# Hanmi Financial Corp: Form 10-Q for the period ended Sep 30, 2023

- Company: [Hanmi Financial Corp](/companies/hafc.md) (CIK 1109242)
- Form: 10-Q
- Filed: 2023-11-08
- Accepted by EDGAR: Nov 8, 2023, 12:43 ET
- Period: 2023-09-30
- Accession: 0000950170-23-060872
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1109242/000095017023060872/hafc-20230930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1109242/000095017023060872/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Interest expense | 3 months, 2023-07-01 to 2023-09-30 | $39.2m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2023-01-01 to 2023-09-30 | $104.0m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-07-01 to 2023-09-30 | $7.9m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2023-01-01 to 2023-09-30 | $25.7m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-01 to 2023-09-30 | $18.8m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-01-01 to 2023-09-30 | $61.4m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-01 to 2023-09-30 | $0.62 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-01-01 to 2023-09-30 | $2.01 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | $0.62 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-01 to 2023-09-30 | $2.01 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-30 | 30,292,872 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-01-01 to 2023-09-30 | 30,338,678 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-01-01 to 2023-09-30 | $99.6m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2023-01-01 to 2023-09-30 | $330.0k | us-gaap:PaymentsToAcquireProductiveAssets |
| Dividends paid | 9 months, 2023-01-01 to 2023-09-30 | $22.9m | us-gaap:PaymentsOfDividends |
| Share repurchases | 9 months, 2023-01-01 to 2023-09-30 | $3.3m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Total assets | at 2023-09-30 | $7.35bn | us-gaap:Assets |
| Total liabilities | at 2023-09-30 | $6.69bn | us-gaap:Liabilities |
| Shareholders' equity | at 2023-09-30 | $663.4m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 72,173 characters.

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

### Forward-Looking Statements

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

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

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

### Critical Accounting Policies

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

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

### Executive Overview

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

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

Other financial highlights include the following:

- Cash and due from banks decreased $63.4 million to $289.0 million as of September 30, 2023 from $352.4 million at December 31, 2022.
- Securities decreased $36.6 million to $817.2 million at September 30, 2023 from $853.8 million at December 31, 2022.
- Loans receivable, before the allowance for credit losses, were $6.02 billion at September 30, 2023 compared with $5.97 billion at December 31, 2022.
- Deposits were $6.26 billion at September 30, 2023 compared with $6.17 billion at December 31, 2022.
- Stockholders’ equity at September 30, 2023 was $663.4 million, compared with $637.5 million at December 31, 2022.
- Return on average assets and return on average stockholders’ equity for the quarter ended September 30, 2023 were 1.00% and 9.88%, respectively. For the nine months of 2023, return on average assets and return on average stockholders’ equity were 1.11% and 11.05%, respectively.

### Results of Operations

### Net Interest Income

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

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

*(dollars in thousands)*

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

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

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

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

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

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

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

*(in thousands)*

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

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

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

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

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

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

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

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

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

*(dollars in thousands)*

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

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

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

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

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

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

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

*(in thousands)*

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

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

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

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

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

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

The average balance of interest-bearing liabilities increased $784.0 million, or 22.4%, to $4.29 billion for the nine months ended September 30, 2023 compared to $3.50 billion for the nine months ended September 30, 2022. The average balance of time deposits and borrowings increased $1.40 billion and $63.2 million, respectively, offset by decreases in the average balance of money market and savings accounts, subordinated debentures, and interest-bearing demand deposits of $601.5 million, $27.2 million, and $22.0 million, respectively.

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

### Credit Loss Expense

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

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

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

### Noninterest Income

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

*(in thousands)*

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

For the three months ended September 30, 2023, noninterest income was $11.2 million, an increase of $2.3 million, or 26.0%, compared with $8.9 million for the same period in 2022. The increase was attributable to a $4.0 million gain on the sale-leaseback of a branch property (see "Note 13 - Leases" to the consolidated financial statements for more details), partially offset by a $1.1 million decrease in the gain on loan sales resulting from lower volume and net trade premiums, and a $0.4 million decrease in service charges on deposit accounts.

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

*(in thousands)*

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

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

### Noninterest Expense

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

*(in thousands)*

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

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

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

*(in thousands)*

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

49

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

### Income Tax Expense

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

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

### Financial Condition

### Securities

As of September 30, 2023, our securities portfolio consisted of U.S. government agency and sponsored agency mortgage-backed securities, collateralized mortgage obligations and debt securities, tax-exempt municipal bonds and U.S. Treasury securities. Most of these securities carry fixed interest rates. Other than holdings of U.S. government agency and sponsored agency obligations, there were no securities of any one issuer exceeding 10% of stockholders’ equity as of September 30, 2023 or December 31, 2022. Securities decreased $36.6 million to $817.2 million at September 30, 2023 from $853.8 million at December 31, 2022, mainly attributed to $74.0 million in paydowns and maturities and $8.1 million in securities sales, offset partially by $64.8 million in securities purchases.

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

*(dollars in thousands)*

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

### Loans Receivable

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

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

*(in thousands)*

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

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

*(in thousands)*

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

51

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

*(in thousands)*

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

### Industry

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

*(in thousands)*

|  | Balance as of September 30, 2023 | Percentage of Loans Receivable Outstanding |
| --- | ---: | ---: |
| Lessor of nonresidential buildings | $1,740,544 | 28.9% |
| Hospitality | 709,757 | 11.8% |

### Loan Quality Indicators

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

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

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

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

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

*(in thousands)*

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

### Nonperforming Assets

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

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

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

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

### Individually Evaluated Loans

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

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

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

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

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

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

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

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

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

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

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

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

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

*(dollars in thousands)*

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

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

*(dollars in thousands)*

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

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

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

*(dollars in thousands)*

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

#### (1) Annualized

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

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

### Deposits

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

*(dollars in thousands)*

|  | September 30, 2023 Balance | Percent | December 31, 2022 Balance | Percent |
| --- | ---: | ---: | ---: | ---: |
| Demand – noninterest-bearing | $2,161,238 | 34.5% | $2,539,602 | 41.3% |
| Interest-bearing: |  |  |  |  |
| Demand | 88,133 | 1.4 | 115,573 | 1.9 |
| Money market and savings | 1,576,006 | 25.2 | 1,556,690 | 25.2 |
| Uninsured amount of time deposits more than $250,000: |  |  |  |  |
| Three months or less | 148,401 | 2.4 | 44,828 | 0.7 |
| Over three months through six months | 338,893 | 5.4 | 123,471 | 2.0 |
| Over six months through twelve months | 200,456 | 3.2 | 191,248 | 3.1 |
| Over twelve months | 4,254 | 0.1 | 138,451 | 2.2 |
| All other insured time deposits | 1,742,691 | 27.8 | 1,458,209 | 23.6 |
| **Total deposits** | **$6,260,072** | **100.0%** | **$6,168,072** | **100.0%** |

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

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

### Borrowings and Subordinated Debentures

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

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

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

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

*(dollars in thousands)*

| FHLB of San Francisco | September 30, 2023 Outstanding Balance | Weighted Average Rate | December 31, 2022 Outstanding Balance | Weighted Average Rate |
| --- | ---: | ---: | ---: | ---: |
| Advances due over 12 months through 24 months | $12,500 | 1.90% | $37,500 | 0.40% |
| Advances due over 24 months through 36 months | 62,500 | 4.37 | 12,500 | 1.90 |
| **Outstanding advances over 12 months** | **$75,000** | **3.96%** | **$50,000** | **0.78%** |

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

### Stockholders' Equity

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

### Interest Rate Risk Management

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

The Company performs simulation modeling to estimate the potential effects of interest rate changes. The following table summarizes one of the stress simulations performed to forecast the impact of changing interest rates on net interest income and the value of interest-earning assets and interest-bearing liabilities reflected on our balance sheet (i.e., an instantaneous parallel shift in the yield curve of the magnitude indicated below) as of September 30, 2023. The Company compares this stress simulation to policy limits, which specify the maximum tolerance level for net interest income exposure over a 1- to 12-month and a 13- to 24- month horizon, given the basis point adjustment in interest rates reflected below.

*(dollars in thousands)*

| Change in Interest Rates (Basis Points) | Net Interest Income Simulation 1- to 12-Month Horizon Dollar Change | Percentage Change | 13- to 24-Month Horizon Dollar Change | Percentage Change |
| ---: | ---: | ---: | ---: | ---: |
| 300 | $(2,959) | (1.29%) | $7,690 | 2.98% |
| 200 | $(2,880) | (1.25%) | $2,768 | 1.07% |
| 100 | $(518) | (0.23%) | $3,524 | 1.37% |
| -100 | $(1,272) | (0.55%) | $(7,326) | (2.84%) |
| -200 | $(4,316) | (1.88%) | $(18,706) | (7.25%) |
| -300 | $(8,856) | (3.85%) | $(34,055) | (13.20%) |

57

*(dollars in thousands)*

| Change in Interest Rates (Basis Points) | Economic Value of Equity (EVE) Dollar Change | Percentage Change |
| ---: | ---: | ---: |
| 300 | $(65,578) | (8.56%) |
| 200 | $(46,754) | (6.10%) |
| 100 | $(13,809) | (1.80%) |
| -100 | $(4,035) | (0.53%) |
| -200 | $(29,532) | (3.85%) |
| -300 | $(75,957) | (9.91%) |

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

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

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

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

### Capital Resources and Liquidity

### Capital Resources

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

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

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

At September 30, 2023, the Bank’s total risk-based capital ratio of 14.42%, Tier 1 risk-based capital ratio of 13.42%, common equity Tier 1 capital ratio of 13.42% and Tier 1 leverage capital ratio of 11.25%, placed the Bank in the “well capitalized” category pursuant to capital rules, which is defined as institutions with total risk-based capital ratio equal to or greater than 10.00%,

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

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

For a discussion of implemented changes to the capital adequacy framework prompted by Basel III and the Dodd- Frank Wall Street Reform and Consumer Protection Act, see our 2022 Annual Report on Form 10-K.

### Liquidity

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

### Off-Balance Sheet Arrangements

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

### Contractual Obligations

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

## Market risk

As filed, 216 characters.

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

## Controls and procedures

As filed, 1,891 characters.

### Evaluation of Disclosure Controls and Procedures

### Evaluation of Disclosure Controls and Procedures

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

### Changes in Internal Control over Financial Reporting

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

## Risk factors

As filed, 387 characters.

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

Filed Nov 8, 2023.
Source: SEC EDGAR, the filing index for accession 0000950170-23-060872. Last ingested by Listed: Oct 29, 2026, 08:02 ET. No prices; not investment advice.