HOPE BANCORP INC (HOPE) FY 2023 MD&A

Item 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read together with our Consolidated Financial Statements and accompanying notes presented elsewhere in this Report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those set forth under Item 1A “Risk Factors” and elsewhere in this Report. Please see the “Forward Looking Information” immediately preceding Part I of this Report.

Overview

Our principal business involves earning interest on loans and investment securities that are funded primarily by customer deposits, wholesale deposits, and other borrowings. Our operating income and net income are derived primarily from the difference between interest income received from interest earning assets and interest expense paid on interest bearing liabilities and, to a lesser extent, from fees received in connection with servicing loan and deposit accounts and income from the sale of loans. Our major expenses are the interest we pay on deposits and borrowings, provisions for credit losses and general operating expenses, which primarily consist of salaries and employee benefits, occupancy costs, and other operating expenses. Interest rates are highly sensitive to many factors that are beyond our control, such as changes in the national economy and in the related monetary policies of the FRB, inflation, unemployment, consumer spending and political changes and events. We cannot predict the impact that these factors and future changes in domestic and foreign economic and political conditions might have on our performance.

Our results are affected by economic conditions in our markets and to a lesser degree in South Korea. A decline in economic and business conditions in our market areas or in South Korea may have a material adverse impact on the quality of our loan portfolio or the demand for our products and services, which in turn may have a material adverse effect on our financial condition and results of operations.

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Selected Financial Data

The following table presents selected financial and other data for each of the years in the five-year period ended December 31, 2023. The information below should be read in conjunction with, the more detailed information included elsewhere herein, including our Audited Consolidated Financial Statements and Notes thereto.

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(1)Net income divided by average assets.

(2)Net income divided by average stockholders’ equity.

(3)Net interest income expressed as a percentage of average interest earning assets.

(4)Interest income divided by average interest earning assets.

(5)Interest expense divided by average interest bearing liabilities.

(6)Noninterest expense divided by the sum of net interest income plus noninterest income.

(7)Excludes delinquent SBA loans that are guaranteed and currently in liquidation.

(8)Excludes acquired credit impaired loans totaling $13.2 million as of December 31, 2019.

(9)Nonperforming assets consist of nonperforming loans and OREO. Prior to January 1, 2023, nonperforming loans included accruing TDR loans.

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Critical Accounting Policies

Our financial statements are prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and generally accepted practices within the banking industry. The financial information contained within these statements is, to a significant extent, financial information that is based on approximate measures of the financial effects of transactions and events that have already occurred. All of our significant accounting policies are described in Note 1 of our Notes to Consolidated Financial Statements presented elsewhere in this Report and are essential to understanding Management’s Discussion and Analysis of Financial Condition and Results of Operations. GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of our financial statements. Actual results may materially and adversely differ from these estimates under different assumptions or conditions.

The following is a summary of the more subjective and complex accounting estimates and judgments affecting the financial condition and results reported in our financial statements. In each area, we have identified the variables we believe to be the most important in the estimation process. We use the best information available to us to make the estimations necessary to value the related assets and liabilities in each of these areas. Management has reviewed these critical accounting estimates and related disclosures with our Audit Committee.

Investment Securities

Description - We evaluate investment securities AFS and HTM for impairment related to credit losses on at least a quarterly basis. Based on our evaluation, we do not believe that we had any investment securities AFS or HTM with a credit loss impairment as of December 31, 2023. Investment securities are discussed in more detail under “Financial Condition - Investment Securities Portfolio.”

Subjective Estimates and Judgments - Significant judgment is involved in determining when an investment securities AFS decline in fair value is credit impaired. Investment securities AFS in unrealized loss positions are first assessed as to whether we intend to sell, or if it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If one of the criteria is met, the security’s amortized cost basis is written down to fair value through current earnings. We then apply a zero credit loss assumption to investment securities issued by the U.S. government or government-sponsored enterprises. For other securities that do not meet these criteria, we evaluate whether the decline in fair value resulted from credit losses or other factors. In evaluating whether a credit loss exists, we set up an initial filter for impairment triggers. Once the quantitative filters have been triggered, the securities are placed on a watch list and an additional assessment is performed to identify whether a credit impairment exists. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security and the issuer, among other factors.

The investment securities HTM as of December 31, 2023, were all issued by the U.S. government or government-sponsored enterprises and therefore the Company applied a zero credit loss assumption.

Impact if Actual Results Differ From Estimates and Judgments - Changes in management’s assessment of the factors used to determine if an investment security is credit impaired could lead to additional impairment charges. Additionally, a security that had no apparent risk could be affected by a sudden or acute market condition and necessitate an impairment charge.

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Allowance for Credit Losses

Description - The allowance for credit losses is maintained at a level believed to be adequate by management to absorb expected lifetime credit losses in the loan portfolio as of the date of the consolidated financial statements. The adequacy of the allowance for credit losses is determined by management based upon an evaluation and review of the credit quality of the loan portfolio, consideration of current and projected economic conditions and variables, historical loss experience, relevant internal and external factors that affect the collection of a loan, and other pertinent factors.

The allowance for credit losses is discussed in more detail under “Financial Condition - Allowance for Credit Losses.”

Subjective Estimates and Judgments - We determine the adequacy of the allowance for credit losses by analyzing and estimating lifetime expected credit losses in the loan portfolio. The allowance for credit losses is determined utilizing quantitative and qualitative loss factors.

Included in the quantitative portion of our analysis of the allowance for credit losses are key inputs including borrowers’ net operating income, debt coverage ratios, and real estate collateral values, as well as key inputs that are more subjective or require management’s judgment including key macroeconomic variables from Moody’s forecast scenarios including GDP, unemployment rates, interest rates, and commercial real estate prices. These key inputs are utilized in our models to develop probability of default (“PD”) and loss given default (“LGD”) assumptions used in the calculation of estimated quantitative losses. The key macroeconomic variables were derived from Moody’s consensus scenario as of December 31, 2023 and 2022.

Certain key macroeconomic variable inputs used in the calculation of our allowance for credit losses experienced a weakening between projections as of December 31, 2022 versus projections as of December 31, 2023, particularly projected GDP growth and CRE Price Index growth rates. This contributed to an increase in our allowance for credit losses estimated loss rates at December 31, 2023, compared with at December 31, 2022. Changes in the key macroeconomic variables are presented in the tables below.

Moody's consensus projected key macroeconomic variable inputs as of December 31, 2023:

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* Represents year over year growth rates.

Moody's consensus projected key macroeconomic variable inputs as of December 31, 2022:

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* Represents year over year growth rates.

In addition to an estimate of quantitatively derived losses, our allowance for credit losses also includes an estimate of qualitatively derived losses to account for risks not fully captured by the quantitative calculation of estimated credit losses. At December 31, 2023, the qualitative portion of our allowance for credit losses totaled $35.7 million compared with $45.1 million at December 31, 2022. The qualitative portion of our allowance for credit losses is determined by management and takes into consideration factors related to changes to lending policies, changes in the nature and volume of loans, risks related to lending management, changes to the volume and severity of past due and nonaccrual loans, changes in the quality of loan review, concentrations of credit, and other external factors. Some of these factors are more subjective than others and require significant judgment from management to determine estimated losses.

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Impact if Actual Results Differ From Estimates and Judgments - Adverse changes in management’s assessment of the assumptions and key inputs used to determine the allowance for credit losses could lead to increases in the allowance for credit losses through additional provisions for credit losses. If actual losses and conditions differ materially from the assumptions used to determine the allowance for credit losses, our actual credit losses could differ materially from management’s estimates.

Moody’s consensus forecast assumes that the probability that the economy will perform better than the consensus estimates is equal to the probability that it will perform worse. A sensitivity analysis of our allowance for credit losses was performed by estimating credit losses using the Moody’s S2 scenario as of December 31, 2023, which has a more negative outlook on the economy compared with the Moody’s consensus scenario. The S2 scenario includes assumptions including elevated market interest rates despite a weakening of the economy due to inflationary concerns, elevated risk associated with the Russian invasion of Ukraine and the Hamas/Israel conflict, rising tensions with China regarding Taiwan that could limit the global chip supply, a decline in consumer confidence due to concerns of additional bank failures, increased risk of a federal government shutdown, and a decline in the stock market in 2024. Incorporating key macroeconomic inputs from Moody’s S2 projected scenario in our calculation of the allowance for credit losses resulted in additional allowance for credit losses of approximately $21.6 million compared with the results using the Moody’s consensus forecast as of December 31, 2023. Management reviews the results using the comparison scenario for sensitivity analysis and considered the results when evaluating the qualitative factor adjustments.

While management believes that it has established adequate allowances for lifetime credit losses on loans, actual results may prove different, and the differences could be material.

Goodwill

Description - Goodwill is generally determined as the excess of the fair value of the consideration paid over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill recorded in a purchase business combination is determined to have an indefinite useful life and is not amortized but tested for impairment at least annually. Goodwill may also be tested for impairment on an interim basis if circumstances change or an event occurs between annual tests that would more likely than not reduce the fair value of the reporting unit below its carrying amount. The Company is managed as a single combined operating segment. An impairment loss must be recognized for any excess of carrying value over fair value of the goodwill.

Subjective Estimates and Judgments - Before applying the goodwill impairment test, in accordance with ASC 350 “Intangibles - Goodwill and Other”, we perform a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount. If we conclude that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, we do not perform Step 1 of the impairment analysis. We assess certain qualitative factors to determine whether impairment is likely including: our market capitalization, capital adequacy, continued performance compared to peers, and continued improvement in asset quality trends, among others. This qualitative assessment can be subjective in nature and includes a certain amount of management judgment in determining whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount.

In the event we perform an impairment test, the determination of fair value is based on a combination of valuation techniques which include the income approach using the discounted cash flow method and market approach using the guideline public company method and guideline transaction method. These valuation approaches incorporate management assumptions and estimates including developing cash flow projections, selecting appropriate discount rates, calculation of a terminal growth rate, minimum target capitalization levels, identifying relevant market comparables, incorporating current and projected economic conditions, and selecting an appropriate control premium.

Management reviewed and assessed events and conditions during the three months ended December 31, 2023, including macroeconomic and market factors, industry and banking sector events, Company-specific stock price and performance indicators, a comparison of management’s forecast and assumptions to those used in its September 30, 2023 quantitative step 1 impairment test. Based on these considerations, management concluded that it was not more-likely-than-not that the fair value of either of goodwill was impaired as of December 31, 2023.

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Impact if Actual Results Differ From Estimates and Judgments - Changes in qualitative factors assessed, changes to assumptions used in the impairment test, selection and weighting of the various fair value techniques, and downturns in economic or business conditions, could have a significant adverse impact on the carrying value of goodwill and could result in impairment losses which could have a material impact our financial condition and earnings. We performed a goodwill impairment quantitative test as of September 30, 2023 and based on this analysis we concluded the fair value of the Company exceeded the carrying value by 15.4% using a discount rate of 13.6% for the income approach. Management performed a sensitivity analysis of the discount rate used in the income approach of the goodwill impairment analysis and a 50 basis point increase to the discount rate would result in the fair value of the Company exceeding the carrying amount by 10.9% a reduction of 4.5%.

Goodwill is discussed in more detail in Note 5 to our Consolidated Financial Statements presented this Report.

Income Taxes

Description - We use the asset and liability method of accounting for income taxes in which deferred tax assets and liabilities are established for the temporary differences between the financial reporting basis and the tax basis of our asset and liabilities. The realization of the net deferred tax asset generally depends upon future levels of taxable income and the existence of prior years’ taxable income, to which “carry back” refund claims could be made. A valuation allowance is maintained, when necessary, to reduce deferred tax assets that management estimates are more likely than not to be unrealizable based on available evidence at the time the estimate is made. Furthermore, tax positions that could be deemed uncertain are required to be disclosed and reserved for if it is more likely than not that the position would not be sustained upon audit examination. Taxes are discussed in more detail in Note 11 to our Notes to Consolidated Financial Statements presented in this Report.

Subjective Estimates and Judgments - Significant management judgment is required in determining income tax expense and deferred tax assets and liabilities. Some judgments are subjective and involve estimates and assumptions about matters that are inherently uncertain. In determining the valuation allowance, we use historical and forecasted future operating results. In determining the level of reserve needed for uncertain tax positions, we consider relevant current legislation and court rulings, among other authoritative items, to determine the level of exposure inherent in our tax positions. Management believes that the accounting estimate related to the valuation allowance and uncertain tax positions are a critical accounting estimate because the underlying assumptions can change from period to period.

Impact if Actual Results Differ From Estimates and Judgments - Although management believes that the judgments and estimates used are reasonable, should actual factors and conditions differ materially from those considered by management, the actual realization of the net deferred tax asset and tax positions taken could differ materially from the amounts recorded in the financial statements. If we are not able to realize all or part of our net deferred tax asset in the future or if a tax position is overturned by a taxing authority, an adjustment to the deferred tax asset valuation allowance would be charged to income tax expense in the period such determination was made which could have a material impact on our earnings.

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Results of Operations

Operations Summary

Our most significant source of income is net interest income, which is the difference between our interest income and our interest expense. Generally, interest income is generated from the loans we extend to our customers, our investments and interest earning cash; and interest expense is generated from interest bearing deposits our customers have with us and from our borrowings or debt. Our ability to generate profitable levels of net interest income is largely dependent on our ability to manage the levels of interest earning assets and interest bearing liabilities, and the rates received or paid on them, as well as our ability to maintain sound asset quality and appropriate levels of capital and liquidity. As mentioned above, interest income and interest expense may fluctuate based on factors beyond our control, such as economic or political conditions and policies.

We attempt to minimize the effect of interest rate fluctuations on net interest margin by monitoring our interest sensitive assets and our interest sensitive liabilities. Net interest income can be affected by a change in the composition of assets and liabilities, such as replacing higher yielding loans with a like amount of lower yielding investment securities. Changes in the level of nonaccrual loans and changes in volume and interest rates can also affect net interest income.

Our other source of income is noninterest income, including service charges and fees on deposit accounts, net gains on sale of loans that were held for sale and investment securities AFS, and other income and fees.

Our expenses consist of interest expense, the provisions for credit losses, and noninterest expenses, which are primarily salaries and benefits and occupancy expense. The following table presents our condensed consolidated statements of income and the changes year over year.

Net Income

Our net income was $133.7 million for 2023 compared with $218.3 million for 2022 and $204.6 million for 2021. Our diluted earnings per common share totaled $1.11, $1.81, and $1.66 for the years 2023, 2022, and 2021, respectively. The return on average assets was 0.67%, 1.20%, and 1.17% and the return on average stockholders’ equity was 6.48%, 10.73%, and 9.88% for the years 2023, 2022, and 2021, respectively. The decrease in net income for 2023 compared with 2022 was primarily due to increases in interest expense, provision for credit losses and noninterest expense. The increase in net income for 2022 compared with 2021 was due primarily to an increase in net interest income, offset partially by increases in the provision for credit losses and noninterest expense.

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Net Interest Margin and Net Interest Rate Spread

We analyze our earnings performance using, among other measures, net interest spread and net interest margin. The net interest spread represents the difference between the weighted average yield earned on interest earning assets and the weighted average rate paid on interest bearing liabilities. Net interest income, when expressed as a percentage of average total interest earning assets, is referred to as the net interest margin. Our net interest margin is affected by changes in the yields earned on assets and rates paid on liabilities, as well as the ratio of the amounts of interest earning assets to interest bearing liabilities.

Interest rates charged on our loans are affected principally by the demand for such loans, the supply of money available for lending purposes, the interest rate environment, and other competitive factors. These 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 FRB.

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The following tables present our consolidated daily average balance of major assets and liabilities, together with interest rates earned and paid on the various sources and uses of funds for the periods indicated:

(1) Interest income on loans includes accretion of net deferred loan origination fees and costs, prepayment fees received on loan payoffs and accretion of discounts on acquired loans. See the table below for detail.

(2) Average balances of loans are net of deferred loan origination fees and costs and include nonaccrual loans and loans held for sale.

(3) Interest income and yields are not presented on a tax-equivalent basis.

(4) Yield on interest earning assets minus cost of interest bearing liabilities.

(5) Cost on interest bearing liabilities and noninterest bearing deposits.

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The following table presents net loan origination fees, loan prepayment fee income, interest reversed for nonaccrual loans, and discount accretion income included as part of loan interest income for the years indicated:

Net Interest Income

Net interest income was $525.9 million for 2023, compared with $578.4 million for 2022 and $512.8 million for 2021. Changes in net interest income are a function of changes in interest rates and volumes of interest earning assets and interest bearing liabilities. The table below sets forth information regarding the changes in interest income and interest expense for the periods indicated. The total change for each category of interest earning assets and interest bearing liabilities is segmented into the change attributable to variations in volume (changes in volume multiplied by the old rate) and the change attributable to variations in interest rates (changes in rates multiplied by the old volume). Nonaccrual loans are included in average loans used to compute this table.

Net interest income before provision for credit losses decreased by $52.6 million, or 9%, for 2023 compared with 2022. The decrease in net interest income was driven by a higher cost of funds and increases in average interest bearing deposits and short-term borrowings, partially offset by expanding yields on interest earning assets and higher average balances in loans and interest earning cash and deposits in other banks. The expanding interest earning asset yields and higher deposit costs reflected rising market interest rates during the period. The upper range of the target Federal Funds rate increased to 5.50% at December 31, 2023, up from 4.50% at December 31, 2022. The increase in average interest earning cash and deposits at other banks reflected a conservative approach to liquidity risk management, given the banking industry volatility caused by multiple bank failures in the first half of 2023. The increase in the average interest earning cash and deposits in other banks was largely funded through FRB’s BTFP borrowings.

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Net interest income before provision for credit losses increased by $65.7 million, or 13%, for 2022 compared with 2021. The increase was primarily due to increases in loans yields, which increased by 55 basis points for 2022 compared with 2021, and an increase in average loan balances. These increases contributed to an increase in total interest income of $149.6 million for 2022 compared with 2021. The increase in interest income was partially offset by an increase in interest expense of $83.9 million, driven by an increase in the cost of interest bearing deposits, which grew by 74 basis points for 2022 compared with 2021, and reflected higher market interest rates Federal Funds target rate hikes during 2022. The upper range of the Federal Funds target rate increased to 4.50% as of December 31, 2022, up from 0.25% as of December 31, 2021.

Interest Income

Interest income was $1.05 billion for 2023, compared with $716.1 million for 2022, and $566.5 million for 2021. The yield on average interest earning assets was 5.60% for 2023, compared with 4.16% for 2022, and 3.42% for 2021.

Comparison of 2023 with 2022

The increase in interest income of $332.8 million, or 46.5%, for 2023 compared with 2022 was primarily driven by higher loan yields, which reflected new loans originated at higher average interest rates and the upward repricing of variable rate loans in a rising interest rate environment, higher volume of average interest earning cash and deposits, and expanding yields on all other interest earning assets.

Comparison of 2022 with 2021

The increase in interest income of $149.6 million, or 26.4%, for 2022 compared with 2021 was primarily due to expanding loan yields, growth in average loans, and higher yields on investment securities.

Interest Expense

Deposits

Interest expense on deposits was $441.2 million for 2023, compared with $114.8 million for 2022, and $42.0 million for 2021. The average cost of deposits was 2.82% for 2023, compared with 0.76% for 2022, and 0.29% for 2021. The average cost of interest bearing deposits was 3.92% for 2023, compared with 1.20% for 2022, and 0.46% for 2021.

Comparison of 2023 with 2022

The increase in interest expense on total deposits of $326.4 million, or 284%, for 2023 compared with 2022 was due to a higher cost of interest bearing deposits, growth in average time deposits, and an increase in average borrowings, reflecting usage of the BTFP. The increase in the cost of deposits was driven by rising market interest rates, a remix of low-yielding deposits into higher-cost options, and deposit pricing competition.

Comparison of 2022 with 2021

The increase in interest expense on total deposits of $72.8 million, or 173%, for 2022 compared with 2021 was primarily due to a higher cost of interest bearing deposits, which reflected a rapidly rising interest rate environment.

FHLB and FRB Borrowings

FHLB and FRB borrowings consist of advances from the FHLB and FRB, including the BTFP. As part of our asset-liability management, we utilize FHLB and FRB borrowings to supplement our deposit source of funds. Therefore, there may be fluctuations in these balances depending on the short-term liquidity and longer-term financing needs of the Bank.

Average FHLB and FRB borrowings were $1.62 billion for 2023, compared with $528.3 million in 2022, and $208.7 million in 2021. Interest expense on FHLB and FRB borrowings was $69.4 million for 2023 compared with $11.5 million for 2022, and $2.6 million for 2021. The average cost of FHLB and FRB borrowings was 4.29% for 2023, compared with 2.18% for 2022, and 1.23% for 2021. Given the attractive cost and structure of the BTFP, we utilized it in 2023 to bolster our on-balance sheet liquidity in response to the banking industry disruption caused by the multiple bank failures in the first half of the year.

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Convertible Notes

In 2018, we issued $217.5 million in senior convertible notes. Interest expense on convertible notes was $1.9 million for 2023 compared with $5.3 million for 2022 and 2021. The cost of our convertible notes for 2023 was 2.47% compared with 2.44% for 2022 and 2.45% for 2021. The cost of our convertible notes consisted of the 2.00% coupon rate and non-cash interest expense from the capitalization of issuance cost. On January 1, 2021, we early adopted ASU 2020-06, which eliminated the discount on our convertible notes and reduced interest expense that was previously recognized on amortization of the discount.

During the year ended December 31, 2023, we repurchased our notes in the aggregate principal amount of $19.9 million and recorded a gain on debt extinguishment of $405 thousand. The repurchased notes were immediately cancelled subsequent to repurchase. On May 15, 2023, most holders of our convertible notes exercised their right to put their notes and therefore we paid off $197.1 million of convertible note principal in cash. During the years ended December 31, 2022 and 2021, there were no repurchases or put options.

Subordinated Debentures

The subordinated debentures bear interest at the 3-month Chicago Mercantile Exchange term Secured Financing Overnight Rate (“SOFR”) rate, plus a designated spread. Prior to LIBOR cessation at June 2023, the interest rate was tied to the 3-month LIBOR rate, plus a designated spread. There were no changes in our balance of subordinated debentures during 2023 or 2022 aside from the increases related to the discount accretion on subordinated debentures acquired from previous acquisitions. Interest expense on subordinated debentures was $10.5 million for 2023 compared with $6.0 million for 2022, $3.9 million for 2021. The average rate on other borrowings increased to 10.02% for 2023, compared with 5.84% for 2022, and 3.82% for 2021. The change in cost of other borrowings for 2023 and 2022 compared with prior years was due to changes in the 3-month SOFR and 3-month LIBOR rates.

Provision for Credit Losses

The provision for credit losses reflects our judgment of the current period cost associated with credit risk inherent in our loan portfolio. The provision for credit losses for each period is dependent upon many factors, including loan growth, net charge offs, changes in the composition of the loan portfolio, delinquencies, assessments by management, third parties’ and regulators’ examination of the loan portfolio, the value of the underlying collateral on problem loans, the general economic conditions in our market areas, and future projections of the economy. Specifically, the provision for credit losses represents the amount charged against current period earnings to achieve an allowance for credit losses that, in our judgment, is adequate to absorb probable lifetime losses inherent in our loan portfolio. Periodic fluctuations in the provision for credit losses result from management’s assessment of the adequacy of the allowance for credit losses; however, actual credit losses could potentially vary materially from current estimates. If the allowance for credit losses is inadequate, we may be required to record additional provision for credit losses, which could have a material adverse effect on our business, financial condition, and results of operations.

Comparison of 2023 with 2022

The provision for credit losses was $29.1 million for 2023, an increase of $19.5 million from $9.6 million for 2022. The increase in provision for credit losses was largely due to increased net charge offs. During 2023, we recorded an idiosyncratic full charge off of $23.4 million related to a borrower that entered into Chapter 7 liquidation in August 2023. In comparison, in 2022, we recorded $17.3 million in recoveries from a previously charged off loan, resulting in total net recoveries in 2022. The increase to the provision for credit losses due to charge offs was partially offset by the year over year decline loans receivable, which reduced the required ACL balance. The allowance for credit losses coverage ratio was 1.15% of loans receivable at December 31, 2023, compared with 1.05% at December 31, 2022.

Comparison of 2022 with 2021

The provision for credit losses was $9.6 million for 2022, an increase of $21.8 million from $12.2 million in negative provision for credit losses for 2021. The positive provision for credit losses for the year ended December 31, 2022, reflected loan growth and an increase in the ACL coverage ratio of loans due to macroeconomic concerns. This increase was partially offset by the continued de-risking of our loan portfolio and continued improvements in our overall credit quality. During the first quarter of 2022, we had a large recovery of $17.3 million on a previously charged off loan, which reduced provision for credit losses in 2022. The allowance for credit losses coverage ratio was 1.05% of loans receivable at December 31, 2022, compared with 1.01% at December 31, 2021.

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Noninterest Income

Noninterest income is primarily comprised of service fees on deposit accounts, international service fees (fees received on trade finance letters of credit), wire transfer fees, swap fee income, net gains on sales of loans, and other income and fees, which included loan servicing fees, earnings on bank owned life insurance, changes in the fair value of our equity investments with readily determinable fair value, and other miscellaneous income. Noninterest income was $45.6 million for 2023 compared with $51.4 million for 2022, and $43.6 million for 2021.

A breakdown of noninterest income by category is shown below:

Comparison of 2023 with 2022

The decrease in noninterest income for 2023 compared with 2022 was primarily attributable to lower net gains on sales of SBA loans and swap fee income, and partially offset by an increase in other income and fees.

Swap fees represent income earned from the execution of customer level back-to-back swap transactions. Swap fees for 2023 declined by $1.9 million compared with 2022 due to an overall decline in swap transactions in 2023 compared with 2022.

During the year ended December 31, 2023, we sold $79.1 million in SBA guaranteed loans and recorded $4.1 million in net gains on sale of SBA loans. During the year ended December 31, 2022, we sold $227.3 million in SBA guaranteed loans and recorded $16.3 million in net gains on sale of SBA loans. We elected to not sell any SBA 7(a) loans during the second half of 2023, retaining loan production on our balance sheet instead.

Other income and fees increased for 2023 compared with 2022, primarily due to a $5.8 million gain from a cash distribution from an investment in an affordable housing partnership, which was received in 2023, and a year-over-year increase in the fair value of equity investments.

Comparison of 2022 with 2021

The increase in service fees on deposit accounts for 2022 compared with 2021 was mainly due to increases in commercial deposit fees, including business account analysis fees.

Swap fees represent income earned from the execution of customer level back-to-back swap transactions. The number of swap transactions and their total notional amounts increased in 2022, compared with the prior year, which resulted in an increase in swap fee income for 2022 compared with 2021.

During the year ended December 31, 2022, we sold $227.3 million in SBA guaranteed loans and recorded $16.3 million in net gains on sale of SBA loans. During the year ended December 31, 2021, we sold $102.4 million in SBA guaranteed loans and recorded $8.4 million in net gains on sale of SBA loans. The average weighted premium on SBA loans sold was 7.19% for 2022 compared with 8.25% for 2021.

Net gain on sale of residential mortgage loans decreased in 2022 compared with 2021 due to a decrease in loans sold and a decrease in premiums received. During 2022, we sold $49.1 million in residential mortgage loans compared with $186.5 million residential mortgage loans sold in 2021. The average weighted premium on residential mortgage loans sold was 1.80% for 2022 compared with 2.38% for 2021.

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Noninterest Expense

Noninterest expense was $364.5 million for 2023, compared with $324.2 million for 2022, and $293.3 million for 2021. The increase in noninterest expense was $40.3 million, or 12%, for 2023 compared with 2022, and $30.9 million, or 11%, for 2022 compared with 2021. Noninterest expense as a percentage of average assets for 2023 was 1.84%, compared with 1.78% for 2022 and 1.68% for 2021.

A breakdown of noninterest expense by category is provided below:

Comparison of 2023 with 2022

The increase in noninterest expense for 2023 compared with 2022 was primarily driven by restructuring costs, higher earned interest credits, and higher FDIC assessments expense.

Salaries and employee benefits expense increased by $3.2 million, or 1.5%, for 2023 compared with 2022. The increase in salaries and employee benefits was primarily due to inflation and higher rates of compensation in a competitive staffing market. Also included in the 2023 salaries and employee benefits expense was $1.7 million of severance costs incurred in the first quarter related to a staffing rationalization, which reduced the Bank’s workforce by 5%. The number of full-time equivalent employees decreased to 1,244 at December 31, 2023, down from 1,549 at December 31, 2022.

FDIC assessments expense increased by $7.0 million, or 112.8%, for 2023 compared with 2022. The FDIC assessment expense utilizes an initial base assessment rate, which is calculated as a percentage of the Bank’s average consolidated total assets less average tangible equity. In addition to the initial assessment base, adjustments are added based upon the Bank’s regulatory rating and on other financial measures. In 2023, the FDIC annual base assessment rate increased by two basis points industry-wide. In addition, in November 2023, the FDIC approved a special assessment at the rate of approximately 13.4 basis points per year, paid in eight quarterly installments beginning in the first quarter of 2024. This rate will be applied to an assessment base of the insured depository institution’s estimated uninsured deposits reported as of December 31, 2022, adjusted to exclude the first $5 billion in estimated uninsured deposits. The increase in FDIC assessment fees for 2023 compared with 2022 was due primarily to the aforementioned increased annual base assessment rate and an additional $4.0 million accrued for the special assessment.

Earned interest credits are provided to certain commercial depositors in the residential mortgage industry to help offset deposit service charges incurred. The earned interest credits are tied to short-term interest rates and have increased with the increases in the Federal Funds rate since mid-2022. Earned interest credits increased $11.4 million for 2023 compared with 2022.

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Restructuring costs totaled $11.6 million in 2023, and were related to the Company’s strategic reorganization announced in October 2023. Restructuring costs primarily comprised severance costs, planned branch closure charges and professional fees. As part of the restructuring, the Company reduced its workforce by 13% in October 2023, and will consolidate certain branches in the first half of 2024. There were no restructuring costs incurred in 2022.

Comparison of 2022 with 2021

The increase in noninterest expense for 2022 compared with 2021 was due mostly to increases in salaries and employee benefits, earned interest credits expenses, furniture and equipment expenses and FDIC assessments, partially offset by declines in professional fees, amortization of investments in affordable housing partnerships expenses and software impairment.

Salaries and employee benefits expense increased by $29.6 million for 2022 compared with 2021. The increase in salaries and employee benefits was due to an overall increase in compensation costs, reflecting an increase in employees, the competitive staffing market, and higher incentive compensation accruals. The number of full-time equivalent employees increased from 1,476 at December 31, 2021 to 1,549 at December 31, 2022.

Professional fees decreased by $5.9 million in 2022 compared with 2021. The decrease in professional fees was due primarily to lower legal fees related to litigation costs and other professional fees.

Earned interest credits increased $9.2 million for 2022 compared with 2021. Earned interest credits are provided to certain commercial depositors in the residential mortgage industry to help offset deposit service charges incurred. The earned interest credits are tied to the Federal Funds rate and increased as interest rates went up in 2022.

Income Tax Provision

The provision for income taxes for 2023 was $44.2 million, compared with $77.8 million in 2022 and $70.7 million in 2021. The effective income tax rate was 24.86% for 2023 compared with 26.27% for 2022 and 25.68% for 2021. The decrease in effective tax rate for 2023 compared with 2022 was primarily due to the benefit from affordable housing partnership investment tax credits having a larger effect because of lower annual pre-tax book income.

We invest in affordable housing partnerships and receive CRA credits and tax credits that reduce the overall effective tax rate. Amortization of investments in affordable housing partnerships is recorded in noninterest expense based on benefit schedules of individual investment projects under the equity method of accounting. The benefit schedules show tax deductions investors can take each year. We amortize the initial cost of the investments in affordable housing partnerships. This amortization expense is more than offset by both tax credits received, which reduce our tax provision expense dollar for dollar, and the tax benefits related to any tax losses generated through the affordable housing project’s expenditures. Total tax credits related to our investment in affordable housing partnership investment was approximately $8.6 million for the year ended December 31, 2023, compared with $8.9 million for the year ended December 31, 2022. The balance of investments in affordable housing partnerships increased from $47.7 million at December 31, 2022, to $54.5 million at December 31, 2023.

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Financial Condition

Our total assets were $19.13 billion at December 31, 2023, compared with $19.16 billion at December 31, 2022, a slight decrease of $33.0 million, or 0.2% year over year.

Cash and Cash Equivalents

Cash and cash equivalents increased to $1.93 billion at December 31, 2023, up from $506.8 million at December 31, 2022. In March 2023, the banking industry experienced significant disruption with multiple high profile bank failures within a few days. As a result, there was an overall decline of consumer confidence in the banking industry and in response to these events we bolstered our on-balance sheet liquidity with drawdowns of our available borrowing capacity, primarily through the use of BTFP. This increased the balance of cash and cash equivalents on our balance sheet in 2023.

Investment Securities Portfolio

The main objectives of our investment strategy are to provide sources of liquidity while managing our interest rate risk and generating an adequate level of interest income. Our investment policy permits investments in various types of securities, certificates of deposits, and federal funds sold in compliance with various restrictions in the policy.

Our investment securities AFS totaled $2.15 billion at December 31, 2023, compared with $1.97 billion at December 31, 2022. At December 31, 2023, we had $263.9 million in investment securities HTM compared with $271.1 million at December 31, 2022. We have the ability and intent to hold investment securities classified as HTM to maturity. $465.7 million in investment securities were purchased and $333.9 million in investment securities were paid down in 2023. There were no sales of investment securities in 2023. At December 31, 2023, $1.70 billion in securities were pledged to the BTFP, to secure public deposits, or for other purposes required or permitted by law, of which $230.4 million in securities were pledged in the State of California time deposit program, and $133 thousand was pledged for other public deposits.

During the second quarter of 2022, we transferred $239.0 million in fair value of debt securities from AFS to HTM. The transferred securities had an amortized cost of $275.5 million with a pre-tax net unrealized loss of $36.6 million, which was recorded as a discount to be amortized as an adjustment to yield. The unrealized holding loss at the date of transfer is reported, net of taxes, in accumulated other comprehensive income (loss) (“AOCI”) as a component of stockholders’ equity and is being amortized over the remaining life of the securities as an adjustment to yield, offsetting the corresponding discount amortization’s impact on interest income.

Our investment portfolio consists of treasury bonds, government sponsored enterprise (“GSE”) bonds, mortgage backed securities (“MBS”), collateralized mortgage obligations (“CMOs”), asset-backed securities, corporate securities, and municipal securities.

Our investment securities portfolio is primarily invested in residential CMOs and residential and commercial MBS, which combined to represent 76% and 84% of our total investment securities portfolio at December 31, 2023 and 2022, respectively. At December 31, 2023 and 2022, all of our CMOs and MBS were issued by the Government National Mortgage Association (“GNMA”), Fannie Mae (“FNMA”), or Freddie Mac (“FHLMC”), which guarantee the contractual cash flows of these investments. All of our corporate, asset-backed, and municipal securities at December 31, 2023, were rated as investment grade.

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The following table presents the amortized cost, estimated fair value, and net unrealized gain and losses on our investment securities as of the dates indicated:

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The following table summarizes the maturity of securities based on carrying value and their related weighted average yield (non-tax equivalent) at December 31, 2023:

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The following table shows the Company’s AFS investments’ gross unrealized losses and estimated fair values, aggregated by investment category and the length of time that the individual securities have been in a continuous unrealized loss position at December 31, 2023. The length of time that the individual investment securities AFS have been in a continuous unrealized loss position is not a factor in determining credit impairment with the adoption of CECL.

We performed an analysis on our investment securities portfolio at December 31, 2023 and 2022, and determined that an allowance for credit losses was not required for investment securities AFS or HTM. The majority of our investment portfolio consisted of securities issued by U.S. Government agencies or U.S. Government sponsored enterprises, which were determined to have a zero loss expectation. At December 31, 2023, we also had 18 asset-backed securities, six corporate securities, and 53 municipal bonds not issued by U.S. Government agencies or U.S. Government sponsored enterprises that were in unrealized loss positions. Based on our analysis of these investment securities, we concluded a credit loss did not exist due to the strength of the issuers, high bond ratings, and because we expect full payment of principal and interest.

Equity Investments

At December 31, 2023, equity investments totaled $43.8 million compared with $42.4 million at December 31, 2022. For the year ended December 31, 2023, we recorded an increase in equity investments due to reinvestments of $1.3 million and change in fair value of $60 thousand, partially offset by return of equity investments of $3 thousand. Equity investments at December 31, 2023 included $4.4 million in equity investments with readily determinable fair values and $39.4 million in equity investments without readily determinable fair values.

Equity investments with readily determinable fair values at December 31, 2023, consisted of mutual funds totaling $4.4 million. Changes to the fair value of equity investments with readily determinable fair values are recorded in other noninterest income. Equity investments without readily determinable fair values at December 31, 2023, included $38.0 million in CRA investments, $1.0 million in Community Development Financial Institutions investments, and $370 thousand in correspondent bank stock. Equity investments without readily determinable fair values are carried at cost, less impairment, and adjustments are made to the carrying balance based on observable price changes. There were no impairments or observable price changes for these investments during the year ended December 31, 2023.

Deferred Tax Assets, Net

At December 31, 2023, we had $135.2 million in net deferred tax assets compared with $150.4 million at December 31, 2022. The decrease in net deferred tax assets was primarily due to lower deferred taxes resulting from a decline in unrealized losses on our investments securities AFS during the year ended December 31, 2023.

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Investments in Affordable Housing Partnerships

At December 31, 2023, we had $54.5 million in investments in affordable housing partnerships compared with $47.7 million at December 31, 2022. The increase in investments in affordable housing partnerships was due to new investments, partially offset by amortization recorded during the year ended December 31, 2023. Commitments to fund investments in affordable housing partnerships totaled $21.0 million at December 31, 2023, compared with $11.8 million at December 31, 2022. The increase in commitments to fund investments in affordable housing partnerships during the year ended December 31, 2023, was due to new commitments made, partially offset by our cash contributions, which reduced the prior commitment balances.

Loans Held For Sale

Loans held for sale at December 31, 2023, totaled $3.4 million compared with $49.2 million at December 31, 2022, representing a decrease of $45.8 million, or 93.1%. Loans held for sale at December 31, 2023, comprised $2.3 million in CRE loans held for sale, and $1.1 million in residential mortgage loans held for sale. At December 31, 2022, loans held for sale consisted of $48.8 million in CRE loans held for sale, and $450 thousand in residential mortgage loans held for sale. The decrease in loans held for sale was primarily due to more loans sold than were originated or transferred to loans held for sale.

Loan Portfolio

We offer a variety of products designed to meet the credit needs of our borrowers. Our lending activities primarily consist of CRE loans, C&I loans, residential mortgage, and consumer and other loans. Real estate loans as a percentage to total loans were 64% at December 31, 2023, compared with 61% at December 31, 2022. Gross loans receivable decreased by $1.55 billion to $13.85 billion at December 31, 2023, from $15.40 billion at December 31, 2022.

Our CRE and C&I loans decreased in 2023 compared with the previous year, reflecting our prudent approach to loan growth and the impact of payoffs and paydowns in a high interest rate environment. The decreases were partially offset by increases in residential mortgage and consumer loans over the same period.

Approximately 45% of our total loans were variable rate loans at December 31, 2023, compared with 46% at December 31, 2022. The rates of interest charged on variable rate loans are set at specified spreads based on the prime lending rate, SOFR rates and other indices, and vary as the rate indices reprice.

With certain exceptions, we are permitted under applicable law to make unsecured loans to single borrowers (including certain related persons and entities) in aggregate amounts of up to 15% of the sum of our total capital, our allowance for credit losses (as defined for regulatory purposes) at the Bank level, and certain capital notes and debentures issued by us. At December 31, 2023, our lending limit was approximately $352.6 million per borrower for unsecured loans. For lending limit purposes, a secured loan is defined as a loan secured by collateral having a current fair value of at least 100% of the amount of the loan or extension of credit at all times and satisfying certain other requirements. In addition to unsecured loans, we are permitted to make such collateral-secured loans in an additional amount up to 10% (for a total of 25%) of our total capital and the allowance for credit losses for a total limit of approximately $587.6 million to one borrower at December 31, 2023. The largest aggregate amount of loans that the Bank had outstanding to any one borrower and related entities was $143.8 million, of which the entire amount was performing and in good standing at December 31, 2023. The exposure consisted of nine loans, predominantly used to finance commercial real estate properties, with a weighted average loan-to-value ratio of 62%.

The following table shows the composition of our loan portfolio by type of loan on the dates indicated:

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Commercial Real Estate Loans

Our CRE loans consist primarily of loans secured by deeds of trust on commercial real estate, including SBA loans secured by commercial real estate. It is our general policy to restrict commercial real estate loan amounts to 75% of the appraised value of the property at the time of loan funding. We offer both fixed and floating interest rate loans. The maturities on such loans are generally up to seven years (with payments determined on the basis of principal amortization schedules of up to 25 years and a balloon payment due at maturity). CRE loans secured by non-consumer residential real estate comprise less than 1% of the total loan portfolio (consumer residential mortgage loans are classified separately and included in residential mortgage loans). Construction loans are also a small portion of the total real estate portfolio, totaling $196.3 million and comprising 1% of total loans outstanding as of December 31, 2023. CRE loans totaled $8.80 billion at December 31, 2023, a decrease of $616.7 million, or 7%, from $9.41 billion at December 31, 2022.

Commercial and Industrial Loans

C&I loans include term loans to businesses, lines of credit, trade finance facilities, asset-based lending, and commercial SBA loans. Business term loans are generally provided to finance business acquisitions, working capital, and/or equipment purchases. Lines of credit are generally provided to finance short-term working capital needs. Trade finance facilities are generally provided to finance import and export activities. SBA loans are provided to small businesses under the U.S. SBA guarantee program. Short-term credit facilities (payable within one year) typically provide for periodic interest payments, with principal payable at maturity. Term loans (usually 5 to 7 years) normally provide for monthly payments of both principal and interest. SBA commercial loans usually have a longer maturity (7 to 10 years). These credits are reviewed on a periodic basis, and most loans are secured by business assets and/or real estate. C&I loans totaled $4.14 billion at December 31, 2023, a decrease of $974.5 million, or 19%, from $5.11 billion at December 31, 2022. In 2023, we completely exited our residential mortgage warehouse line of credit business, which totaled $244.2 million as of December 31, 2022.

Residential Mortgage Loans

The residential mortgage portfolio totaled $883.7 million at December 31, 2023, an increase of $37.6 million, or 4%, from $846.1 million at December 31, 2022.

Consumer and Other Loans

Consumer loans comprise less than 1% of the total loan portfolio, and includes automobile loans, home equity lines and loans, signature term loans and lines of credit, and credit card loans. Consumer loans totaled $37.0 million at December 31, 2023, an increase of $3.7 million, or 11%, from $33.3 million at December 31, 2022.

Loan Commitments

We provide lines of credit to business customers usually on an annual renewal basis. We normally do not make loan commitments in material amounts for periods in excess of one year.

The following table shows our loan commitments and letters of credit outstanding at the dates indicated:

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Nonperforming Assets

Nonperforming assets consist of nonaccrual loans, accruing loans that are 90 days or more past due, accruing restructured loans, and OREO.

Loans are placed on nonaccrual status when they become 90 days or more past due, unless the loan is both well-secured and in the process of collection. Loans may be placed on nonaccrual status earlier if the full and timely collection of principal or interest becomes uncertain. When a loan is placed on nonaccrual status, unpaid accrued interest is charged against interest income. Loans are charged off when collection of the loan is determined to be unlikely. Loans are restructured when, for economic or legal reasons related to the borrower’s financial difficulties, the Bank grants a concession to the borrower that it would not otherwise consider. OREO consists of real estate acquired by the Bank through foreclosure or similar means, including by deed from the owner in lieu of foreclosure, and is held for future sale.

Nonperforming assets were $45.5 million at December 31, 2023, compared with $69.4 million at December 31, 2022. The decrease in nonperforming assets was attributable to a decline in nonaccrual loans and accruing TDR loans. The following table illustrates the composition of nonperforming assets and nonperforming loans at the dates indicated:

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(1) Nonaccrual loans exclude the guaranteed portion of delinquent SBA loans that are in liquidation.

(2) Excludes PCI loans for periods prior to 2020.

(3) The Company adopted ASU 2022-02 on January 1, 2023, which eliminated the concept of TDR loans from GAAP. Prior to January 1, 2023, nonperforming loans included accruing TDR loans.

Maturity of Loans

The following table illustrates the maturity distribution intervals of loans outstanding at December 31, 2023.

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(1) Includes hybrid loans (loans with fixed interest rates for a specified period and then convert to variable interest rates) in fixed interest rate periods at December 31, 2023.

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The following table presents the loans outstanding due after one year at December 31, 2023.

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(1) Includes hybrid loans (loans with fixed interest rates for a specified period and then convert to variable interest rates) in fixed interest rate periods at December 31, 2023.

At December 31, 2023, we had $49.3 million in loan accrued interest receivable compared with $47.3 million at December 31, 2022.

Concentrations

Our lending activities predominantly reflect our branch and office footprint. At December 31, 2023, loans from California represented 54% of the total loans outstanding, and loans from New York and New Jersey represented 18%. The remaining 28% of total loans outstanding represented loans from other states. Although we have a diversified loan portfolio, a substantial portion of the loan portfolio and credit performance depends on the economic stability of Southern California. Within the California market, most of our business activity is with customers located in Southern California (47%). Therefore, our exposure to credit risk is significantly affected by changes in the economy in the Southern California area. Within our CRE loan portfolio, the largest property concentrations are multi-tenant retail buildings (19%), multifamily (14%), industrial & warehouse (14%), and gas station & car wash (12%). Within our C&I loan portfolio, the largest industry concentrations are finance and insurance (20%), information technology (15%), manufacturing (14%), and retail trade (13%).

Allowance for Credit Losses

The Bank has implemented a multi-faceted process to identify, manage, and mitigate the credit risks that are inherent in the loan portfolio. For new loans, each loan application package is fully analyzed by experienced reviewers and approvers. In accordance with current lending approval authority guidelines, a majority of loans are approved by the Management Loan Committee (“MLC”) and Directors Loan Committee (“DLC”). For existing loans, the Bank maintains a systematic loan review program, which includes internally conducted reviews and periodic reviews by external loan review consultants. Based on these reviews, loans are graded as to their overall credit quality, which is measured based on: payment capacity and collateral documentation; proper lien perfection; proper approval by loan committee(s); adherence to any loan agreement covenants; compliance with internal policies and procedures, and with laws and regulations; adequacy and strength of repayment sources including borrower or collateral generated cash flow; payment performance; and liquidation value of the collateral. We closely monitor loans that management has determined require further supervision because of the loan size, loan structure, and/or specific circumstances of the borrower.

When principal or interest on a loan is 90 days or more past due, a loan is generally placed on nonaccrual status unless it is considered to be both well-secured and in the process of collection. Further, a loan is considered a loss in whole or in part when (1) it appears that loss exposure on the loan exceeds the collateral value for the loan, (2) servicing of the unsecured portion has been discontinued, or (3) collection is not anticipated due to the borrower’s financial condition and general economic conditions in the borrower’s industry. Any loan or portion of a loan judged by management to be uncollectible is charged against the allowance for credit losses, while any recoveries are credited to the allowance.

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Allowance for Credit Losses

The allowance for credit losses (“ACL”) was $158.7 million at December 31, 2023, compared with allowance for credit losses of $162.4 million at December 31, 2022. The year-over-year decline in ACL was primarily due to a year-over-year decrease in loan balances at December 31, 2023 compared to December 31, 2022. The ACL was 1.15% of loans receivable at December 31, 2023, and 1.05% of loans receivable at December 31, 2022. ACL on individually evaluated loans decreased from $3.9 million at December 31, 2022, to $2.7 million at December 31, 2023. In addition to allowance for credit losses, we had $3.8 million in allowances for unfunded loan commitments at December 31, 2023, compared with $1.4 million at December 31, 2022.

We recorded a provision for credit losses of $29.1 million in 2023 compared with a provision for credit losses of $9.6 million in 2022, and a negative provision for credit losses of $12.2 million in 2021. During 2023, we charged off $37.5 million in loans outstanding and recovered $5.2 million in loans previously charged off compared with $12.4 million in charge offs and $24.6 million in recoveries for 2022. The increase in net charge offs for 2023 was largely due to an idiosyncratic full charge off of $23.4 million related to a borrower that entered into Chapter 7 liquidation in August 2023. In comparison, in 2022, we recorded $17.3 million in recoveries from a previously charged off loan, which contributed to a net recovery position for 2022 compared with total net charge offs for 2023.

The following table presents total nonaccrual and delinquent loans (loans past due 30+ days) at the dates indicated:

We categorize loans into risk categories based on relevant information about the ability of borrowers to service their debt including but not limited to current financial information, historical payment experience, credit documentation, public information, and current economic trends. We analyze loans individually by classifying the loans as to credit risk. This analysis includes all non-homogeneous loans. Homogeneous loans are not risk rated and credit risk is analyzed largely by the number of days past due.

This analysis is performed on at least a quarterly basis. We use the following definitions for risk ratings:

•Pass: Loans that meet a preponderance or more of our underwriting criteria and evidence an acceptable level of risk.

•Special Mention: Loans that have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

•Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the repayment of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

•Doubtful/Loss: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or repayment in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

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Total criticized loans, or loans rated special mention, substandard, doubtful, or loss at December 31, 2023, totaled $322.4 million compared with $261.3 million at December 31, 2022. Loans assigned a risk rating of Special Mention, Substandard, Doubtful, or Loss are referred to as Criticized Loans and loans assigned a risk rating of Substandard, Doubtful, or Loss are separately referred to as Classified Loans. The following table provides the detail of Criticized Loans by risk rating at the dates indicated:

In 2023, we sold $172.1 million in loans with elevated credit risk comprising $147.5 million in substandard loans and $24.6 million in special mention loans. In 2022, we sold $77.0 million in loans with elevated credit risk comprising $76.6 million in substandard loans and $400 thousand in special mention loans. In 2021, we sold $251.0 million in loans with elevated credit risk comprising $182.6 million in substandard loans and $68.4 million in special mention loans.

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The following table shows the provision for credit losses, the amount of loans charged off, and recoveries on loans previously charged off together with the balance in the allowance for credit losses at the beginning and end of each year, the amount of average and total loans outstanding as well as other pertinent ratios at the dates and for the years indicated: