 5.00 %

Note 11 — Fair Value Measurements

Fair Value Measurements

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

• Level 1 - Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
• Level 2 - Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.
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• 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.
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Fair value is used on a recurring basis for certain assets and liabilities in which fair value is the primary basis of accounting. Additionally, fair value is used on a non-recurring basis to evaluate assets or liabilities for impairment or for disclosure purposes.

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

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

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

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

Loans held for sale - Loans held for sale includes the guaranteed portion of SBA 7(a) loans carried at the lower of cost or fair value. Management obtains quotes, bids or pricing indication sheets on all or part of the loans directly from the purchasing financial institutions. Premiums received or to be received on the quotes, bids or pricing indication sheets are indicative of the fact that cost is lower than fair value. At March 31, 2022 and December 31, 2021, the entire balance of loans held for sale was recorded at its cost. We record loans held for sale on a nonrecurring basis with Level 2 inputs.

Nonperforming loans – Nonaccrual loans receivable and loans 90-days past due and still accruing interest are considered nonperforming for reporting purposes and are measured and recorded at fair value on a non-recurring basis. All nonperforming loans with a carrying balance over $250,000 are individually evaluated for the amount of impairment, if any. Nonperforming loans with a carrying balance of $250,000 or less are evaluated collectively. However, from time to time, nonrecurring fair value adjustments to collateral dependent nonperforming loans are recorded based on either the current appraised value of the collateral, a Level 2 measurement, or management’s judgment and estimation of value reported on older appraisals that are then adjusted based on recent market trends, a Level 3 measurement.

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

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

Assets and Liabilities Measured at Fair Value on a Recurring Basis

As of March 31, 2022 and December 31, 2021, assets and liabilities measured at fair value on a recurring basis are as follows:

Level 1 Level 2 Level 3
Significant
Observable
Quoted Prices in Inputs with No
Active Markets Active Market Significant
for Identical with Identical Unobservable
Assets Characteristics Inputs Total Fair Value
(in thousands)
March 31, 2022
Assets:
Securities available for sale:
U.S. Treasury securities $ 18,214 $ — $ — $ 18,214
U.S. government agency and sponsored agency obligations:
Mortgage-backed securities — 576,876 — 576,876
Collateralized mortgage obligations — 87,164 — 87,164
Debt securities — 124,624 — 124,624
Total U.S. government agency and sponsored agency obligations — 788,664 — 788,664
Municipal bonds-tax exempt — 70,102 — 70,102
Total securities available for sale $ 18,214 $ 858,766 $ — $ 876,980
Derivative financial instruments $ — $ 4,468 $ — $ 4,468
Liabilities:
Derivative financial instruments $ — $ 4,395 $ — $ 4,395
December 31, 2021
Assets:
Securities available for sale:
U.S. Treasury securities $ 15,397 $ — $ — $ 15,397
U.S. government agency and sponsored agency obligations:
Mortgage-backed securities — 607,505 — 607,505
Collateralized mortgage obligations — 93,604 — 93,604
Debt securities — 115,896 — 115,896
Total U.S. government agency and sponsored agency obligations — 817,005 — 817,005
Municipal bonds-tax exempt — 78,388 — 78,388
Total securities available for sale $ 15,397 $ 895,393 $ — $ 910,790
Derivative financial instruments $ — $ 1,379 $ — $ 1,379
Liabilities:
Derivative financial instruments $ — $ 1,360 $ — $ 1,360

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

As of March 31, 2022 and December 31, 2021, assets and liabilities measured at fair value on a non-recurring basis are as follows:

Level 1 Level 2 Level 3
Significant
Observable
Quoted Prices in Inputs With No
Active Markets Active Market Significant
for Identical With Identical Unobservable
Total Assets Characteristics Inputs
(in thousands)
March 31, 2022
Assets:
Collateral dependent loans ^(1)^ $ 3,141 $ — $ — $ 3,141
Other real estate owned 675 — — 675
Repossessed personal property 25 — — 25
December 31, 2021
Assets:
Collateral dependent loans ^(2)^ $ 3,398 $ — $ — $ 3,398
Other real estate owned 675 — — 675
Repossessed personal property 8 — — 8
^(1)^ Consisted of real estate loans of $3.1 million.
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(2) Consisted of real estate loans of $3.4 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 March 31, 2022 and December 31, 2021:

Fair Value Valuation<br><br><br>Techniques Unobservable<br><br><br>Input(s) Range (Weighted<br><br><br>Average)
(in thousands)
March 31, 2022
Collateral dependent loans:
Real estate loans:
Commercial property
Retail $ 1,708 Market approach Market data comparison (25)% to 27% / 9% ^(1)^
Other 482 Market approach Market data comparison (20)% to 0% / 0% ^(1)^
Residential/consumer loans 951 Market approach Market data comparison (4)% to 10% / 6% ^(1)^
Total real estate loans 3,141
Total $ 3,141
Other real estate owned $ 675 Market approach Market data comparison (10)% to 10% / (3)%
Repossessed personal property 25 Market approach Market data comparison ^^ ^(2)^
December 31, 2021
Collateral dependent loans:
Real estate loans:
Commercial property
Retail $ 1,917 Market approach Market data comparison (28)% to 23% / (6)% ^(1)^
Other 499 Market approach Market data comparison (20)% to 20% / 0% ^(1)^
Residential/consumer loans 982 Market approach Market data comparison (19)% to 8% / 3% ^(1)^
Total real estate loans 3,398
Total $ 3,398
Other real estate owned $ 675 Market approach Market data comparison (20)% to (5)% / (12)%
Repossessed personal property 8 Market approach Market data comparison ^^ ^(2)^
^(1)^ Appraisal reports utilize a combination of valuation techniques including a market approach, where prices and other relevant information generated by market transactions involving similar or comparable properties are used to determine the appraised value. Appraisals may include an ‘as is’ and ‘upon completion’ valuation scenarios. Adjustments are routinely made in the appraisal process by third-party appraisers to adjust for differences between the comparable sales and income data. Adjustments also result from the consideration of relevant economic and demographic factors with the potential to affect property values. Also, prospective values are based on the market conditions which exist at the date of inspection combined with informed forecasts based on current trends in supply and demand for the property types under appraisal. Positive adjustments disclosed in this table represent increases to the sales comparison and negative adjustment represent decreases.
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^(2)^ The equipment is usually too low in value to use a professional appraisal service. The values are determined internally using a combination of auction values, vendor recommendations and sales comparisons depending on the equipment type. Some highly commoditized equipment, such as commercial trucks have services that provide industry values.
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ASC 825, Financial Instruments, requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured on a recurring basis or non-recurring basis are discussed above.

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

Recognition and Measurement of Financial Assets and Financial Liabilities (Topic 825), among other provisions, requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. Other than certain financial instruments for which we have concluded that the carrying amounts approximate fair value, the fair value estimates shown below are based on an exit price notion as of March 31, 2022, as required by ASU 2016-01. The financial instruments for which we have concluded that the carrying amounts approximate fair value include, cash and due from banks, accrued interest receivable and payable, and noninterest-bearing deposits. The fair values of off-balance sheet items are based upon the difference between the current value of similar loans and the price at which the Bank has committed to make the loans.

The estimated fair values of financial instruments were as follows:

March 31, 2022
Carrying Fair Value
Amount Level 1 Level 2 Level 3
(in thousands)
Financial assets:
Cash and due from banks $ 312,491 $ 312,491 $ — $ —
Securities available for sale 876,980 18,214 858,766 —
Loans held for sale 15,617 — 16,948 —
Loans receivable, net of allowance for credit losses 5,265,988 — — 5,208,194
Accrued interest receivable 12,289 12,289 — —
Financial liabilities:
Noninterest-bearing deposits 2,678,726 — 2,678,726 —
Interest-bearing deposits 3,104,444 — — 3,101,440
Borrowings and subordinated debentures 253,967 — 122,525 129,028
Accrued interest payable 966 966 — —
December 31, 2021
--- --- --- --- --- --- --- --- ---
Carrying Fair Value
Amount Level 1 Level 2 Level 3
(in thousands)
Financial assets:
Cash and due from banks $ 608,965 $ 608,965 $ — $ —
Securities available for sale 910,790 15,397 895,393 —
Loans held for sale 13,342 — 14,723 —
Loans receivable, net of allowance for credit losses 5,078,984 — — 5,072,282
Accrued interest receivable 11,976 11,976 — —
Financial liabilities:
Noninterest-bearing deposits 2,574,517 — 2,574,517 —
Interest-bearing deposits 3,211,752 — — 3,211,708
Borrowings and subordinated debentures 352,506 — 137,198 213,179
Accrued interest payable 1,161 1,161 — —

Note 12 — Off-Balance Sheet Commitments

The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk similar to the risk involved with on-balance sheet items.

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

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

March 31, December 31,
2022 2021
(in thousands)
Unusued commitments to extend credit $ 626,615 $ 626,474
Standby letters of credit 46,669 49,287
Commercial letters of credit 46,617 39,261
Total commitments $ 719,901 $ 715,022

The allowance for credit losses related to off-balance sheet items is 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 is based on periodic evaluations of the unfunded credit facilities including an assessment of the probability of commitment usage, credit risk factors for loans outstanding to these same customers, and the terms and expiration dates of the unfunded credit facilities.

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

Three Months Ended March 31,
2022 2021
(in thousands)
Balance at beginning of period $ 2,586 $ 2,792
Provision expense (recovery) for credit losses (228 ) (450 )
Balance at end of period $ 2,358 $ 2,342

Note 13 — Leases

The Company enters into leases in the normal course of business primarily for financial centers, 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 March 31, 2022, the outstanding balances for our right-of-use asset and lease liability were $44.5 million and $48.0 million, respectively. The outstanding balances of the right-of-use asset and lease liability were $46.3 million and $49.7 million, respectively, as of December 31, 2021.

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

At March 31, 2022, future minimum rental commitments under these non-cancelable operating leases, with initial or remaining terms of one year or more, were as follows:

Amount
(in thousands)
2022 $ 7,734
2023 7,431
2024 7,047
2025 6,410
2026 5,175
Thereafter 18,885
Remaining lease commitments 52,682
Interest (4,696 )
Present value of lease liability $ 47,986

Weighted average remaining lease terms for the Company's operating leases were 7.68 years and 7.85 years as of March 31, 2022 and December 31, 2021, respectively. Weighted average discount rates used for the Company's operating leases were 2.38 percent and 2.38 percent as of March 31, 2022 and December 31, 2021, respectively. Net lease expense recognized for both the three months ended March 31, 2022 and 2021 was $2.1 million. This included operating lease costs of $2.0 million for both the three months ended March 31, 2022 and 2021. Sublease income for operating leases was inconsequential for the three months ended March 31, 2022 and 2021.

Cash paid and included in cash flows from operating activities for amounts used in the measurement of the lease liability of the Company's operating leases was $2.0 million for each of the three months ended March 31, 2022 and 2021.

Note 14 — Liquidity

Hanmi Financial

As of March 31, 2022 and December 31, 2021, Hanmi Financial had $18.2 million and $94.9 million, respectively, in cash on deposit with its bank subsidiary. Management believes that Hanmi Financial, on a stand-alone basis, had adequate liquid assets to meet its current debt obligations.

Hanmi Bank

The principal objective of our liquidity management program is to maintain the Bank’s ability to meet the day-to-day cash flow requirements of our customers who wish either to withdraw funds or to draw upon credit facilities to meet their cash needs. Management believes that the Bank, on a stand-alone basis, has adequate liquid assets to meet its current obligations. The Bank’s primary funding source will continue to be deposits originating from its branch platform. The Bank’s wholesale funds historically consisted of FHLB advances and brokered deposits. As of March 31, 2022 and December 31, 2021, the Bank had $125.0 million and $137.5 million, respectively, of FHLB advances and $120.3 million and $141.8 million, respectively, of brokered deposits.

We monitor the sources and uses of funds on a regular basis to maintain an acceptable liquidity position. The Bank’s primary source of borrowings is the FHLB, from which the Bank is eligible to borrow up to 30.0 percent of its assets. As of March 31, 2022, the total borrowing capacity available based on pledged collateral and the remaining available borrowing capacity were $1.67 billion and $1.45 billion, respectively, compared to $1.84 billion and $1.61 billion, respectively, as of December 31, 2021.

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

As a means of augmenting its liquidity, the Bank had an available borrowing source of $28.2 million from the Federal Reserve Discount Window, to which the Bank pledged securities with a carrying value of $32.3 million, and had no borrowings as of March 31, 2022. The Bank also maintains a line of credit for repurchase agreements up to $100.0 million. The Bank also had three unsecured federal funds lines of credit totaling $115.0 million with no outstanding balances as of March 31, 2022.

Note 15 — Derivatives and Hedging Activities

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

The table below presents the fair value of the Company’s derivative financial instruments as well as their location on the Balance Sheet as of March 31, 2022 and December 31, 2021.

As of March 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 $ 61,843 Other Assets $ 4,468 $ 61,843 Other Liabilities $ 4,395
Total derivatives not designated as hedging instruments $ 4,468 $ 4,395
As of December 31, 2021 Derivative Assets Derivative Liabilities
Notional Amount Balance Sheet Location Fair Value Notional Amount Balance Sheet Location Fair Value
(in thousands)
Derivatives not designated as hedging instruments
Interest rate products $ 61,968 Other Assets $ 1,379 $ 61,968 Other Liabilities $ 1,360
Total derivatives not designated as hedging instruments $ 1,379 $ 1,360

The table below presents the effect of the Company’s derivative financial instruments that are not designated as hedging instruments on the Income Statement for the three and three months ended March 31, 2022 and 2021.

Derivatives Not Designated as Hedging Instruments under Subtopic 815-20 Location of Gain or (Loss) Recognized in Income on Derivative Amount of Gain or (Loss) Recognized in Income on Derivative
Three Months Ended March 31,
2022 2021
(in thousands)
Interest rate products Other income $ 55 $ 150
Total $ 55 $ 150

The Company did not recognize any fee income from its derivative financial instruments for the three months ended March 31, 2022 nor 2021.

The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives as of March 31, 2022 and December 31, 2021. The net amounts of derivative assets or liabilities can be reconciled to the tabular disclosure of fair value. The derivative assets are located within the prepaid and other assets line item on the Consolidated Balance Sheets and the derivative liabilities are located within the accrued expenses and other liabilities line item on the Consolidated Balance Sheets.

Offsetting of Derivative Assets
As of March 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 $ 4,468 $ — $ 4,468 $ 4,395 $ 73 $ —
Offsetting of Derivative Liabilities
As of March 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 $ 4,395 $ — $ 4,395 $ 4,395 $ — $ —
Offsetting of Derivative Assets
As of December 31, 2021
Gross Amounts Not Offset in the Consolidated Balance Sheets
Gross Amounts of Recognized Assets Gross Amounts Offset in the Consolidated Balance Sheets Net Amounts of Assets presented in the Consolidated Balance Sheets Financial Instruments Cash Collateral Received Net Amount
Derivatives $ 1,379 $ — $ 1,379 $ 1,360 $ 19 $ —
Offsetting of Derivative Liabilities
As of December 31, 2021
Gross Amounts Not Offset in the Consolidated Balance Sheets
Gross Amounts of Recognized Liabilities Gross Amounts Offset in the Consolidated Balance Sheets Net Amounts of Liabilities presented in the Consolidated Balance Sheets Financial Instruments Cash Collateral Provided Net Amount
Derivatives $ 1,360 $ — $ 1,360 $ 1,360 $ — $ —

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

As of March 31, 2022 and December 31, 2021, the fair value of derivatives in a net asset position for counterparty transactions, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $4.5 and $1.4 million, respectively. As of March 31, 2022, the Company had not posted any collateral with its counterparties related to these agreements and is adequately collateralized since its net asset position was $73,000 ($4.5 fair value of assets less $4.4 fair value of liabilities) as of March 31, 2022. As of December 31, 2021, the Company had posted no collateral related to these agreements and was adequately collateralized since its net asset position was $19,000 ($1.4 million fair value of assets less $1.4 million fair value of liabilities).

Note 16 — Subsequent Events

As of the date of issuance of these financial statements, no subsequent events were identified.

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

The following is management’s discussion and analysis of our results of operations and financial condition as of and for the three months ended March 31, 2022. This analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Annual Report on Form 10-K”) and with the unaudited consolidated financial statements and notes thereto set forth in this Quarterly Report on Form 10-Q for the period ended March 31, 2022 (this “Report”).

Forward-Looking Statements

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

Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ from those expressed or implied by the forward-looking statements. These factors include the following: failure to maintain adequate levels of capital and liquidity to support our operations; the effect of potential future supervisory action against us or Hanmi Bank; the effect of our rating under the Community Reinvestment Act and our ability to address any issues raised in our regulatory exams; general economic and business conditions internationally, nationally and in those areas in which we operate; volatility and deterioration in the credit and equity markets; changes in consumer spending, borrowing and savings habits; availability of capital from private and government sources; demographic changes; competition for loans and deposits and failure to attract or retain loans and deposits; fluctuations in interest rates and a decline in the level of our interest rate spread; inflation; risks of natural disasters; the current or anticipated impact of military conflict, terrorism or other geopolitical events; a failure in or breach of our operational or security systems or infrastructure, including cyber-attacks; the failure to maintain current technologies; the inability to successfully implement future information technology enhancements; difficult business and economic conditions that can adversely affect our industry and business, including competition, fraudulent activity and negative publicity; risks associated with Small Business Administration loans; failure to attract or retain key employees; our ability to access cost-effective funding; fluctuations in real estate values; changes in accounting policies and practices; the imposition of tariffs or other domestic or international governmental policies impacting the value of the products of our borrowers; changes in governmental regulation, including, but not limited to, any increase in Federal Deposit Insurance Corporation insurance premiums; the ability of Hanmi Bank to make distributions to Hanmi Financial Corporation, which is restricted by certain factors, including Hanmi Bank’s retained earnings, net income, prior distributions made, and certain other financial tests; 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.

Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the continued impact of the COVID-19 pandemic on our business and results of operation. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations: demand for our products and services may decline; if the economy worsens, loan delinquencies, problem assets, and foreclosures may increase collateral for loans, especially real estate, may decline in value, which could cause credit loss expense to increase; our allowance for credit losses may have to be increased if borrowers experience financial difficulties; the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; a material decrease in net income or a net loss over several quarters could result in the elimination or a decrease in the rate of our quarterly cash dividend; our cyber security risks are increased as the result of an increase in the number of employees working remotely; Federal Deposit Insurance Corporation premiums may increase if the agency experiences additional resolution costs; a worsening of business and economic conditions or in the financial markets could result in an impairment of certain intangible assets such as goodwill or remaining assets; and the unanticipated loss or unavailability of key directors or employees due to the pandemic, which could harm our ability to operate our business or execute our business strategy, especially as we may not be successful in find and integrating suitable replacements.

For additional information concerning risks we face, see “Part II, Item 1A. Risk Factors” in this Report and “Item 1A. Risk Factors” in Part I of the 2021 Annual Report on Form 10-K. We undertake no obligation to update these forward-looking statements to reflect events or circumstances that occur after the date on which such statements were made, except as required by law.

COVID-19

The COVID-19 pandemic has caused significant economic dislocation in the United States. Various state governments and federal agencies have required lenders to provide forbearance and other relief to borrowers (e.g., waiving late payment and other fees). The federal banking agencies have encouraged financial institutions to prudently work with affected borrowers and passed legislation that provided relief from reporting loan classifications due to modifications related to the COVID-19 outbreak. Certain industries have been particularly hard hit, including the travel and hospitality industry, the restaurant industry and the retail industry. Finally, the spread of the coronavirus has caused us to modify our business practices, including employee travel, employee work locations, and cancellation or limitation of physical participation in meetings, events and conferences. As it relates to Bank customers and employees, the Company continues to follow COVID-19 mandates and restrictions issued by governmental authorities.

Critical Accounting Policies

We have established various accounting policies that govern the application of GAAP in the preparation of our financial statements. Our significant accounting policies are described in the Notes to consolidated financial statements in our 2021 Annual Report on Form 10-K. We had no significant changes in our accounting policies since the filing of our 2021 Annual Report on Form 10-K.

Certain accounting policies require us to make significant estimates and assumptions that have a material impact on the carrying value of certain assets and liabilities, and we consider these critical accounting policies. For a description of these critical accounting policies, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies” in our 2021 Annual Report on Form 10-K. Actual results could differ significantly from these estimates and assumptions, which could have a material impact on the carrying value of assets and liabilities at the balance sheet dates and our results of operations for the reporting periods. Management has discussed the development and selection of these critical accounting policies with the Audit Committee of the Company’s Board of Directors.

Executive Overview

Net income was $20.7 million, or $0.68 per diluted share, for the three months ended March 31, 2022 compared with $16.7 million, or $0.54 per diluted share, for the same period a year ago. The increase in net income for the 2022 first quarter reflected a net recovery of credit loss expense of $1.4 million for the three months ended March 31, 2022 compared with a net credit loss expense of $2.1 million for the same period a year ago. In addition, an increase of $5.0 million in net interest income favorably impacted results. These impacts were offset partially by a $2.2 million increase in noninterest expense and a $1.3 million decrease in noninterest income.

Other financial highlights include the following:

• Cash and due from banks decreased $296.5 million to $312.5 million as of March 31, 2022 from $609.0 million at December 31, 2021, primarily as excess liquidity was used to fund strong loan production and the redemption of subordinated debentures.
• Securities decreased $33.8 million to $877.0 million at March 31, 2022 from $910.8 million at December 31, 2021, attributable to the impact of after-tax unrealized losses from rising interest rates.
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• Loans receivable, before the allowance for credit losses, were $5.34 billion at March 31, 2022 compared with $5.15 billion at December 31, 2021
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• Deposits were $5.78 billion at March 31, 2022 compared with $5.79 billion at December 31, 2021.
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• Subordinated debentures and borrowings decreased $98.5 million to $254.0 million at March 31, 2022 from $352.5 million at December 31, 2021, primarily due to the redemption of the 2017 Notes.
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Results of Operations

Net Interest Income

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

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

Three Months Ended
March 31, 2022 March 31, 2021
Interest Average Interest Average
Average Income / Yield / Average Income / Yield /
Balance Expense Rate Balance Expense Rate
Assets (in thousands)
Interest-earning assets:
Loans receivable ^(1)^ $ 5,231,672 $ 53,924 4.18 % $ 4,843,825 $ 50,614 4.24 %
Securities ^(2)^ 930,505 2,586 1.11 % 774,022 1,140 0.59 %
FHLB stock 16,385 248 6.14 % 16,385 206 5.10 %
Interest-bearing deposits in other banks 494,887 216 0.18 % 395,602 96 0.10 %
Total interest-earning assets 6,673,449 56,974 3.46 % 6,029,834 52,056 3.50 %
Noninterest-earning assets:
Cash and due from banks 62,968 56,666
Allowance for credit losses (73,177 ) (89,681 )
Other assets 229,952 233,146
Total assets $ 6,893,192 $ 6,229,965
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Deposits:
Demand: interest-bearing $ 124,892 $ 17 0.06 % $ 102,980 $ 14 0.05 %
Money market and savings 2,106,008 1,189 0.23 % 1,967,012 1,479 0.30 %
Time deposits 937,044 807 0.35 % 1,238,513 2,465 0.81 %
Total interest-bearing deposits 3,167,944 2,013 0.26 % 3,308,505 3,958 0.49 %
Borrowings 130,556 337 1.05 % 150,000 478 1.29 %
Subordinated debentures 213,171 3,598 6.75 % 119,040 1,619 5.44 %
Total interest-bearing liabilities 3,511,671 5,948 0.69 % 3,577,545 6,055 0.69 %
Noninterest-bearing liabilities and equity:
Demand deposits: noninterest-bearing 2,634,398 1,991,204
Other liabilities 88,367 80,060
Stockholders' equity 658,756 581,156
Total liabilities and stockholders' equity $ 6,893,192 $ 6,229,965
Net interest income (taxable equivalent basis) $ 51,026 $ 46,001
Cost of deposits ^(3)^ 0.14 % 0.30 %
Net interest spread (taxable equivalent basis) ^(4)^ 2.77 % 2.81 %
Net interest margin (taxable equivalent basis) ^(5)^ 3.10 % 3.09 %
(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.
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(2) Amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate.
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(3) Represents interest expense on deposits as a percentage of all interest-bearing and noninterest-bearing deposits.
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(4) Represents the average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities.
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(5) Represents net interest income as a percentage of average interest-earning assets.
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The table below shows changes in interest income (on a tax equivalent basis) and interest expense and the amounts attributable to variations in interest rates and volumes for the periods indicated. The variances attributable to simultaneous volume and rate changes have been allocated to the change due to volume and the change due to rate categories in proportion to the relationship of the absolute dollar amount attributable solely to the change in volume and to the change in rate.

Three Months Ended
March 31, 2022 vs March 31, 2021
Increases (Decreases) Due to Change In
Volume Rate Total
(in thousands)
Interest and dividend income:
Loans receivable ^(1)^ $ 4,031 $ (721 ) $ 3,310
Securities ^(2)^ 270 1,176 1,446
FHLB stock — 42 42
Interest-bearing deposits in other banks 28 92 120
Total interest and dividend income 4,329 589 4,918
Interest expense:
Demand: interest-bearing $ 2 $ 1 $ 3
Money market and savings 98 (388 ) (290 )
Time deposits (497 ) (1,161 ) (1,658 )
Borrowings (58 ) (83 ) (141 )
Subordinated debentures 1,517 462 1,979
Total interest expense 1,062 (1,169 ) (107 )
Change in net interest income $ 3,267 $ 1,758 $ 5,025
(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.
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(2) Amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate.
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For the three months ended March 31, 2022 and 2021, net interest income, on a taxable equivalent basis, was $51.0 million and $46.0 million, respectively. The net interest spread and net interest margin, on a taxable equivalent basis, for the quarter ended March 31, 2022 were 2.77 percent and 3.10 percent, respectively, compared with 2.81 percent and 3.09 percent, respectively, for the same period in 2021. Interest and dividend income, on a taxable equivalent basis, increased $4.9 million, or 9.4 percent, to $57.0 million for the three months ended March 31, 2022 from $52.1 million for the same period in 2021 due to higher average interest-earning asset balances. Interest expense decreased $0.1 million, or 1.8 percent, to $5.9 million for the three months ended March 31, 2022 from $6.1 million for the same period in 2021 primarily due to a shift from time deposits into lower yielding deposit accounts and lower rates paid on interest-bearing deposits, offset by the increased interest expense associated with the issuance of the 2021 Notes and the $1.1 million charge for unamortized debt issuance costs related to the redemption of the 2017 Notes.

The average balance of interest earning assets increased $643.6 million, or 10.7 percent, to $6.67 billion for the three months ended March 31, 2022 from $6.03 billion for the three months ended March 31, 2021. The average balance of loans increased $387.8 million, or 8.0 percent, to $5.23 billion for the three months ended March 31, 2022 from $4.84 billion for the three months ended March 31, 2021 due mainly to strong loan production. The average balance of securities increased $156.5 million, or 20.2 percent, to $930.5 million for the three months ended March 31, 2022 from $774.0 million for the three months ended March 31, 2021. Interest-bearing deposits at other banks increased $99.3 million to $494.9 million for the three months ended March 31, 2021, as increased marketing efforts and proceeds from government aid programs and a decrease in consumer spending drove an increase in noninterest-bearing customer deposits.

The average yield on interest-earning assets, on a taxable equivalent basis, decreased 4 basis points to 3.46 percent for the three months ended March 31, 2022 from 3.50 percent for the three months ended March 31, 2021, mainly due to lower yields on loans. The average yield on loans decreased to 4.18 percent for the three months ended March 31, 2022 from 4.24 percent for the three months ended March 31, 2021, driven mainly by lower yields on commercial real estate loans. The average yield on securities, on a taxable equivalent basis, increased to 1.11 percent for the three months ended March 31, 2022 from 0.59 percent for the three months ended March 31, 2021 reflecting the rising market interest rate environment.

The average balance of interest-bearing liabilities decreased $65.9 million, or 1.8 percent, to $3.51 billion for the three months ended March 31, 2022 compared to $3.58 billion for the three months ended March 31, 2021. Average time deposit balances decreased $301.5 million offset by increases in the average balances of $139.0 million in money market and savings accounts and $94.1 million in subordinated debentures due to the 2021 Notes issued in August 2021.

The average cost of interest-bearing liabilities was 0.69 percent for both the three months ended March 31, 2022 and 2021. The average cost of subordinated debentures increased 130 basis points to 6.74 percent for the three months ended March 31, 2022 compared to 5.44 percent for the three months ended March 31, 2021 due to a pre-tax charge of $1.1 million for the remaining debt issuance costs for the 2017 Notes. The average cost of borrowings decreased by 24 basis points to 1.05 percent for the three months ended March 31, 2022 compared to 1.29 percent for the three months ended March 31, 2021. The average cost of deposits decreased by 23 basis points to 0.26 percent for the three months ended March 31, 2022 compared to 0.49 percent for the three months ended March 31, 2021.

Credit Loss Expense

For the first quarter of 2022, the Company recorded $1.4 million recovery of credit loss expense, comprised of a $1.1 million negative provision for loan losses, and a $228,000 negative provision for off-balance sheet items. For the same period in 2021, credit loss expense was $2.1 million, comprised of a loan loss provision of $1.0 million, a $2.1 million provision for an SBA guarantee repair loss, a $450,000 negative provision for off-balance sheet items and a $471,000 negative provision for losses on accrued interest receivable for loans currently or previously modified under the CARES Act. The recovery of credit loss expense for the three months ended March 31, 2022 as compared to the same period in 2021 resulted from a combination of overall improvements in asset quality and economic forecasts, as well as a net reduction in specific qualitative factors allocated to criticized hospitality loans impacted by the pandemic, offset by strong loan growth.

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 March 31, Increase<br><br><br>(Decrease) Increase<br><br><br>(Decrease)
2022 2021 Amount Percent
(in thousands)
Service charges on deposit accounts $ 2,875 $ 2,357 $ 518 21.98 %
Trade finance and other service charges and fees 1,142 1,034 108 10.44 %
Servicing income 734 846 (112 ) (13.24 )%
Bank-owned life insurance income 244 256 (12 ) (4.69 )%
All other operating income 1,004 841 163 19.38 %
Service charges, fees & other 5,999 5,334 665 12.47 %
Gain on sale of SBA loans 2,521 1,671 850 50.87 %
Gain on sale of PPP loans — 2,454 (2,454 ) (100.00 )%
Net gain on sales of securities — 99 (99 ) (100.00 )%
Legal settlement — 250 (250 ) (100.00 )%
Total noninterest income $ 8,520 $ 9,808 $ (1,288 ) (13.13 )%

For the three months ended March 31, 2022, noninterest income was $8.5 million, a decrease of $1.3 million, or 13.1 percent, compared with $9.8 million for the same period in 2021. The decrease was mainly attributable to a $2.5 million decrease in gains on sale of PPP loans, partially offset by a $0.9 million increase in the gains of sale of SBA and a $0.5 million increase in service charges and fees, which was driven by updates to the Company’s business deposit account fee schedules and enhanced operational practices that increased fee collections.

Noninterest Expense

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

Three Months Ended March 31, Increase<br><br><br>(Decrease) Increase<br><br><br>(Decrease)
2022 2021 Amount Percent
(in thousands)
Salaries and employee benefits $ 17,717 $ 16,820 $ 897 5.33 %
Occupancy and equipment 4,646 4,595 51 1.11 %
Data processing 3,236 2,926 310 10.59 %
Professional fees 1,430 1,447 (17 ) (1.17 )%
Supplies and communications 665 757 (92 ) (12.15 )%
Advertising and promotion 817 359 458 127.58 %
All other operating expenses 3,186 2,378 808 33.98 %
Subtotal 31,697 29,282 2,415 8.25 %
Other real estate owned expense (income) 12 221 (209 ) (94.57 )%
Repossessed personal property expense (income) (17 ) 32 (49 ) (153.13 )%
Total noninterest expense $ 31,692 $ 29,535 $ 2,157 7.30 %

For the three months ended March 31, 2022, noninterest expense was $31.7 million, an increase of $2.2 million, or 7.3 percent, compared with $29.5 million for the same period in 2021. Salaries and employee benefits increased $0.9 million primarily as a result of an increase in bonus and incentive expenses. A $0.5 million increase in advertising and promotion expense was primarily related to branding and promotional campaigns. All other operating expenses increased $0.8 million mainly due to loan related expenses (appraisal fees and real estate taxes paid).

Income Tax Expense

Income tax expense was $8.5 million and $7.5 million representing an effective income tax rate of 29.0 percent and 31.1 percent for the three months ended March 31, 2022 and 2021, respectively. The decrease in the effective tax rate for the three months ended March 31, 2022, compared to the same period in 2021 was principally due to a decrease of incremental tax charges related to the Company’s share-based compensation recognized as income tax expense.

Financial Condition

Securities

As of March 31, 2022, our securities portfolio consisted of U.S. government agency and sponsored agency mortgage-backed securities, collateralized mortgage obligations and debt securities, tax-exempt municipal bonds and, to a lesser extent, U.S. Treasury securities. Most of these securities carry fixed interest rates. Other than holdings of U.S. government agency and sponsored agency obligations, there were no securities of any one issuer exceeding 10 percent of stockholders’ equity as of March 31, 2022 or December 31, 2021.

The following table summarizes the contractual maturity schedule for securities, at amortized cost, and their cost weighted average yield, which is calculated using amortized cost as the weight, as of March 31, 2022:

After One<br><br><br>Year But After Five<br><br><br>Years But
Within One<br><br><br>Year Within Five<br><br><br>Years Within Ten<br><br><br>Years After Ten<br><br><br>Years Total
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
(in thousands)
Securities available for sale:
U.S. Treasury securities $ — 0.00 % $ 18,953 1.22 % $ — 0.00 % $ — 0.00 % $ 18,953 1.22 %
U.S. government agency and sponsored agency obligations:
Mortgage-backed securities 306 1.95 % 3,697 0.87 % 1,499 1.05 % 612,957 1.26 % 618,459 1.26 %
Collateralized mortgage obligations 28 2.38 % 104 1.16 % 1,534 1.94 % 91,658 1.03 % 93,324 1.05 %
Debt securities — 0.00 % 126,402 0.94 % 4,968 1.00 % — 0.00 % 131,370 0.94 %
Total U.S. government agency and sponsored agency obligations 334 1.99 % 130,203 0.94 % 8,001 1.19 % 704,615 1.23 % 843,153 1.18 %
Municipal bonds-tax exempt — 0.00 % — 0.00 % 4,042 1.50 % 74,859 0.00 % 78,901 0.08 %
Total securities available for sale $ 334 1.98 % $ 149,156 0.97 % $ 12,043 1.29 % $ 779,474 1.24 % $ 941,007 1.20 %

Loans Receivable

As of March 31, 2022 and December 31, 2021, loans receivable (excluding loans held for sale), net of deferred loan fees and costs, discounts and allowance for credit losses, were $5.27 billion and $5.08 billion, respectively. The increase primarily reflected $506.9 million in new loan production and $210.6 million in loan sales and payoffs, as well as amortization and other reductions of $108.0 million. Loan production primarily consisted of commercial real estate of $233.3 million, commercial and industrial loans of $98.4 million and residential mortgages of $61.0 million.

The table below shows the maturity distribution of outstanding loans as of March 31, 2022. In addition, the table shows the distribution of such loans between those with floating or variable interest rates and those with fixed or predetermined interest rates.

Within One<br><br><br>Year After One<br><br><br>Year but<br><br><br>Within Five<br><br><br>Years After Five<br><br><br>Years but<br><br><br>Within<br><br><br>Fifteen<br><br><br>Years After<br><br><br>Fifteen<br><br><br>Years Total
(in thousands)
Real estate loans:
Commercial property
Retail $ 127,151 $ 548,614 $ 314,951 $ — $ 990,716
Hospitality 182,325 429,441 106,955 — 718,721
Other 275,316 1,102,954 477,095 118,726 1,974,091
Total commercial property loans 584,792 2,081,009 899,001 118,726 3,683,528
Construction 41,681 46,244 — — 87,925
Residential/consumer loans 6,335 184 5,504 420,782 432,805
Total real estate loans 632,808 2,127,437 904,505 539,508 4,204,258
Commercial and industrial loans 301,450 253,463 78,194 — 633,107
Leases receivable 20,730 429,332 50,073 — 500,135
Loans receivable $ 954,988 $ 2,810,232 $ 1,032,772 $ 539,508 $ 5,337,500
Loans with predetermined interest rates $ 345,769 $ 2,057,439 $ 255,627 $ 157,099 $ 2,815,934
Loans with variable interest rates 609,219 752,793 777,145 382,409 2,521,566

The table below shows the maturity distribution of outstanding loans with fixed or predetermined interest rates due after one year, as of March 31, 2022.

After One<br><br><br>Year but<br><br><br>Within Three<br><br><br>Years After Three<br><br><br>Years but<br><br><br>Within Five<br><br><br>Years After Five<br><br><br>Years but<br><br><br>Within<br><br><br>Fifteen<br><br><br>Years After<br><br><br>Fifteen<br><br><br>Years Total
(in thousands)
Real estate loans:
Commercial property
Retail $ 183,135 $ 272,027 $ 72,147 $ — $ 527,309
Hospitality 137,877 96,275 7,221 — 241,373
Other 253,083 627,186 108,909 16,368 1,005,546
Total commercial property loans 574,095 995,488 188,277 16,368 1,774,228
Construction 27,286 — — — 27,286
Residential/consumer loans 117 54 2,918 140,731 143,820
Total real estate loans 601,498 995,542 191,195 157,099 1,945,334
Commercial and industrial loans 19,560 11,508 14,359 — 45,427
Leases receivable 176,763 252,568 50,073 — 479,404
Loans receivable $ 797,821 $ 1,259,618 $ 255,627 $ 157,099 $ 2,470,165

The table below shows the maturity distribution of outstanding loans with floating or variable interest rates (including hybrids) due after one year, as of March 31, 2022.

After One<br><br><br>Year but<br><br><br>Within Three<br><br><br>Years After Three<br><br><br>Years but<br><br><br>Within Five<br><br><br>Years After Five<br><br><br>Years but<br><br><br>Within<br><br><br>Fifteen<br><br><br>Years After<br><br><br>Fifteen<br><br><br>Years Total
(in thousands)
Real estate loans:
Commercial property
Retail $ 47,471 $ 45,980 $ 242,803 $ — $ 336,254
Hospitality 156,012 39,277 99,734 — 295,023
Other 106,331 116,355 368,187 102,358 693,231
Total commercial property loans 309,814 201,612 710,724 102,358 1,324,508
Construction 18,958 — — — 18,958
Residential/consumer loans 13 — 2,586 280,051 282,650
Total real estate loans 328,785 201,612 713,310 382,409 1,626,116
Commercial and industrial loans 56,013 166,383 63,835 — 286,231
Loans receivable $ 384,798 $ 367,995 $ 777,145 $ 382,409 $ 1,912,347

Industry

As of March 31, 2022, the loan portfolio included the following concentrations of loans to one type of industry that were greater than 10.0 percent of loans receivable outstanding:

Percentage of
Balance as of Loans Receivable
March 31, 2022 Outstanding
(in thousands)
Lessor of nonresidential buildings $ 1,725,288 32.3 %
Hospitality 765,072 14.3 %

Loan Quality Indicators

Loans and leases 30 to 89 days past due and still accruing were 0.10 percent of loans and leases at March 31, 2022, compared with 0.11 percent at December 31, 2021.

At March 31, 2022 and December 31, 2021, there were no loans 90 days or more past due and still accruing.

Special mention loans were $141.0 million at March 31, 2022 compared with $95.3 million at December 31, 2021. The change reflects additions of $68.1 million and reductions (comprising upgrades, downgrades and payments) of $22.5 million.

Classified loans were $57.4 million at March 31, 2022 compared with $60.6 million at December 31, 2021. The change reflects additions of $2.8 million and reductions (comprising upgrades, payments, sales, and charge-offs) of $6.0 million.

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

Special Mention Classified
(in thousands)
March 31, 2022
Balance at beginning of period $ 95,294 $ 60,633
Additions 68,120 2,807
Reductions (22,456 ) (6,036 )
Balance at end of period $ 140,958 $ 57,404
December 31, 2021
Balance at beginning of period $ 76,978 $ 140,169
Additions 146,226 60,083
Reductions (127,910 ) (139,619 )
Balance at end of period $ 95,294 $ 60,633

Nonperforming Assets

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

Except for nonaccrual loans, management is not aware of any other loans as of March 31, 2022 for which known credit problems of the borrower would cause serious doubts as to the ability of such borrowers to comply with their present loan or lease repayment terms, or any known events that would result in a loan or lease 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, or changes in the financial condition or business of borrowers may adversely affect a borrower’s ability to pay.

Nonperforming loans were $11.5 million at March 31, 2022, or 0.21 percent of loans, compared with $13.4 million at December 31, 2021, or 0.26 percent of the portfolio. The change reflects additions of $1.2 million and reductions (comprising upgrades, payments, sales, and charge-offs) of $3.1 million.

Nonperforming assets were $12.1 million at March 31, 2022, or 0.18 percent of total assets, compared with $14.0 million, or 0.21 percent, at December 31, 2021.

Individually Evaluated Loans

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

Individually evaluated loans were $11.5 million and $13.4 million as of March 31, 2022 and December 31, 2021, respectively, representing a decrease of $1.9 million, or 14.4 percent. Specific allowances associated with individually evaluated loans decreased $0.6 million to $2.2 million as of March 31, 2022 compared with $2.8 million as of December 31, 2021.

For the three months ended March 31, 2022, we restructured monthly payments for one loan, with a net carrying value of $92,000 at the time of modification, which was subsequently classified as a TDR. For the year ended December 31, 2021, no loans were restructured and subsequently classified as TDRs. Temporary payment structure modifications included, but were not limited to, extending the maturity date, reducing the amount of principal and/or interest due monthly, and/or allowing for interest only monthly payments for six months or less.

As of March 31, 2022 and December 31, 2021, TDRs on accrual status were $92,000 consisting of reduction of principal and interest payments. The allowance for credit losses relating to these loans was inconsequential. There were no TDRs on accrual status as of December 31, 2021. As of March 31, 2022 and December 31, 2021, restructured loans on nonaccrual status were $2.6 million and $2.9 million, respectively, and the allowance for credit losses relating to these loans, respectively, was inconsequential.

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 March 31, 2022 and December 31, 2021 reflected losses expected over the remaining contractual life of the assets based on historical, current, and forward-looking information. The contractual term does not consider extensions, renewals or modifications unless the Company has identified an expected troubled debt restructuring.

Management selected three loss methodologies for the collective allowance estimation. At March 31, 2022, the Company used the discounted cash flow (“DCF”) method to estimate allowances for credit losses for the commercial and industrial loan portfolio, the Probability of Default/Loss Given Default (“PD/LGD”) method for the commercial real estate, construction and residential real estate portfolios, and the Weighted Average Remaining Maturity (“WARM”) method to estimate expected credit losses for equipment financing agreements and the equipment lease receivables 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. Since reasonable and supportable forecasts of economic conditions are imbedded directly into the DCF model, qualitative adjustments are reduced but considered. For each of these loan segments, the Company applied an annualized historical PD/LGD using all available historical periods. The PD/LGD method incorporates a forecast 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 March 31, 2022 and December 31, 2021, the Company relied on the economic projections from Moody’s Analytics Economic Scenarios and Forecasts to inform its loss driver forecasts over the four-quarter forecast period. For all loan pools, the Company utilizes and forecasts the national unemployment rate as the primary loss driver.

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

The allowance for credit losses was $71.5 million at March 31, 2022 compared with $72.6 million at December 31, 2021. The allowance attributed to individually evaluated loans was $2.2 million at March 31, 2022 compared with $2.8 million at December 31, 2021. The allowance attributed to collectively evaluated loans was $69.3 million at March 31, 2022 compared with $69.8 million at December 31, 2021, and considered the impact of changes in macroeconomic assumptions, including an improving unemployment rate for the subsequent four quarters. The Company recognizes the inherent uncertainties in the estimate of the allowance for credit losses and the effect the COVID-19 pandemic may have on borrowers.

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

March 31, 2022 December 31, 2021
Allowance Amount Percentage of Total Allowance Total Loans Percentage of Total Loans Allowance Amount Percentage of Total Allowance Total Loans Percentage of Total Loans
(dollars in thousands)
Real estate loans:
Commercial property
Retail $ 6,827 9.5 % $ 990,716 18.6 % $ 6,579 9.1 % $ 970,134 18.8 %
Hospitality 19,625 27.5 % 718,721 13.5 % 22,670 31.2 % 717,692 13.9 %
Other 15,904 22.2 % 1,974,091 37.0 % 15,065 20.8 % 1,919,033 37.3 %
Total commercial property loans 42,356 59.2 % 3,683,528 69.1 % 44,314 61.1 % 3,606,859 70.0 %
Construction 3,531 4.9 % 87,925 1.6 % 4,078 5.6 % 95,006 1.8 %
Residential/consumer loans 468 0.7 % 432,805 8.1 % 498 0.7 % 400,546 7.8 %
Total real estate loans 46,355 64.8 % 4,204,258 78.8 % 48,890 67.4 % 4,102,411 79.6 %
Commercial and industrial loans 12,944 18.1 % 633,107 11.8 % 12,418 17.1 % 561,831 10.9 %
Leases receivable 12,213 17.1 % 500,135 9.4 % 11,249 15.5 % 487,299 9.5 %
Total $ 71,512 100.0 % $ 5,337,500 100.0 % $ 72,557 100.0 % $ 5,151,541 100.0 %

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

As of
March 31, 2022 December 31, 2021
(in thousands)
Ratios:
Allowance for credit losses to loans receivable 1.34 % 1.41 %
Nonaccrual loans to loans 0.21 % 0.26 %
Allowance for credit losses to nonaccrual loans 623.47 % 543.09 %
Balance:
Nonaccrual loans at end of period $ 11,470 $ 13,360
Nonperforming loans at end of period $ 11,470 $ 13,360

As of March 31, 2022 and December 31, 2021, the allowance for credit losses related to off-balance sheet items, primarily unfunded loan commitments, was $2.4 million and $2.6 million, respectively. The Bank closely monitors the borrower’s repayment capabilities, while funding existing commitments to ensure losses are minimized. Based on management’s evaluation and analysis of portfolio credit quality and prevailing economic conditions, we believe these allowances were adequate for current expected lifetime losses in the loan portfolio and off-balance sheet exposure as of March 31, 2022.

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

Three Months Ended
Average Loans Net Charge-Offs (Recoveries) Net Charge-Offs (Recoveries) to Average Loans ^(1)^
(in thousands)
March 31, 2022
Commercial real estate loans $ 3,752,658 $ 335 0.04 %
Residential/consumer loans 407,967 (2 ) (0.00 )%
Commercial and industrial loans 578,583 (259 ) (0.18 )%
Leases receivable 492,464 (176 ) (0.14 )%
Total $ 5,231,672 $ (102 ) (0.01 )%
March 31, 2021
Commercial real estate loans $ 3,369,821 $ 1,237 0.15 %
Residential/consumer loans 334,873 (1 ) (0.00 )%
Commercial and industrial loans 723,343 (6 ) (0.00 )%
Leases receivable 415,788 1,768 1.70 %
Total $ 4,843,825 $ 2,998 0.25 %
^(1)^ Annualized
--- ---

For the three months ended March 31, 2022, gross charge-offs were $0.8 million, a decrease of $2.7 million, from $3.5 million for the same period in 2021 and gross recoveries were $0.9 million, an increase of $0.4 million, from $0.5 million for the three months ended March 31, 2021. Net loan recoveries were $0.1 million, or 0.01 percent of average loans, compared with net loan charge-offs of $3.0 million, or 0.25 percent of average loans, for the three months ended March 31, 2022 and 2021, respectively.

Deposits

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

December 31, 2021
Percent Balance Percent
Demand – noninterest-bearing 2,678,726 46.3 % $ 2,574,517 44.5 %
Interest-bearing:
Demand 126,907 2.2 % 125,183 2.2 %
Money market and savings 2,080,969 36.0 % 2,099,381 36.3 %
Uninsured time deposits of more than 250,000:
Three months or less 77,862 1.4 % 69,464 1.2 %
Over three months through six months 44,392 0.8 % 73,808 1.3 %
Over six months through twelve months 44,824 0.8 % 29,706 0.5 %
Over twelve months 398 0.0 % 549 0.0 %
Other time deposits 729,092 12.6 % 813,661 14.1 %
Total deposits 5,783,170 100.0 % $ 5,786,269 100.0 %

All values are in US Dollars.

Total deposits were $5.78 billion and $5.79 billion as of March 31, 2022 and December 31, 2021, respectively, representing a decrease of $3.1 million, or 0.1 percent.

The decrease in deposits was primarily driven by a reduction in time deposits, offset by an increase in noninterest-bearing demand deposits. At March 31, 2022, the loan-to-deposit ratio was 92.3 percent compared with 89.0 percent at December 31, 2021. The increase in noninterest-bearing deposits reflects growth from new and existing customer relationships and other economic stimulus activities.

As of March 31, 2022, the aggregate amount of uninsured deposits (deposits in amounts greater than $250,000, which is the maximum amount for federal deposit insurance) was $2.60 billion, of which $2.43 billion were demand deposits and money market and savings deposits and $167.5 million were time deposits. As of December 31, 2021, the aggregate amount of uninsured deposits was $2.63 billion, consisting of $2.46 billion in demand deposits and money market and savings deposits and $173.5 million in time deposits.

Borrowings and Subordinated Debentures

Borrowings mostly take the form of advances from the FHLB. At March 31, 2022 and December 31, 2021, total advances from the FHLB were $125.0 million and $137.5 million, respectively. The Bank had no overnight advances from the FHLB at both March 31, 2022 and December 31, 2021.

The weighted-average interest rate of all FHLB advances at March 31, 2022 and December 31, 2021 were 1.04 percent and 1.05 percent, respectively, and weighted-average interest rate of FHLB advances for the three months ended March 31, 2022 and December 31, 2021 were 1.05 percent and 1.17 percent, respectively. Average balances of FHLB advances for the three months ended March 31, 2022 and December 31, 2021 were $130.6 million and $145.3 million, respectively, with maximum amount outstanding at any month end during the three months period ended March 31, 2022 and December 31, 2021 of $137.5 million and $162.5 million, respectively. Interest expense on borrowings for the three months ended March 31, 2022 and 2021 was $337,000 and $478,000, respectively.

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

March 31, 2022 December 31, 2021
FHLB of San Francisco Outstanding<br><br><br>Balance Weighted<br><br><br>Average<br><br><br>Rate Outstanding<br><br><br>Balance Weighted<br><br><br>Average<br><br><br>Rate
(dollars in thousands)
Advances due over 12 months through 24 months $ 50,000 0.37 % $ 50,000 0.97 %
Advances due over 24 months through 36 months 25,000 1.22 % 37,500 0.40 %
Outstanding advances over 12 months $ 75,000 0.65 % $ 87,500 0.73 %

Subordinated debentures were $129.0 million as of March 31, 2022 and $215.0 million as of December 31, 2021. The $86.0 million decrease in subordinated debentures was primarily due to the redemption of the 2017 Notes on March 30, 2022. Subordinated debentures are comprised of fixed-to-floating subordinated notes of $108.0 million and $194.2 million as of March 31, 2022 and December 31, 2021, respectively, and junior subordinated deferrable interest debentures of $20.9 million and $20.8 million as of March 31, 2022 and December 31, 2021, respectively. See “Note 8 – Borrowings and Subordinated Debentures” to the consolidated financial statements for more details.

Interest Rate Risk Management

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

The Company performs simulation modeling to estimate the potential effects of interest rate changes. The following table summarizes one of the stress simulations performed to forecast the impact of changing interest rates on net interest income and the value of interest-earning assets and interest-bearing liabilities reflected on our balance sheet (i.e., an instantaneous parallel shift in the yield curve of the magnitude indicated below) as of March 31, 2022. The Company compares this stress simulation to policy limits, which specify the maximum tolerance level for net interest income exposure over a 1- to 12-month and a 13- to 24- month horizon, given the basis point adjustment in interest rates reflected below.

Net Interest Income Simulation
Change in 1- to 12-Month Horizon 13- to 24-Month Horizon
Interest Dollar Percentage Dollar Percentage
Rate Change Change Change Change
(dollars in thousands)
300% $ 23,820 10.57 % $ 43,216 19.43 %
200% $ 15,965 7.08 % $ 28,990 13.04 %
100% $ 8,592 3.81 % $ 16,145 7.26 %
(100%) $ (12,086 ) (5.36 %) $ (24,853 ) (11.18 %)
Change in Economic Value of Equity (EVE)
--- --- --- --- --- --- ---
Interest Dollar Percentage
Rate Change Change
(dollars in thousands)
300% $ 150,525 18.78 %
200% $ 111,620 13.92 %
100% $ 62,588 7.81 %
(100%) $ (109,312 ) (13.64 %)

The estimated sensitivity does not necessarily represent our forecast, and the results may not be indicative of actual changes to our net interest income. These estimates are based upon a number of assumptions including the nature and timing of interest rate levels including yield curve shape, prepayments on loans receivable and securities, pricing strategies on loans receivable and deposits, and replacement of asset and liability cash flows. While the assumptions used are based on current economic and local market conditions, there is no assurance as to the predictive nature of these conditions, including how customer preferences or competitor influences might change.

Capital Resources and Liquidity

Capital Resources

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

In response to the uncertainty surrounding the COVID-19 pandemic, the Board reduced the quarterly cash dividends paid on common stock beginning in the second quarter of 2020. Due to the continued stabilization of Company results and financial condition, the Board authorized an increase in the quarterly cash dividend to $0.12 per share for the second quarter of 2021. As the effects of the pandemic continued to subside and the Company’s results and financial condition improved, the Board again increased the dividend for the fourth quarter of 2021 to $0.20 per share and for the first quarter of 2022 to $0.22 per share. The Board expects to continue to re-evaluate the level of quarterly dividends in subsequent quarters.

The Company’s ability to pay dividends to shareholders depends in part upon dividends it receives from the Bank. California law restricts the amount available for cash dividends to the lesser of a bank’s retained earnings or net income for its last three fiscal years (less any distributions to shareholders made during such period). Where the above test is not met, cash dividends may still be paid, with the prior approval of the Department of Financial Protection and Innovation (“DFPI”), in an amount not exceeding the greatest of: (1) retained earnings of the bank; (2) net income of the bank for its last fiscal year; or (3) the net income of the bank for its current fiscal year. As of April 1, 2022, after giving effect to the 2022 second quarter dividend declared by the Company, the Bank has the ability to pay dividends of approximately $83.5 million without the prior approval of the Commissioner of the DFPI.

At March 31, 2022, the Bank’s total risk-based capital ratio of 14.19 percent, Tier 1 risk-based capital ratio of 13.09 percent, common equity Tier 1 capital ratio of 13.09 percent and Tier 1 leverage capital ratio of 10.84 percent, placed the Bank in the “well capitalized” category pursuant to capital rules, which is defined as institutions with total risk-based capital ratio equal to or greater than 10.00 percent, Tier 1 risk-based capital ratio equal to or greater than 8.00 percent, common equity Tier 1 capital ratios equal to or greater than 6.50 percent, and Tier 1 leverage capital ratio equal to or greater than 5.00 percent.

At March 31, 2022, the Company's total risk-based capital ratio was 14.73 percent, Tier 1 risk-based capital ratio was 11.71 percent, common equity Tier 1 capital ratio was 11.34 percent and Tier 1 leverage capital ratio was 9.70 percent.

For a discussion of implemented changes to the capital adequacy framework prompted by Basel III and the Dodd- Frank Wall Street Reform and Consumer Protection Act, see our 2021 Annual Report on Form 10-K.

Liquidity

For a discussion of liquidity for the Company, see Note 14 - Liquidity included in the notes to unaudited consolidated financial statements in this Report and Note 22 – Liquidity in our 2021 Annual Report on Form 10-K.

Off-Balance Sheet Arrangements

For a discussion of off-balance sheet arrangements, see Note 12 - Off-Balance Sheet Commitments included in the notes to unaudited consolidated financial statements in this Report and “Item 1. Business - Off-Balance Sheet Commitments” in our 2021 Annual Report on Form 10-K.

Contractual Obligations

There have been no material changes to the contractual obligations described in our 2021 Annual Report on Form 10-K.

Recently Issued Accounting Standards Not Yet Effective

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

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

The amendments are effective for all entities from the beginning of an interim period that includes the issuance date of ASU 2020-04. An entity may elect to apply the amendments prospectively through December 31, 2022.

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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 March 31, 2022.

Changes in Internal Control over Financial Reporting

There were no changes in the Corporation's internal control over financial reporting (as defined in Rule 13a-15(f)) during the quarter ended March 31, 2022 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

There have been no material changes in risk factors applicable to the Corporation from those described in “Risk Factors” in Part I, Item 1A of the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

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

On January 24, 2019, the Company announced a stock repurchase program that authorized the repurchase of up to 5 percent of its outstanding shares or approximately 1.5 million shares of common stock. As of March 31, 2022, 659,972 shares remained available for future purchases under that stock repurchase program. The Company acquired 5,161 shares from employees in connection with the satisfaction of employee tax withholding obligations incurred through vesting of Company stock awards for the three months ended March 31, 2022.

The following table represents information with respect to repurchases of common stock made by the Company during the three months ended March 31, 2022:

Purchase Date: Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Program Maximum Shares That May Yet Be Purchased Under the Program
January 1, 2022 - January 31, 2022 $ — — 659,972
February 1, 2022 - February 28, 2022 $ — — 659,972
March 1, 2022 - March 31, 2022 $ — — 659,972
Total $ — — 659,972

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

Exhibit<br><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 March 31, 2022, formatted in Inline XBRL
* Attached as Exhibit 101 to this report are documents formatted in Inline XBRL (Extensible Business Reporting Language).
--- ---
† Constitutes a management contract or compensatory plan or arrangement.
--- ---

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

Hanmi Financial Corporation
Date: May 9, 2022 By: /s/ Bonita I. Lee
Bonita I. Lee
President and Chief Executive Officer (Principal Executive Officer)
Date: May 9, 2022 By: /s/ Romolo C. Santarosa
--- --- --- ---
Romolo C. Santarosa
Senior Executive Vice President and Chief Financial Officer (Principal Financial Officer)

57

hafc-ex311_7.htm

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: May 9, 2022 /s/ Bonita I. Lee
--- --- ---
Bonita I. Lee
President and Chief Executive Officer<br><br><br>(Principal Executive Officer)

hafc-ex312_9.htm

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: May 9, 2022 /s/ Romolo C. Santarosa
--- --- ---
Romolo C. Santarosa
Senior Executive Vice President and Chief Financial Officer<br><br><br>(Principal Financial Officer)

hafc-ex321_11.htm

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 March 31, 2022, 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: May 9, 2022 /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.

hafc-ex322_12.htm

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 March 31, 2022, 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: May 9, 2022 /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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