# HANMI FINANCIAL CORP (HAFC) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from HANMI FINANCIAL CORP's 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1109242/000095017024022986/hafc-20231231.htm
Accession: 0000950170-24-022986
Filing date: 2024-02-29
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/HAFC/
All MD&A years: /company/HAFC/mda/
Previous year: /company/HAFC/mda/fy2022/ (FY 2022)
Next year: /company/HAFC/mda/fy2024/ (FY 2024)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This discussion presents management’s analysis of the financial condition and results of operations as of and for the years ended December 31, 2023, 2022 and 2021. This discussion should be read in conjunction with our Consolidated Financial Statements and the Notes related thereto presented elsewhere in this Report. See also “Cautionary Note Regarding Forward-Looking Statements.”

Critical Accounting Policies

We have established various accounting policies that govern the application of GAAP in the preparation of our Consolidated Financial Statements. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions to arrive at the carrying value of assets and liabilities and amounts reported as revenues and expenses. Our financial position and results of operations can be materially affected by these estimates and assumptions. Critical accounting policies are those policies that are most important to the determination of our financial condition and results of operations and that require management to make assumptions and estimates that are subjective or complex. Our significant accounting policies are discussed in the “Notes to Consolidated Financial Statements, Note 1 — Summary of Significant Accounting Policies.” Management believes that the following policy is critical.

Allowance for credit losses and Allowance for credit losses related to off-balance sheet items

Our allowance for credit losses methodologies incorporate a variety of risk considerations, both quantitative and qualitative, in establishing an allowance for credit losses that management believes is appropriate at each reporting date. Quantitative factors include our historical loss experiences on loan pools segmented by type, and considers risk rating, delinquency and charge-off trends, collateral values, changes in nonperforming loans, and other factors.

We use qualitative factors to adjust the allowance calculation for risks not considered by the quantitative calculations. Qualitative factors considered in our methodologies include the general economic forecast in our markets, concentrations of credit, changes in lending management and staff, quality of the loan review system, and changes in interest rates.

The Company reviews baseline and alternative economic scenarios from Moody’s and quarterly projections of federal funds target rates from the Federal Open Market Committee (“FOMC”) for consideration as qualitative factors. Moody’s publishes a baseline forecast that represents the estimate of the most likely path for the United States economy through the current business cycle (50% probability that economic conditions will be worse and 50% probability that economic conditions will be better) as well as alternative scenarios to examine how different types of shocks will affect the future performance of the United States economy.

Certain quantitative and qualitative factors used to estimate credit losses and establish an allowance for credit losses are subject to uncertainty. The adequacy of our allowance for credit losses is sensitive to changes in current and forecasted economic conditions that may affect the ability of borrowers to make contractual payments as well as the value of the collateral securing such payments.

Although management believes it uses the best information necessary to establish the allowance for credit losses, future adjustments to the allowance for credit losses may be necessary and the Company’s results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations.

In addition, because future events affecting borrowers and collateral cannot be predicted without uncertainty, the existing allowance for credit losses may not be adequate or increases may be necessary should the quality of any loans deteriorate as a result of the factors discussed. Any material increase in the allowance for credit losses would adversely impact the Company's financial condition and results of operations.

See “— Allowance for Credit Losses”, “Financial Condition — Allowance for credit losses and Allowance for credit losses related to off-balance sheet items”, “Results of Operations — Credit Loss Expense” and “Notes to Consolidated Financial Statements, Note 1 — Summary of Significant Accounting Policies” for additional information on methodologies used to determine the allowance for credit losses and the allowance for credit losses related to off-balance sheet items.

30

Allowance Attribution Analysis

[[GREPCENT_TABLE]]
[["","","Allowance for credit losses"],["","","(in thousands)"],["December 31, 2022","","$","71,523"],["Charge-offs","","","(16,090",")"],["Recoveries","","","9,047"],["Provision (recovery) attributed to qualitative considerations","","","(2,525",")"],["Provision attributed to quantitative considerations","","","371"],["Provision attributed to individually evaluated loans","","","7,136"],["December 31, 2023","","$","69,462"]]
[[/GREPCENT_TABLE]]

The following are the key assumptions employed in the determination of the allowance for credit losses at December 31, 2023 and 2022:

Economic Factors

[[GREPCENT_TABLE]]
[["","","12/31/2023","","","12/31/2022","","","Description of Economic Factors"],["Prepayment rates","","","14.44","%","","","14.52","%","","Average total portfolio rate"],["Curtailment rates","","","83.72","%","","","85.80","%","","Average total portfolio rate"],["Unemployment rate","","","3.96","%","","","4.00","%","","Average of 4 quarter forecast period; Baseline (1)"],["Gross domestic product (\u201cGDP\u201d) growth rate year over year %","","","(0.91",")%","","","(1.29",")%","","Average of 4 quarter forecast period; Alternative Scenario 3 (2)"],["Consumer sentiment","","","71.78","","","","70.10","","","Average of 4 quarter forecast period; Alternative Scenario 3 (2)"],["Federal funds target rate","","","4.6","%","","","5.1","%","","1 year forecast of median target rate; FOMC December 2023 projection"]]
[[/GREPCENT_TABLE]]

(1)
The Moody's Baseline scenario was used for the unemployment rate forecast for periods ended December 31, 2023 and 2022. The unemployment rate forecast remained with the Baseline Scenario due to job market volatility and deterioration below expectations, with less impact to the lending environment compared to GDP growth and consumer sentiment forecasts.

(2)
The Moody's Alternative Scenario 3 was used for the GDP growth rate and consumer sentiment forecast for the periods ended December 31, 2023 and 2022. Effective Q2 2022, the Company elected to use Alternative Scenario 3 (mid-level downside/pessimistic scenario) for the GDP growth rate and consumer sentiment forecasts, given the elevation in inflation and rising rate environment.

The potential effect from changes in key assumptions could affect the estimated allowance for credit losses at December 31, 2023. The following table illustrates the possible individual effects to the allowance for credit losses from changes in such assumptions:

Sensitivity Analysis

[[GREPCENT_TABLE]]
[["Assumptions","","Increase","","","Decrease"],["","","(in thousands)"],["Forecast period (from 12 months to 6 or 24 months)","","$","494","","","$","(1,267",")"],["Estimated unemployment rate (from Baseline to S2 or S1) (1)","","$","10,658","","","$","(2,643",")"],["Estimated prepayment and curtailment rates (+/-10%)","","$","538","","","$","(539",")"],["Estimated GDP growth rate (from S3 to S4 or S2) (1)","","$","33","","","$","(57",")"],["Consumer sentiment (from S3 to S4 or S2) (1)","","$","654","","","$","(2,091",")"],["Federal funds target rate (+/- 25 bps)","","$","100","","","$","(100",")"]]
[[/GREPCENT_TABLE]]

31

(1)
The following table provides additional details to the Baseline and Alternative Scenarios referred to above:

[[GREPCENT_TABLE]]
[["","","Unemployment Rate","","","GDP Year over Year % Change","","","Consumer Sentiment"],["Baseline scenario","","","3.96","%","","","\u2014","%","","","\u2014"],["Alternative Scenario S1","","","3.14","%","","","\u2014","%","","","\u2014"],["Alternative Scenario S2","","","5.70","%","","","0.35","%","","","79.99"],["Alternative Scenario S3","","","\u2014","%","","","-0.91","%","","","71.78"],["Alternative Scenario S4","","","\u2014","%","","","-1.65","%","","","69.23"]]
[[/GREPCENT_TABLE]]

Executive Overview

For the years ended December 31, 2023, 2022 and 2021, net income was $80.0 million, $101.4 million and $98.7 million, respectively. The decrease of $21.4 million, or 21.1%, in net income for the year ended December 31, 2023 as compared with the year ended December 31, 2022, reflects a $16.4 million decrease in net interest income, a $6.2 million increase in noninterest expense and a $3.5 million increase in credit loss expense, offset by a $4.8 million decrease in income tax expense.

The increase of $2.7 million, or 2.8%, in net income for the year ended December 31, 2022 as compared with the year ended December 31, 2021, was primarily attributable to an increase in net interest income of $42.6 million. Offsetting this increase were an increase in noninterest expense of $5.8 million, a decrease in noninterest income of $6.3 million, as well as a $25.2 million reduction in the benefit from the year-ago credit loss recovery.

For the years ended December 31, 2023, 2022 and 2021, our earnings per diluted share were $2.62, $3.32 and $3.22, respectively.

Additional significant financial highlights include:

•
Loans receivable increased by $215.3 million, or 3.6%, to $6.18 billion as of December 31, 2023, compared with $5.97 billion as of December 31, 2022. The net increase was due to production of $1.29 billion, offset by payoffs and prepayments of $1.07 billion.

•
Securities increased $11.9 million to $865.7 million at December 31, 2023 from $853.8 million at December 31, 2022, primarily attributable to a decrease in unrealized losses during 2023.

•
Deposits were $6.28 billion at December 31, 2023 compared with $6.17 billion at December 31, 2022 as time deposits and money market and savings deposits increased $498.7 million and $178.0 million, respectively, while non-interest bearing demand deposits decreased $536.0 million.

•
Borrowings decreased $25.0 million to $325.0 million at December 31, 2023 compared with $350.0 million at December 31, 2022.

•
Cash dividends were $1.00 per share of common stock for the year ended December 31, 2023 compared with $0.94 and $0.54 per share of common stock for the years ended December 31, 2022 and 2021, respectively.

•
Return on average assets and return on average stockholders’ equity for the year ended December 31, 2023 were 1.08% and 10.70%, respectively, as compared with 1.44% and 14.83%, respectively, for the year ended December 31, 2022.

Results of Operations

Net Interest Income

Our primary source of revenue is net interest income, which is the difference between interest and fees derived from earning assets, and interest paid on liabilities obtained to fund those assets. Our net interest income is affected by changes in the level and mix of interest-earning assets and interest-bearing liabilities, referred to as volume changes. Net interest income is also affected by changes in the yields earned on assets and rates paid on liabilities, referred to as rate changes. Interest rates charged on loans are affected principally by changes to market interest rates, the demand for such loans, 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.

32

The following table shows the average balances 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.

[[GREPCENT_TABLE]]
[["","","For the Year Ended"],["","","December 31, 2023","","","December 31, 2022","","","December 31, 2021"],["","","","","","Interest","","","Average","","","","","","Interest","","","Average","","","","","","Interest","","","Average"],["","","Average","","","Income /","","","Yield /","","","Average","","","Income /","","","Yield /","","","Average","","","Income /","","","Yield /"],["","","Balance","","","Expense","","","Rate","","","Balance","","","Expense","","","Rate","","","Balance","","","Expense","","","Rate"],["Assets","","(dollars in thousands)"],["Interest-earning assets:"],["Loans receivable (1)","","$","5,968,339","","","$","339,811","","","","5.69","%","","$","5,596,564","","","$","257,878","","","","4.61","%","","$","4,794,505","","","$","208,601","","","","4.35","%"],["Securities (2)","","","967,231","","","","16,938","","","","1.78","%","","","949,889","","","","12,351","","","","1.33","%","","","845,437","","","","6,230","","","","0.75","%"],["FHLB stock","","","16,385","","","","1,229","","","","7.50","%","","","16,385","","","","1,024","","","","6.25","%","","","16,385","","","","941","","","","5.74","%"],["Interest-bearing deposits in other banks","","","230,835","","","","11,350","","","","4.92","%","","","236,678","","","","2,560","","","","1.08","%","","","684,442","","","","903","","","","0.13","%"],["Total interest-earning assets","","","7,182,790","","","","369,328","","","","5.15","%","","","6,799,516","","","","273,813","","","","4.03","%","","","6,340,769","","","","216,675","","","","3.42","%"],["Noninterest-earning assets:"],["Cash and due from banks","","","62,049","","","","","","","","","","66,993","","","","","","","","","","62,401"],["Allowance for credit losses","","","(70,501",")","","","","","","","","","(73,094",")","","","","","","","","","(84,735",")"],["Other assets","","","240,779","","","","","","","","","","247,838","","","","","","","","","","225,750"],["Total assets","","$","7,415,117","","","","","","","","","$","7,041,253","","","","","","","","","$","6,544,185"],["Liabilities and stockholders' equity"],["Interest-bearing liabilities:"],["Deposits:"],["Demand: interest-bearing","","$","97,388","","","$","117","","","","0.12","%","","$","121,992","","","$","100","","","","0.08","%","","$","113,326","","","$","61","","","","0.05","%"],["Money market and savings","","","1,547,911","","","","44,066","","","","2.85","%","","","2,025,961","","","","12,753","","","","0.63","%","","","2,028,235","","","","5,199","","","","0.26","%"],["Time deposits","","","2,371,520","","","","90,525","","","","3.82","%","","","1,136,073","","","","13,085","","","","1.15","%","","","1,111,857","","","","6,395","","","","0.58","%"],["Total interest-bearing deposits","","","4,016,819","","","","134,708","","","","3.35","%","","","3,284,026","","","","25,938","","","","0.79","%","","","3,253,418","","","","11,655","","","","0.36","%"],["Borrowings","","","197,409","","","","6,867","","","","3.48","%","","","148,047","","","","2,382","","","","1.61","%","","","145,297","","","","1,697","","","","1.17","%"],["Subordinated debentures","","","129,708","","","","6,482","","","","5.00","%","","","149,891","","","","7,846","","","","5.23","%","","","154,400","","","","8,273","","","","5.35","%"],["Total interest-bearing liabilities","","","4,343,936","","","","148,057","","","","3.41","%","","","3,581,964","","","","36,166","","","","1.01","%","","","3,553,115","","","","21,625","","","","0.61","%"],["Noninterest-bearing liabilities and equity:"],["Demand deposits: noninterest-bearing","","","2,173,813","","","","","","","","","","2,665,646","","","","","","","","","","2,307,052"],["Other liabilities","","","149,460","","","","","","","","","","109,847","","","","","","","","","","77,637"],["Stockholders' equity","","","747,908","","","","","","","","","","683,796","","","","","","","","","","606,381"],["Total liabilities and stockholders' equity","","$","7,415,117","","","","","","","","","$","7,041,253","","","","","","","","","$","6,544,185"],["Net interest income (taxable equivalent basis)","","","","","$","221,271","","","","","","","","","$","237,647","","","","","","","","","$","195,050"],["Cost of deposits (3)","","","","","","","","","2.18","%","","","","","","","","","0.44","%","","","","","","","","","0.21","%"],["Net interest spread (taxable equivalent basis) (4)","","","","","","","","","1.74","%","","","","","","","","","3.02","%","","","","","","","","","2.81","%"],["Net interest margin (taxable equivalent basis)(5)","","","","","","","","","3.08","%","","","","","","","","","3.50","%","","","","","","","","","3.08","%"]]
[[/GREPCENT_TABLE]]

(1)
Loans receivable include loans held for sale and exclude the allowance for credit losses. Nonaccrual loans receivable are included in the average loans receivable balance.

(2)
Amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate of 21%.

(3)
Represents interest expense on deposits as a percentage of all interest-bearing and noninterest-bearing deposits.

(4)
Represents the average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities.

(5)
Represents net interest income as a percentage of average interest-earning assets.

33

The table below shows changes in interest income and interest expense and the amounts attributable to variations in interest rates and volumes for the periods indicated. The variances are primarily attributable to simultaneous volume and rate changes that 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.

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2023 vs 2022","","","2022 vs 2021"],["","","Increases (Decreases) Due to Change In","","","Increases (Decreases) Due to Change In"],["","","Volume","","","Rate","","","Total","","","Volume","","","Rate","","","Total"],["","","(in thousands)"],["Interest and dividend income:"],["Loans receivable (1)","","$","17,046","","","$","64,887","","","$","81,933","","","$","34,743","","","$","14,534","","","$","49,277"],["Securities (2)","","","225","","","","4,362","","","","4,587","","","","770","","","","5,351","","","","6,121"],["FHLB stock","","","\u2014","","","","205","","","","205","","","","\u2014","","","","83","","","","83"],["Interest-bearing deposits in other banks","","","(63",")","","","8,853","","","","8,790","","","","(591",")","","","2,248","","","","1,657"],["Total interest and dividend income (taxable equivalent) (2)","","$","17,208","","","$","78,307","","","$","95,515","","","$","34,922","","","$","22,216","","","$","57,138"],["Interest expense:"],["Demand: interest-bearing","","$","(20",")","","$","37","","","$","17","","","$","5","","","$","34","","","$","39"],["Money market and savings","","","(2,467",")","","","33,780","","","","31,313","","","","(5",")","","","7,559","","","","7,554"],["Time deposits","","","14,230","","","","63,210","","","","77,440","","","","139","","","","6,551","","","","6,690"],["Borrowings","","","617","","","","3,868","","","","4,485","","","","32","","","","653","","","","685"],["Subordinated debentures","","","(1,056",")","","","(308",")","","","(1,364",")","","","(248",")","","","(179",")","","","(427",")"],["Total interest expense","","$","11,304","","","$","100,587","","","$","111,891","","","$","(77",")","","$","14,618","","","$","14,541"],["Change in net interest income (taxable equivalent) (2)","","$","5,904","","","$","(22,280",")","","$","(16,376",")","","$","34,999","","","$","7,598","","","$","42,597"]]
[[/GREPCENT_TABLE]]

(1)
Loans receivable include loans held for sale and exclude the allowance for credit losses. Nonaccrual loans receivable are included in the average loans receivable balance.

(2)
Amounts calculated on a fully equivalent basis using the current statutory federal tax rate of 21%.

2023 Compared to 2022

Interest income, on a taxable equivalent basis, increased $95.5 million, or 34.9%, to $369.3 million for the year ended December 31, 2023 from $273.8 million for the year ended December 31, 2022. Interest expense increased $111.9 million, or 309.4%, to $148.1 million for 2023, from $36.2 million in 2022. Net interest income, on a taxable equivalent basis, decreased by $16.4 million, or 6.9%, to $221.3 million in 2023, from $237.6 million in 2022. The decrease in net interest income was due to higher rates paid on deposits and borrowings and higher average time deposit balances, offset partially by increases in higher average interest-earning asset yields and higher average loan balances. Average loans were 83.1% of average interest earning assets for 2023, an increase from 82.3% for 2022. The net interest spread and net interest margin, on a taxable equivalent basis, for the year ended December 31, 2023 were 1.74% and 3.08%, respectively, compared with 3.02% and 3.50%, respectively, for 2022.

The average balance of interest earning assets increased $383.3 million, or 5.6%, to $7.18 billion for the year ended December 31, 2023 from $6.80 billion for 2022. The increase in the average balance of interest-earning assets was due mainly to a $371.8 million increase in average loans, from $5.60 billion in 2022, to $5.97 billion in 2023. The average balance of securities increased $17.3 million, or 1.8%, to $967.2 million in 2023 from $949.9 million for 2022. The average balance of interest-bearing liabilities increased $762.0 million, or 21.3%, to $4.34 billion for 2023 compared to $3.58 billion in 2022. The average balance of time deposits and borrowings increased $1.24 billion and $49.4 million, respectively, offset by decreases in the average balance of money market and savings accounts, subordinated debentures, and interest-bearing demand deposits of $478.1 million, $20.2 million, and $24.6 million, respectively.

The average yield on interest-earning assets, on a taxable equivalent basis, increased 112 basis points to 5.15% in 2023 from 4.03% in 2022, due mainly to the increase in the yields on loans and interest-bearing deposits in other banks. The average yield on loans increased to 5.69% for the year ended December 31, 2023 from 4.61% for 2022, primarily due to the continued increase in market interest rates in 2023. The average yield on securities, on a taxable equivalent basis, increased to 1.78% for 2023 from 1.33% for 2022. The average rate paid on interest-bearing liabilities increased by 240 basis points to 3.41% for 2023 from 1.01% for 2022. The increase reflected the higher cost of interest-bearing deposits, the greater percentage of time deposits in the deposit portfolio, and the increase in the average rate on borrowings due to increases in market rates in 2023. The average rate on interest-bearing deposits increased from 0.79% in 2022, to 3.35% in 2023. The average rate on borrowings increased from 1.61% in 2022, to 3.48% in 2023.

34

2022 Compared to 2021

Interest income, on a taxable equivalent basis, increased $57.1 million, or 26.4%, to $273.8 million for the year ended December 31, 2022 from $216.7 million for the year ended December 31, 2021. Interest expense increased $14.5 million, or 67.2%, to $36.2 million for 2022, from $21.6 million in 2021. Net interest income, on a taxable equivalent basis, increased by $42.6 million, or 21.8%, to $237.6 million in 2022, from $195.1 million in 2021. The increase in net interest income was due to an increase in the average yield and average balance on average interest-earning assets, offset partially by increases in the rates paid on interest-bearing liabilities and borrowings. Average loans were 82.3% of average interest earning assets for 2022, an increase from 75.6% for 2021. The net interest spread and net interest margin, on a taxable equivalent basis, for the year ended December 31, 2022 were 3.02% and 3.50%, respectively, compared with 2.81% and 3.08%, respectively, for 2021.

The average balance of interest earning assets increased $458.7 million, or 7.2%, to $6.80 billion for the year ended December 31, 2022 from $6.34 billion for 2021. The increase in the average balance of interest-earning assets was due mainly to an $802.0 million increase in average loans, from $4.79 billion in 2021, to $5.60 billion in 2022. The average balance of securities increased $104.5 million, or 12.4%, to $949.9 million in 2022 from $845.4 million for 2021. The average balance of interest-bearing liabilities increased $28.8 million, or 0.8%, to $3.58 billion for 2022 compared to $3.55 billion in 2021. The increase in average interest-bearing liabilities resulted primarily from an increase in average time deposits in 2022.

The average yield on interest-earning assets, on a taxable equivalent basis, increased 61 basis points to 4.03% in 2022 from 3.42% in 2021, due mainly to the increase in the yields on loans and securities. The average yield on loans increased to 4.61% for the year ended December 31, 2022 from 4.35% for 2021, primarily due to the continued increase in market interest rates in 2022. The average yield on securities, on a taxable equivalent basis, increased to 1.33% for 2022 from 0.75% for 2021. The average rate paid on interest-bearing liabilities increased by 40 basis points to 1.01% for 2022 from 0.61% for 2021. The increase reflected the higher cost of interest-bearing deposits, and an increase in the average rate on borrowings due to increases in market rates in 2022. The average rate paid on interest-bearing deposits increased from 0.36% in 2021, to 0.79% in 2022. The average rate on borrowings increased from 1.17% in 2021, to 1.61% in 2022. The average balance of subordinated debentures decreased from $154.4 million in 2021, to $149.9 million in 2022, and the average rate decreased by 12 basis points, resulting in a $0.4 million decrease in corporate interest expense.

Credit Loss Expense

As a result of credit risks inherent in our lending business, we recognize an allowance for credit losses through charges to credit loss expense. These charges pertain not only to our outstanding loan portfolio, but also to off-balance sheet items, such as commitments to extend credit. Credit loss expense for our outstanding loan portfolio is recorded to the allowance for credit losses. The allowance for off-balance sheet items is included in accrued expenses and other liabilities and the allowance for uncollectible accrued interest receivable is included in accrued interest receivable.

2023 Compared to 2022

Credit loss expense for 2023 was $4.3 million, compared with a credit loss expense of $0.8 million for 2022. The 2023 credit loss expense was comprised of a $4.9 million provision for credit losses and a $0.6 million recovery for off-balance sheet items. The credit loss expense for 2022 was comprised of a $0.3 million provision for loan losses and a $0.5 million provision for off-balance sheet items. The increase in credit loss expense for 2023 compared to 2022 was mainly attributable to a $5.2 million increase in specific allowances arising from a charge-off on a $10.0 million nonperforming commercial and industrial loan in the health-care industry.

2022 Compared to 2021

The credit loss expense for 2022 was $0.8 million, compared with a credit loss recovery of $24.4 million for 2021. The credit loss expense for 2022 was comprised of a $0.3 million provision for credit losses and a $0.5 million provision for off-balance sheet items. For the year ended December 31, 2021, the credit loss expense recovery was $24.4 million and was comprised of a $24.1 million negative provision for credit losses, and a $0.2 million negative provision for off-balance sheet items. Additionally, the credit loss expense recovery included a $1.7 million negative provision for accrued interest receivable for loans currently or previously modified under the CARES Act, offset by a $1.6 million SBA guarantee repair loss allowance.

35

Noninterest Income

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

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2023","","","2022","","","2021"],["","","(in thousands)"],["Service charges on deposit accounts","","$","10,147","","","$","11,488","","","$","11,043"],["Trade finance and other service charges and fees","","","4,832","","","","4,805","","","","4,628"],["Servicing income","","","3,177","","","","2,757","","","","2,820"],["Bank-owned life insurance income","","","792","","","","832","","","","1,011"],["All other operating income","","","5,458","","","","4,840","","","","3,857"],["Service charges, fees and other","","","24,406","","","","24,722","","","","23,359"],["Gain on sale of SBA loans","","","5,701","","","","9,478","","","","17,266"],["Net gain (loss) on sales of securities","","","(1,871",")","","","\u2014","","","","(499",")"],["Gain on sale of bank premises","","","4,000","","","","\u2014","","","","45"],["Legal settlement","","","1,943","","","","\u2014","","","","325"],["Total noninterest income","","$","34,179","","","$","34,200","","","$","40,496"]]
[[/GREPCENT_TABLE]]

2023 Compared to 2022

For the year ended December 31, 2023, noninterest income was $34.2 million, essentially unchanged from 2022. Service charges on deposit accounts decreased by $1.3 million primarily due to lower business deposit account transaction income and non-sufficient funds fees of $0.9 million and $0.4 million, respectively. The $0.7 million increase in all other operating income was primarily due to a $0.6 million increase in swap fee income. Gain on sale of SBA loans decreased $3.8 million due to lower sales volumes of $100.5 million compared with $156.1 million for 2022 and lower net premium of 7.12% compared with 7.44% for 2022. During the third quarter of 2023, a $4.0 million gain was recognized on a branch building sale-leaseback transaction. During the second quarter of 2023, there was a $1.9 million net loss on sales of $8.1 million of securities as part of a portfolio realignment as well as $1.9 million of income from a legal settlement.

2022 Compared to 2021

For the year ended December 31, 2022, noninterest income was $34.2 million, a decrease of $6.3 million, or 15.5%, compared with $40.5 million in 2021. The decrease was primarily due to a $7.8 million decrease in the gain on sale of SBA loans. The volume of SBA loans sold for the full year 2022 declined to $156.1 million from $261.8 million for the full year 2021. 2021 SBA loan sales included $132.7 million of second-draw PPP loans sold for gains of $3.0 million.

Noninterest Expense

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

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2023","","","2022","","","2021"],["","","(in thousands)"],["Salaries and employee benefits","","$","81,398","","","$","76,140","","","$","72,561"],["Occupancy and equipment","","","18,340","","","","17,648","","","","19,075"],["Data processing","","","13,695","","","","13,134","","","","12,003"],["Professional fees","","","6,255","","","","5,692","","","","5,566"],["Supplies and communications","","","2,479","","","","2,638","","","","3,026"],["Advertising and promotion","","","3,105","","","","3,637","","","","2,649"],["All other operating expenses","","","11,306","","","","11,386","","","","9,870"],["Subtotal","","","136,578","","","","130,275","","","","124,750"],["Other real estate owned expense (income)","","","(166",")","","","(6",")","","","197"],["Repossessed personal property expense (income)","","","115","","","","15","","","","(492",")"],["Total noninterest expense","","$","136,527","","","$","130,284","","","$","124,455"]]
[[/GREPCENT_TABLE]]

36

2023 Compared to 2022

For the year ended December 31, 2023, noninterest expense was $136.5 million, an increase of $6.2 million, or 4.8%, compared with $130.3 million for 2022. The increase in noninterest expense was due to a $5.3 million, or 6.9%, increase in salaries and benefits, a $0.7 million increase in occupancy and equipment expense, a $0.6 million increase in professional fees and a $0.6 million increase in data processing expenses, offset partially by a $0.5 million decrease in advertising and promotion. The increase in salaries and benefits was due to annual merit increases, higher benefit costs, and a decrease in capitalized loan origination costs resulting from lower loan originations.

2022 Compared to 2021

For the year ended December 31, 2022, noninterest expense was $130.3 million, an increase of $5.8 million, or 4.7%, compared with $124.5 million for 2021. The increase in noninterest expense was mainly due to a $3.6 million, or 4.9% increase in salaries and benefits, a $1.8 million increase in other operating expenses, a $1.1 million increase in data processing expenses and a $1.0 million increase in advertising and promotion, offset partially by a $1.4 million decrease in occupancy and equipment. The increase in salaries and benefits was due to salary increases and increases in employees, as a result of increased staffing added to support the growth in loans and deposits. The number of full-time equivalent employees increased to 624 as of December 31, 2022, from 590 as of December 31, 2021. The increase in other operating expenses was due mainly to an increase in loan related expenses as a result of increased loan volume and a $0.4 million servicing asset valuation adjustment. The increase in data processing was due to increased processing costs related to higher volumes. The increase in advertising and promotion was due to services added during 2022. The decrease in occupancy and equipment was due primarily to a $1.5 million reversal of estimated property taxes in 2022.

Income Tax Expense

For the years ended December 31, 2023, 2022 and 2021, income tax expense was $34.5 million, $39.3 million and $36.8 million, respectively. The effective tax rate for the years ended December 31, 2023, 2022 and 2021 was 30.1%, 27.9% and 27.2%, respectively. The higher effective tax rate for 2023 compared with 2022 was due mainly to the increases in the permanent difference addback and valuation allowance for state net operating loss carryforwards. The higher effective tax rate for 2022 compared with 2021 was due mainly to a lower reduction in the deferred tax asset valuation allowance required for state net operating loss carryforwards and state tax credits.

Income taxes are discussed in more detail in “Notes to Consolidated Financial Statements, Note 1 — Summary of Significant Accounting Policies” and “Note 11 — Income Taxes” presented elsewhere herein.

Financial Condition

Securities Portfolio

As of December 31, 2023, our securities portfolio was composed of mortgage-backed securities, collateralized mortgage obligations, debt securities issued by U.S. government agencies and sponsored agencies and tax-exempt municipal bonds. Most of the securities carried fixed interest rates. Other than holdings of U.S. government and agency securities, there were no securities of any one issuer exceeding 10% of stockholders’ equity as of December 31, 2023, 2022 and 2021.

As of December 31, 2023, securities available for sale increased $11.9 million, or 1.4%, to $865.7 million from $853.8 million as of December 31, 2022. The increase was primarily attributable to the decrease in unrealized losses at year-end 2023 when compared with year-end 2022.

37

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 December 31, 2023:

[[GREPCENT_TABLE]]
[["","","","","","After One Year But","","","After Five Years But"],["","","Within One Year","","","Within Five Years","","","Within Ten Years","","","After Ten Years","","","Total"],["","","Amount","","","Yield","","","Amount","","","Yield","","","Amount","","","Yield","","","Amount","","","Yield","","","Amount","","","Yield"],["","","(dollars in thousands)"],["Securities available for sale:"],["U.S. Treasury securities","","$","37,650","","","","3.81","%","","$","48,705","","","","4.04","%","","$","\u2014","","","","\u2014","%","","$","\u2014","","","","\u2014","%","","$","86,355","","","","3.94","%"],["U.S. government agency and sponsored agency obligations:"],["Mortgage-backed securities - residential","","","9","","","","2.86","","","","41","","","","3.05","","","","24,149","","","","3.52","","","","480,345","","","","1.67","","","","504,544","","","","1.76"],["Mortgage-backed securities - commercial","","","4,131","","","","3.73","","","","4,407","","","","0.84","","","","\u2014","","","","\u2014","","","","51,435","","","","1.56","","","","59,973","","","","1.66"],["Collateralized mortgage obligations","","","\u2014","","","","\u2014","","","","189","","","","1.28","","","","421","","","","2.37","","","","106,213","","","","2.99","","","","106,823","","","","2.98"],["Debt securities","","","20,731","","","","2.49","","","","111,484","","","","1.15","","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","132,215","","","","1.36"],["Total U.S. government agency and sponsored agency obligations","","","24,871","","","","2.70","","","","116,121","","","","1.14","","","","24,570","","","","3.50","","","","637,993","","","","1.88","","","","803,555","","","","1.85"],["Municipal bonds-tax exempt","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","23,060","","","","1.38","","","","54,061","","","","1.32","","","","77,121","","","","1.33"],["Total securities available for sale","","$","62,521","","","","3.36","%","","$","164,826","","","","2.00","%","","$","47,630","","","","2.47","%","","$","692,054","","","","1.84","%","","$","967,031","","","","2.00","%"]]
[[/GREPCENT_TABLE]]

Loan Portfolio

As of December 31, 2023, 2022 and 2021, loans receivable (excluding loans held for sale), net of deferred loan costs, discounts and allowance for credit losses, were $6.11 billion, $5.90 billion and $5.08 billion, respectively, representing an increase of $217.4 million or 3.7% for 2023 and an increase of $816.6 million, or 16.1% for 2022. The $217.4 million net increase in loans for 2023 was due to production of $1.29 billion, offset by payoffs and prepayments of $1.07 billion. Loan originations in 2023 consisted of $400.8 million of commercial real estate loans, $183.4 million of commercial and industrial loans, $305.9 million of residential/consumer loans, $248.6 million of equipment financing agreements, and $149.9 million of SBA loans.

The table below shows the maturity distribution of outstanding loans (before the allowance for credit losses) as of December 31, 2023. In addition, the table shows the distribution of such loans between those with floating or variable interest rates and those with fixed or predetermined interest rates.

[[GREPCENT_TABLE]]
[["","","Within One Year","","","After One Year but Within Three Years","","","After Three Years but Within Five Years","","","After Five Years but Within Fifteen Years","","","After Fifteen Years","","","Total"],["","","(in thousands)"],["Real estate loans:"],["Commercial property"],["Retail","","$","143,282","","","$","302,488","","","$","337,496","","","$","273,366","","","$","50,728","","","$","1,107,360"],["Hospitality","","","223,201","","","","144,700","","","","195,646","","","","160,426","","","","16,546","","","","740,519"],["Office","","","44,642","","","","304,724","","","","187,473","","","","31,255","","","","6,887","","","","574,981"],["Other","","","161,349","","","","449,605","","","","464,594","","","","240,056","","","","50,930","","","","1,366,534"],["Total commercial property loans","","","572,474","","","","1,201,517","","","","1,185,209","","","","705,103","","","","125,091","","","","3,789,394"],["Construction","","","90,314","","","","7,992","","","","2,039","","","","\u2014","","","","\u2014","","","","100,345"],["Residential","","","4,389","","","","79","","","","51","","","","4,596","","","","953,546","","","","962,661"],["Total real estate loans","","","667,177","","","","1,209,588","","","","1,187,299","","","","709,699","","","","1,078,637","","","","4,852,400"],["Commercial and industrial loans","","","300,604","","","","211,592","","","","117,201","","","","118,422","","","","\u2014","","","","747,819"],["Equipment financing agreements","","","32,505","","","","199,095","","","","330,200","","","","20,415","","","","\u2014","","","","582,215"],["Loans receivable","","$","1,000,286","","","$","1,620,275","","","$","1,634,700","","","$","848,536","","","$","1,078,637","","","$","6,182,434"],["Loans with predetermined interest rates","","$","457,273","","","$","1,166,448","","","$","1,140,292","","","$","96,975","","","$","266,551","","","$","3,127,539"],["Loans with variable interest rates","","","543,013","","","","453,827","","","","494,408","","","","751,561","","","","812,086","","","","3,054,895"]]
[[/GREPCENT_TABLE]]

38

The table below shows the maturity distribution of outstanding loans with fixed or predetermined interest rates due after one year, as of December 31, 2023.

[[GREPCENT_TABLE]]
[["","","After One Year but Within Three Years","","","After Three Years but Within Five Years","","","After Five Years but Within Fifteen Years","","","After Fifteen Years","","","Total"],["","","(in thousands)"],["Real estate loans:"],["Commercial property"],["Retail","","$","271,788","","","$","207,650","","","$","26,063","","","$","241","","","$","505,742"],["Hospitality","","","78,569","","","","162,169","","","","1,046","","","","\u2014","","","","241,784"],["Office","","","240,043","","","","127,410","","","","\u2014","","","","\u2014","","","","367,453"],["Other","","","372,383","","","","299,167","","","","38,983","","","","5,263","","","","715,796"],["Total commercial property loans","","","962,783","","","","796,396","","","","66,092","","","","5,504","","","","1,830,775"],["Construction","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014"],["Residential","","","78","","","","\u2014","","","","2,574","","","","261,047","","","","263,699"],["Total real estate loans","","","962,861","","","","796,396","","","","68,666","","","","266,551","","","","2,094,474"],["Commercial and industrial loans","","","4,492","","","","13,695","","","","7,894","","","","\u2014","","","","26,081"],["Equipment financing agreements","","","199,095","","","","330,201","","","","20,415","","","","\u2014","","","","549,711"],["Loans receivable","","$","1,166,448","","","$","1,140,292","","","$","96,975","","","$","266,551","","","$","2,670,266"]]
[[/GREPCENT_TABLE]]

The table below shows the maturity distribution of outstanding loans with floating or variable interest rates (including hybrids) due after one year, as of December 31, 2023.

[[GREPCENT_TABLE]]
[["","","After One Year but Within Three Years","","","After Three Years but Within Five Years","","","After Five Years but Within Fifteen Years","","","After Fifteen Years","","","Total"],["","","(in thousands)"],["Real estate loans:"],["Commercial property"],["Retail","","$","30,700","","","$","129,845","","","$","247,302","","","$","50,487","","","$","458,334"],["Hospitality","","","66,132","","","","33,477","","","","159,380","","","","16,546","","","","275,535"],["Office","","","64,682","","","","60,063","","","","31,255","","","","6,887","","","","162,887"],["Other","","","77,222","","","","165,427","","","","201,073","","","","45,668","","","","489,390"],["Total commercial property loans","","","238,736","","","","388,812","","","","639,010","","","","119,588","","","","1,386,146"],["Construction","","","7,992","","","","2,039","","","","\u2014","","","","\u2014","","","","10,031"],["Residential","","","\u2014","","","","51","","","","2,022","","","","692,498","","","","694,571"],["Total real estate loans","","","246,728","","","","390,902","","","","641,032","","","","812,086","","","","2,090,748"],["Commercial and industrial loans","","","207,099","","","","103,506","","","","110,529","","","","\u2014","","","","421,134"],["Equipment financing agreements","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014"],["Loans receivable","","$","453,827","","","$","494,408","","","$","751,561","","","$","812,086","","","$","2,511,882"]]
[[/GREPCENT_TABLE]]

As of December 31, 2023, the loan portfolio included the following concentrations of loans to one type of industry that were greater than 10% of loans receivable:

[[GREPCENT_TABLE]]
[["","","Balance as of December 31, 2023","","","Percentage of Loans Receivable Outstanding"],["","","(dollars in thousands)"],["Lessor of nonresidential buildings","","$","1,743,709","","","","28.2","%"],["Hospitality","","$","744,571","","","","12.0","%"]]
[[/GREPCENT_TABLE]]

Loan Quality Indicators

Loans 30 to 89 days past due and still accruing were $10.3 million, $7.5 million and $5.9 million as of December 31, 2023, 2022 and 2021, respectively, representing an increase of $2.8 million, or 37.0%, for 2023 and an increase of $1.6 million

39

or 27.4%, for 2022. The increase for 2023 was primarily attributable to a $7.6 million increase in past due and still accruing equipment financing agreements, offset by $1.4 million in reductions from equipment financing agreements brought current as well as payoffs and charge-offs of $3.9 million. At December 31, 2023, equipment financing agreements comprised 9.4% of the total loan portfolio, compared with 10.0% at December 31, 2022. Of these, 1.37% were 30 to 89 days delinquent and still accruing at December 31, 2023, compared with 1.04% at December 31, 2022.

At December 31, 2023, 2022 and 2021, there were no loans 90 days or more past due and still accruing interest.

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

[[GREPCENT_TABLE]]
[["","","Special Mention","","","Classified"],["","","(in thousands)"],["December 31, 2023"],["Balance at beginning of period","","$","79,013","","","$","46,192"],["Additions","","","58,235","","","","16,013"],["Reductions","","","(71,933",")","","","(30,838",")"],["Balance at end of period","","$","65,315","","","$","31,367"],["December 31, 2022"],["Balance at beginning of period","","$","95,294","","","$","60,633"],["Additions","","","133,134","","","","15,808"],["Reductions","","","(149,415",")","","","(30,249",")"],["Balance at end of period","","$","79,013","","","$","46,192"]]
[[/GREPCENT_TABLE]]

Special mention loans decreased $13.7 million, or 17.3%, to $65.3 million at December 31, 2023 from $79.0 million at December 31, 2022. The decrease in special mention loans included upgrades to pass loans of $60.0 million, downgrades to classified loans of $10.0 million and pay downs and payoffs of $1.7 million. The upgrades to pass loans were primarily attributable to a $23.5 million loan relationship in the automobile manufacturing industry and an $8.5 million commercial real estate and commercial and industrial relationship in the consumer electronics industry. The downgrades to classified loans was primarily due to a $4.8 million commercial and industrial health-care industry loan, net of a $5.2 million charge-off. The decrease in special mention loans was partially offset by downgrades from pass loans. Downgrades from pass loans included an assisted living facility construction loan of $28.0 million, a commercial and industrial digital communications industry loan of $13.9 million, and $11.5 million in other loan downgrades.

Classified loans decreased $14.8 million, or 32.1%, to $31.4 million at December 31, 2023, from $46.2 million at December 31, 2022. The decrease was primarily attributable to loan upgrades of $20.1 million, pay downs and payoffs of $5.5 million, charge-offs of $2.8 million, and loan sales of $2.4 million. Loan upgrades during 2023 consisted primarily of two commercial real estate hospitality loans of $17.2 million. The decreases were partially offset by the downgrade of a nonperforming commercial and industrial health-care industry loan totaling $4.8 million, downgrades of $6.6 million in equipment financing agreements and $4.6 million in other loan downgrades.

Nonperforming Assets

Nonperforming loans consist of loans 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 management believes 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 delinquency of the loan. 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, which generally occurs after sustained payment of six months. Interest income is recognized on the accrual basis for loans not meeting the criteria for nonaccrual. OREO consists of properties acquired by foreclosure or similar means.

Except for nonperforming loans discussed below, management is not aware of any loans as of December 31, 2023 for which known credit problems of the borrower would cause serious doubts as to the ability of such borrowers to comply with

40

their present loan repayment terms, or any known events that would result in the loan being designated as nonperforming at some future date.

Nonaccrual loans were $15.5 million and $9.8 million as of December 31, 2023 and 2022, respectively, representing an increase of $5.7 million, or 58.2%, for 2023. The increase in nonaccrual loans for 2023 resulted from additions to nonperforming loans of $12.7 million, offset by payoffs, paydowns, note sales, or upgrades of $7.0 million. At December 31, 2023, 1.25% of equipment financing agreements were on nonaccrual status compared with 0.96% at December 31, 2022. As of December 31, 2023 and 2022, all loans 90 days or more past due were classified as nonaccrual.

The $15.5 million of nonperforming loans as of December 31, 2023 had individually evaluated allowances of $3.4 million, compared with $9.8 million of nonperforming loans with individually evaluated allowances of $3.3 million as of December 31, 2022.

Nonperforming assets were $15.6 million at December 31, 2023, or 0.21% of total assets, compared with $10.0 million, or 0.14%, at December 31, 2022. Additionally, not included in nonperforming assets were repossessed personal property assets associated with equipment finance agreements of $1.3 million and $0.5 million at December 31, 2023 and 2022, respectively.

As of December 31, 2023 and 2022, OREO consisted of one property with a carrying value of $0.1 million.

Individually Evaluated Loans

The Company reviews all loans on an individual basis when they do not share similar risk characteristics with loan pools. Individually evaluated loans are measured for expected credit losses based on the present value of expected cash flows discounted at the effective interest rate, the observable market price, or the fair value of collateral.

Individually evaluated loans were $15.4 million, $9.8 million and $13.4 million as of December 31, 2023, 2022 and 2021, respectively, representing an increase of $5.6 million, or 56.8%, for 2023, and a decrease of $3.5 million, or 26.3%, for 2022. The increase primarily reflected the addition of a $10.0 million nonperforming commercial and industrial loan in the health-care industry, of which $5.2 million was charged off in 2023. Specific allowance allocations associated with individually evaluated loans increased $0.1 million to $3.4 million as of December 31, 2023, compared with $3.3 million as of December 31, 2022.

No loans were modified to borrowers with financial difficulties for which a concession was made during the years ended December 31, 2023, 2022 and 2021. A borrower is experiencing financial difficulties when there is a probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. The Company has granted a concession by providing principal forgiveness, a term extension, an other-than-insignificant payment delay, or an interest rate reduction.

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 December 31, 2023 and 2022 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.

Management selected three loss methodologies for the collective allowance estimation. At December 31, 2023, the Company used the discounted cash flow (“DCF”) method to estimate allowances for credit losses for the commercial and industrial loan portfolio, the Probability of Default/Loss Given Default (“PD/LGD”) method for the commercial property, construction and residential property portfolios, and the Weighted Average Remaining Maturity (“WARM”) method to estimate expected credit losses for equipment financing agreements. Loans that do not share similar risk characteristics are individually evaluated for allowances.

For all loan pools 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. For each of these loan segments, the Company applied an annualized historical PD/LGD using all available historical periods. Since reasonable and supportable forecasts of economic conditions are embedded directly into the DCF model, qualitative adjustments are considered but were minimal.

41

For loan pools utilizing the PD/LGD method, the Company used historical periods that included an economic downturn to derive historical losses for better alignment in the estimation of expected losses under the PD/LGD method. The Company relied on Frye-Jacobs modeled LGD rates for loan segments with insufficient historical loss data. The Frye-Jacobs model provides a means of applying an LGD rate in the event that limited to no loss data is available. The PD/LGD method incorporates a forecast into loss estimates using a qualitative adjustment.

The Company used the WARM method to estimate expected credit losses for the equipment financing agreements portfolio. The Company applied an expected loss ratio based on internal historical losses adjusted as appropriate for qualitative factors.

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

The methodology for calculating the allowance for credit losses is discussed in more detail in “Notes to Consolidated Financial Statements, Note 1 — Summary of Significant Accounting Policies.”

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, delinquent and nonperforming loans and adversely-rated equipment financing agreements, and reasonable and supportable forecasts of economic conditions.

The table below presents the allowance for credit losses by portfolio segment as a percentage of the total allowance for credit losses and loans by portfolio segment as a percentage of the aggregate investment of loans receivable for the periods presented:

[[GREPCENT_TABLE]]
[["","","As of December 31,"],["","","2023","","","2022"],["","","Allowance Amount","","","Percentage of Total Allowance","","","Total Loans","","","Percentage of Total Loans","","","Allowance Amount","","","Percentage of Total Allowance","","","Total Loans","","","Percentage of Total Loans"],["","","(dollars in thousands)"],["Real estate loans:"],["Commercial property"],["Retail","","$","10,264","","","","14.8","%","","$","1,107,360","","","","17.9","%","","$","7,872","","","","11.0","%","","$","1,023,608","","","","17.2","%"],["Hospitality","","","15,534","","","","22.4","","","","740,519","","","","12.0","","","","13,407","","","","18.7","","","","646,893","","","","10.8"],["Office","","","3,024","","","","4.4","","","","574,981","","","","9.3","","","","2,293","","","","3.2","","","","499,946","","","","8.4"],["Other","","","8,663","","","","12.4","","","","1,366,534","","","","22.1","","","","13,056","","","","18.3","","","","1,553,729","","","","26.0"],["Total commercial property loans","","","37,485","","","","54.0","","","","3,789,394","","","","61.3","","","","36,628","","","","51.2","","","","3,724,176","","","","62.4"],["Construction","","","2,756","","","","4.0","","","","100,345","","","","1.6","","","","4,022","","","","5.7","","","","109,205","","","","1.8"],["Residential","","","5,258","","","","7.5","","","","962,661","","","","15.6","","","","3,376","","","","4.7","","","","734,472","","","","12.4"],["Total real estate loans","","","45,499","","","","65.5","","","","4,852,400","","","","78.5","","","","44,026","","","","61.6","","","","4,567,853","","","","76.6"],["Commercial and industrial loans","","","10,257","","","","14.8","","","","747,819","","","","12.1","","","","15,267","","","","21.3","","","","804,492","","","","13.4"],["Equipment financing agreements","","","13,706","","","","19.7","","","","582,215","","","","9.4","","","","12,230","","","","17.1","","","","594,788","","","","10.0"],["Total","","$","69,462","","","","100.0","%","","$","6,182,434","","","","100.0","%","","$","71,523","","","","100.0","%","","$","5,967,133","","","","100.0","%"]]
[[/GREPCENT_TABLE]]

The following table sets forth certain information regarding certain ratios related to our allowance for credit losses for the periods presented:

[[GREPCENT_TABLE]]
[["","","As of and for the Year Ended December 31,"],["","","2023","","","2022","","","2021"],["","","(dollars in thousands)"],["Ratios:"],["Allowance for credit losses to loans","","","1.12","%","","","1.20","%","","","1.41","%"],["Nonaccrual loans to loans","","","0.25","%","","","0.17","%","","","0.26","%"],["Allowance for credit losses to nonaccrual loans","","","448.89","%","","","726.42","%","","","543.09","%"],["Balance:"],["Nonaccrual loans at end of period","","$","15,474","","","$","9,846","","","$","13,360"],["Nonperforming loans at end of period","","$","15,474","","","$","9,846","","","$","13,360"]]
[[/GREPCENT_TABLE]]

42

The allowance for credit losses was $69.5 million at December 31, 2023 compared with $71.5 million at December 31, 2022. The allowance for credit losses as a percentage of loans decreased to 1.12% as of December 31, 2023 from 1.20% as of December 31, 2022. The allowance attributed to loans individually evaluated was $3.4 million at December 31, 2023 compared with $3.3 million at December 31, 2022. The allowance attributed to loans collectively evaluated was $66.1 million at December 31, 2023, compared with $68.2 million at December 31, 2022. The decrease principally reflected the reduction of required reserves due to upgrades during the year ended December 31, 2023 of loans previously adversely affected by the pandemic.

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

[[GREPCENT_TABLE]]
[["","","For the year ended December 31,"],["","","2023","","","2022","","","2021"],["","","Average Loans","","","Net (Charge-offs) Recoveries","","","Net (Charge-offs) Recoveries to Average Loans","","","Average Loans","","","Net (Charge-offs) Recoveries","","","Net (Charge-offs) Recoveries to Average Loans","","","Average Loans","","","Net (Charge-offs) Recoveries","","","Net (Charge-offs) Recoveries to Average Loans"],["","","(dollars in thousands)"],["Commercial real estate loans","","$","3,769,283","","","$","(322",")","","","(0.01",")%","","$","3,833,043","","","$","(1,041",")","","","(0.03",")%","","$","3,364,940","","","$","420","","","","0.01","%"],["Construction loans","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","68,851","","","","8,954","","","","13.00"],["Residential loans","","","873,904","","","","7","","","","0.00","","","","541,975","","","","3","","","","\u2014","","","","344,698","","","","6","","","","\u2014"],["Commercial and industrial loans","","","729,382","","","","432","","","","0.06","","","","686,042","","","","654","","","","0.10","","","","580,220","","","","351","","","","0.06"],["Equipment financing agreements","","","595,770","","","","(7,160",")","","","(1.20",")","","","535,504","","","","(990",")","","","(0.18",")","","","435,797","","","","(3,454",")","","","(0.79",")"],["Total","","$","5,968,339","","","$","(7,043",")","","","(0.12",")%","","$","5,596,564","","","$","(1,374",")","","","(0.02",")%","","$","4,794,506","","","$","6,277","","","","0.13","%"]]
[[/GREPCENT_TABLE]]

For the year ended December 31, 2023, gross charge-offs were $16.1 million, an increase of $11.4 million, or 240.7%, from $4.7 million for 2022, and gross recoveries were $9.0 million, an increase of $5.7 million, or 170.2%, from $3.3 million for 2022. Net loan charge-offs were $7.0 million, or 0.12% of average loans, compared with net loan charge-offs of $1.4 million, or 0.02% of average loans and net loan charge-offs of $6.3 million or 0.13% of average loans, respectively, for the years ended December 31, 2023, 2022 and 2021. Gross charge-offs for the year ended December 31, 2023 consisted of the $5.2 million charge-off on a nonperforming commercial and industrial loan in the health-care industry, the $1.0 million charge-off on a nonperforming commercial and industrial loan, and $8.8 million of charge-offs of equipment financing arrangements. Gross recoveries for the year ended December 31, 2023 primarily consisted of a $6.8 million recovery from a troubled loan relationship in 2019.

The allowance for off-balance sheet exposure, as of December 31, 2023, 2022 and 2021 was $2.5 million, $3.1 million and $2.6 million, respectively, representing a decrease of $0.6 million, or 20.6%, in 2023, and an increase of $0.5 million, or 20.4%, in 2022. 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 losses inherent in the loan portfolio and off-balance sheet exposure as of December 31, 2023.

Deposits

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

[[GREPCENT_TABLE]]
[["","","As of December 31,"],["","","2023","","","2022","","","2021"],["","","Balance","","","Percent","","","Balance","","","Percent","","","Balance","","","Percent"],["","","(dollars in thousands)"],["Demand \u2013 noninterest-bearing","","$","2,003,596","","","","31.9","%","","$","2,539,602","","","","41.3","%","","$","2,574,517","","","","44.5","%"],["Interest-bearing:"],["Demand","","","87,452","","","","1.4","","","","115,573","","","","1.9","","","","125,183","","","","2.2"],["Money market and savings","","","1,734,659","","","","27.6","","","","1,556,690","","","","25.2","","","","2,099,381","","","","36.2"],["Uninsured amount of time deposits more than $250,000:"],["Three months or less","","","186,321","","","","3.0","","","","44,828","","","","0.7","","","","69,464","","","","1.2"],["Over three months through six months","","","201,085","","","","3.2","","","","123,471","","","","2.0","","","","73,808","","","","1.3"],["Over six months through twelve months","","","222,683","","","","3.5","","","","191,248","","","","3.1","","","","29,706","","","","0.5"],["Over twelve months","","","70,932","","","","1.1","","","","138,451","","","","2.2","","","","549","","","","\u2014"],["All other insured time deposits","","","1,773,846","","","","28.2","","","","1,458,209","","","","23.6","","","","813,661","","","","14.1"],["Total deposits","","$","6,280,574","","","","100.0","%","","$","6,168,072","","","","100.0","%","","$","5,786,269","","","","100.0","%"]]
[[/GREPCENT_TABLE]]

Total deposits were $6.28 billion, $6.17 billion and $5.79 billion as of December 31, 2023, 2022 and 2021, respectively, representing an increase of $112.5 million, or 1.8%, for 2023, and an increase of $381.8 million, or 6.6%, for 2022. The increase

43

in total deposits for 2023 was primarily attributable to an increase of $498.7 million in time deposits and an increase of $178.0 million in money market and savings accounts, offset by a decrease of $536.0 million in non-interest bearing demand deposits. The changes in the deposit composition from 2022 to 2023 were primarily due to the increase in deposit rates. At December 31, 2023, the loan-to-deposit ratio was 98.4% compared with 96.7% at December 31, 2022.

The average balance of deposits for the years ended December 31, 2023, 2022 and 2021 were $6.19 billion, $5.95 billion and $5.56 billion, respectively. The average balance of deposits increased 4.0%, 7.0% and 12.4% in 2023, 2022 and 2021, respectively.

As of December 31, 2023, the aggregate amount of uninsured deposits (deposits in amounts greater than $250,000, which is the maximum amount for federal deposit insurance) was $2.52 billion. The aggregate amount of our uninsured time deposits was $681.0 million. Other uninsured deposits, such as demand deposits and money market and savings deposits were $1.84 billion. In addition, $1.09 billion of total uninsured deposits were in accounts with balances of $5.0 million or more at December 31, 2023.

The Bank’s wholesale funds historically consisted of FHLB advances, brokered deposits, as well as State of California time deposits. As of December 31, 2023 and 2022, the Bank had $325.0 million and $350.0 million of FHLB advances, $58.3 million and $83.3 million of brokered deposits, and $120.0 million and $120.0 million of State of California time deposits, respectively.

Borrowings and Subordinated Debentures

Borrowings mostly take the form of FHLB advances. At December 31, 2023, FHLB advances were $325.0 million, a decrease of $25.0 million from $350.0 million at December 31, 2022. Funds from deposit growth not used to fund loan production were used to pay off borrowings. At December 31, 2023, the Bank had $112.5 million in term advances and $212.5 million in FHLB open advances. FHLB term advances and open advances were $100.0 million and $250.0 million, respectively, at December 31, 2022.

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

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

The following is financial data pertaining to FHLB advances:

[[GREPCENT_TABLE]]
[["","","As of December 31,"],["","","2023","","","2022","","","2021"],["","","(dollars in thousands)"],["Weighted-average interest rate at end of year","","","4.69","%","","","3.57","%","","","1.05","%"],["Weighted-average interest rate during the year","","","3.48","%","","","1.52","%","","","1.17","%"],["Average balance of FHLB advances","","$","197,390","","","$","148,027","","","$","145,277"],["Maximum amount outstanding at any month-end","","$","450,000","","","$","350,000","","","$","162,500"]]
[[/GREPCENT_TABLE]]

Subordinated debentures were $130.0 million as of December 31, 2023 and $129.4 million as of December 31, 2022. Subordinated debentures were comprised of fixed-to-floating subordinated notes of $108.3 million and $108.2 million as of December 31, 2023 and 2022, respectively, and junior subordinated deferrable interest debentures of $21.7 million and $21.2 million as of December 31, 2023 and 2022, respectively. See “Note 10 - Subordinated Debentures” to the consolidated financial statements for more details.

Stockholder's Equity

Stockholders’ equity at December 31, 2023 was $701.9 million, an increase of $64.4 million from $637.5 million at December 31, 2022. The increase during 2023 includes a $16.8 million increase in unrealized after-tax gain on securities available for sale due to changes in intermediate-term interest rates. 2023 net income, net of $30.5 million of dividends paid,

44

added $49.5 million to stockholders' equity for the period. In addition, Hanmi repurchased 250,000 shares during 2023 at an average share price of $16.34 for a total cost of $4.1 million. At December 31, 2023, 409,972 shares remain under the Company’s share repurchase program.

Interest Rate Risk Management

The financial performance of the Company is impacted by changes in interest rates because the Company's primary source of income is derived from earning a spread between the interest income it receives on its interest-earning assets and the interest expense it pays on its interest-bearing liabilities, its net interest income. We emphasize capital protection through stable earnings rather than maximizing yield. 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 measure sensitivity of its interest-earning assets and interest-bearing liabilities to changes in interest rates. It consists of forecasting the net interest income and measuring the economic value of equity in scenarios of instantaneous parallel shifts in the yield curve, and measuring changes from the current rate scenario. The following table summarizes the results as of December 31, 2023. The results are compared to policy limits, which for net interest income, specify the maximum tolerance level over a 1- to 12-month and a 13- to 24-month horizon.

[[GREPCENT_TABLE]]
[["","","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%","","$","(1,869",")","","","(0.84","%)","","$","4,454","","","","1.75","%"],["200%","","$","(2,029",")","","","(0.92","%)","","$","843","","","","0.33","%"],["100%","","$","(56",")","","","(0.03","%)","","$","2,528","","","","0.99","%"],["(100%)","","$","(1,703",")","","","(0.77","%)","","$","(6,482",")","","","(2.55","%)"],["(200%)","","$","(5,147",")","","","(2.32","%)","","$","(16,981",")","","","(6.68","%)"],["(300%)","","$","(10,084",")","","","(4.55","%)","","$","(31,131",")","","","(12.24","%)"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","Economic Value of Equity (EVE)"],["Change in"],["Interest","","Dollar","","","Percentage"],["Rate","","Change","","","Change"],["","","(dollars in thousands)"],["300%","","$","(56,333",")","","","(8.51","%)"],["200%","","$","(39,880",")","","","(6.02","%)"],["100%","","$","(10,210",")","","","(1.54","%)"],["(100%)","","$","(8,396",")","","","(1.27","%)"],["(200%)","","$","(38,669",")","","","(5.84","%)"],["(300%)","","$","(92,019",")","","","(13.90","%)"]]
[[/GREPCENT_TABLE]]

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

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

[[GREPCENT_TABLE]]
[["","Conditional prepayment rates*:"],["","Loans receivable","","15","%"],["","Securities","","6","%"],["","Deposit rate betas*:"],["","NOW, savings, money market demand","","48","%"],["","Time deposits, retail and wholesale","","76","%"],["","* Balance-weighted average"]]
[[/GREPCENT_TABLE]]

45

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 levels of capital, management periodically assesses projected sources and uses of capital in conjunction with projected increases in assets and levels of risk. Management considers, among other things, earnings generated from operations, and access to capital from financial markets through the issuance of additional securities, including common stock or notes, to meet our capital needs.

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 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. The Company paid $30.5 million ($1.00 per share), $28.6 million ($0.94 per share), and $16.5 million ($0.54 per share) in dividends in 2023, 2022, and 2021, respectively. As of January 1, 2024, after giving effect to the 2024 first quarter dividend declared by the Company, the Bank has the ability to pay $174.5 million of dividends without the prior approval of the Commissioner of the DFPI.

At December 31, 2023, the Bank’s total risk-based capital ratio was 14.27%, Tier 1 risk-based capital ratio was 13.26%, common equity Tier 1 capital ratio was 13.26%, and Tier 1 leverage capital ratio was 11.32%, placing the Bank in the “well capitalized” category, which is defined as institutions with total risk-based capital ratio equal to or greater than 10.00%, Tier 1 risk-based capital ratio equal to or greater than 8.00%, common equity Tier 1 capital ratio of 6.50%, and Tier 1 leverage capital ratio equal to or greater than 5.00%.

At December 31, 2023, the Company’s total risk-based capital ratio, Tier 1 risk-based capital ratio, common equity Tier 1 capital ratio and Tier 1 leverage capital ratio were 14.95%, 12.20%, 11.86%, and 10.37%, respectively, all of which exceeded the Company’s regulatory capital ratio requirements.

For a discussion of recently implemented changes to the capital adequacy framework prompted by Basel III and the Dodd-Frank Act, see “Note 13 — Regulatory Matters” of Notes to Consolidated Financial Statements in this Report.

Liquidity

The Bank has Contingency Funding Plan (“CFP”) designed to ensure that liquidity sources are sufficient to meet its ongoing obligations and commitments, particularly in the event of a liquidity contraction. The CFP provides a framework for management and other critical personnel to follow in the event of a liquidity contraction or in anticipation of such an event. Management believes that Hanmi Financial, on a stand-alone basis, had adequate liquid assets to meet its current debt obligations.

For a discussion of our liquidity position, see “Note 22 - Liquidity” of Notes to Consolidated Financial Statements in this Report.

Off-Balance Sheet Arrangements

For a discussion of off-balance sheet arrangements, see “Note 19 — Off-Balance Sheet Commitments” of Notes to Consolidated Financial Statements and “Item 1. Business — Off-Balance Sheet Commitments” in this Report.