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

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

Title ofeach class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock, $0.001 par value

HAFC

Nasdaq Global Select Market

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

☐

Indicate by check mark whether the Registrant has submitted electronically ~~and posted on its corporate Website, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit ~~and post~~ suchfiles). Yesx☒ No ¨

☐

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

Large accelerated filer	☒		Accelerated filer		☐

~~Large Accelerated Filer~~ Non-accelerated filer	x ☐	~~Accelerated Filer~~	¨ Smaller reporting company		☐
~~Non-Accelerated Filer~~	¨ ~~(Do Not Check if a Smaller Reporting Company)~~	~~Smaller Reporting Company~~	¨
			Emerging Growth Company	¨	☐

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

☐

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

☒

As of ~~November 4, 2017,~~August 3, 2020, there were ~~32,409,174~~30,656,746 outstanding shares of the Registrant’s CommonStock.

Hanmi Financial Corporation and Subsidiaries

Quarterly Report on Form 10-Q

Three ~~and Nine~~ Months Ended ~~September~~June 30, ~~2017~~

2020

Table of Contents



		Part I – Financial Information

Item 1.		Financial Statements		3

		Consolidated Balance Sheets ~~(Unaudited)~~at June 30, 2020 (unaudited) and December 31, 2019		3

		Consolidated Statements of Income (Unaudited)		4

		Consolidated Statements of Comprehensive Income (Loss) (Unaudited)		5

		Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)		6

		Consolidated Statements of Cash Flows (Unaudited)	7	8

		Notes to Consolidated Financial Statements (Unaudited)	8	9

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		42

Item 3.		Quantitative and Qualitative Disclosures About Market Risk	69	66

Item 4.		Controls and Procedures	70	66

		Part II – Other Information
~~Item 1.~~	~~Legal Proceedings~~	71
Item 1.		Legal Proceedings		67
~~Item 1A.~~	~~Risk Factors~~	71
Item 1A.		Risk Factors		67

Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	71	68

Item 3.		Defaults Upon Senior Securities	71	68

Item 4.		Mine Safety Disclosures	71	68

Item 5.		Other Information	71	68

Item 6.	~~Exhibits~~	72Exhibits		69

Signatures			73	70

Part I — Financial Information

Item 1. Financial Statements

Hanmi Financial Corporation and Subsidiaries

Consolidated Balance Sheets

(Unaudited)

(in thousands, except share data)

	June 30,			December 31,
	2020			2019

Assets
Cash and due from banks	$	546,048		$	121,678
Securities available for sale, at fair value (amortized cost of $655,500, as of June 30, 2020 and $629,725 as of December 31, 2019)		655,971			634,477
Loans held for sale, at the lower of cost or fair value		17,942			6,020
Loans receivable, net of allowance for credit losses of $86,330 as of June 30, 2020 and $61,408 as of December 31, 2019		4,739,312			4,548,739
Accrued interest receivable		21,372			11,742
Premises and equipment, net		26,412			26,070
Customers' liability on acceptances		—			66
Servicing assets		6,187			6,956
Goodwill and other intangible assets, net		11,742			11,873
Federal Home Loan Bank ("FHLB") stock, at cost		16,385			16,385
Income tax assets		43,286			36,787
Bank-owned life insurance		53,334			52,782
Prepaid expenses and other assets		80,172			64,610
Total assets	$	6,218,163		$	5,538,184

Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing	$	1,865,213		$	1,391,624
Interest-bearing		3,344,568			3,307,338
Total deposits		5,209,781			4,698,962
Accrued interest payable		8,655			11,215
Bank's liability on acceptances		—			66
Borrowings		251,808			90,000
Subordinated debentures ($126,800 face amount less unamortized discount and debt issuance costs of $8,130) as of June 30, 2020 and ($126,800 face amount less unamortized discount and debt issuance costs of $8,423) as of December 31, 2019		118,670			118,377
Accrued expenses and other liabilities		81,813			56,297
Total liabilities		5,670,727			4,974,917
Stockholders' equity:
Preferred Stock, $0.001 par value; authorized 10,000,000 shares; 0 shares issued as of June 30, 2020 and December 31, 2019		—			—
Common stock, $0.001 par value; authorized 62,500,000 shares; issued 33,495,913 shares (30,657,629 shares outstanding) as of June 30, 2020 and issued 33,475,402 shares (30,799,624 shares outstanding) as of December 31, 2019		33			33
Additional paid-in capital		577,211			575,816
Accumulated other comprehensive income, net of tax expense of $136 as of June 30, 2020 and $1,370 as of December 31, 2019		335			3,382
Retained earnings		88,859			100,551
Less treasury stock; 2,838,284 shares as of June 30, 2020 and 2,675,778 shares as of December 31, 2019		(119,002	)		(116,515	)
Total stockholders' equity		547,436			563,267
Total liabilities and stockholders' equity	$	6,218,163		$	5,538,184

(Unaudited) September 30, 2017 December 31, 2016
Assets
Cash and due from banks $ 138,139
$ 147,235
Securities available for sale, at fair value (amortized cost of $597,944 as of September 30, 2017 and $521,053 as of December 31, 2016) 598,440
516,964
Loans held for sale, at the lower of cost or fair value 6,469
9,316
Loans and leases receivable, net of allowance for loan and lease losses of $32,492 as of September 30, 2017 and $32,429 as of December 31, 2016 4,162,863
3,812,340
Accrued interest receivable 12,098
10,987
Premises and equipment, net 26,648
28,698
Other real estate owned ("OREO"), net 1,946
7,484
Customers’ liability on acceptances 647
978
Servicing assets 10,428
10,564
Goodwill and other intangible assets, net 12,628
12,889
Federal Home Loan Bank ("FHLB") stock, at cost 16,385
16,385
Income tax asset, net 46,210
48,047
Bank-owned life insurance 50,268
49,440
Prepaid expenses and other assets 28,227
30,019
Total assets $ 5,111,396
$ 4,701,346
Liabilities and stockholders’ equity
Liabilities:
Deposits:
Noninterest-bearing $ 1,293,538
$ 1,203,240
Interest-bearing 3,005,472
2,606,497
Total deposits 4,299,010
3,809,737
Accrued interest payable 4,071
2,567
Bank’s liability on acceptances 657
978
FHLB advances 110,000
315,000
Subordinated debentures 117,140
18,978
Accrued expenses and other liabilities 21,271
23,061
Total liabilities 4,552,149
4,170,321
Stockholders’ equity:
Common stock, $0.001 par value; authorized 62,500,000 shares; issued 33,059,166 shares (32,413,082 shares outstanding) as of September 30, 2017 and issued 32,946,197 shares (32,330,747 shares outstanding) as of December 31, 2016 33
33
Additional paid-in capital 564,787
562,446
Accumulated other comprehensive income (loss), net of tax expense of $207 as of September 30, 2017 and tax benefit of $1,696 as of December 31, 2016 290
(2,394 )
Retained earnings 65,858
41,726
Less: treasury stock, at cost; 646,084 shares as of September 30, 2017 and 615,450 shares as of December 31, 2016 (71,721 ) (70,786 )
Total stockholders’ equity 559,247
531,025
Total liabilities and stockholders’ equity $ 5,111,396
$ 4,701,346

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

Hanmi Financial Corporation and Subsidiaries

Consolidated Statements of Income (Unaudited)

(in thousands, except share and per share data)

	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Interest and dividend income:
Interest and fees on loans receivable	$	52,230	$	56,872	$	106,878	$	115,206
Interest on securities		3,225		3,770		6,880		7,226
Dividends on FHLB stock		203		283		492		572
Interest on deposits in other banks		78		557		411		892
Total interest and dividend income		55,736		61,482		114,661		123,896
Interest expense:
Interest on deposits		8,889		16,728		21,631		32,410
Interest on borrowings		760		—		1,256		72
Interest on subordinated debentures		1,645		1,764		3,357		3,536
Total interest expense		11,294		18,492		26,244		36,018
Net interest income before credit loss expense		44,442		42,990		88,417		87,878
Credit loss expense		24,594		16,699		40,333		17,816
Net interest income after credit loss expense		19,848		26,291		48,084		70,062
Noninterest income:
Service charges on deposit accounts		2,032		2,486		4,432		4,844
Trade finance and other service charges and fees		961		1,204		1,948		2,328
Gain on sale of Small Business Administration ("SBA") loans		—		1,060		1,154		1,986
Net gain on sales of securities		15,712		570		15,712		1,295
Other operating income		2,226		2,409		3,908		3,530
Total noninterest income		20,931		7,729		27,154		13,983
Noninterest expense:
Salaries and employee benefits		14,701		16,881		32,450		32,619
Occupancy and equipment		4,508		3,468		8,983		7,989
Data processing		2,804		2,140		5,473		4,223
Professional fees		1,545		1,983		3,460		3,632
Supplies and communications		858		649		1,639		1,493
Advertising and promotion		456		945		1,190		1,705
Other operating expenses		2,266		4,078		5,011		7,549
Total noninterest expense		27,138		30,144		58,206		59,210
Income before tax		13,641		3,876		17,032		24,835
Income tax expense		4,466		1,220		5,506		7,507
Net income	$	9,175	$	2,656	$	11,526	$	17,328
Basic earnings per share	$	0.30	$	0.09	$	0.38	$	0.56
Diluted earnings per share	$	0.30	$	0.09	$	0.38	$	0.56
Weighted-average shares outstanding:
Basic		30,426,967		30,685,301		30,447,984		30,688,698
Diluted		30,426,967		30,727,681		30,450,231		30,729,020

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
Interest and dividend income:
Interest and fees on loans and leases $ 50,265
$ 41,150
$ 143,614
$ 120,862
Interest on securities 3,188
2,701
8,657
8,604
Dividends on Federal Reserve Bank ("FRB") and FHLB stock 286
419
943
1,540
Interest on deposits in other banks 123
55
323
152
Total interest and dividend income 53,862
44,325
153,537
131,158
Interest expense:
Interest on deposits 7,071
4,358
18,687
11,769
Interest on FHLB advances 198
179
714
673
Interest on subordinated debentures 1,667
206
3,677
584
Total interest expense 8,936
4,743
23,078
13,026
Net interest income before provision for loan and lease losses 44,926
39,582
130,459
118,132
Loan and lease loss provision (income) 269
(1,450 ) 611
(4,490 )
Net interest income after provision for loan and lease losses 44,657
41,032
129,848
122,622
Noninterest income:
Service charges on deposit accounts 2,678
2,883
7,667
8,782
Trade finance and other service charges and fees 1,133
992
3,449
3,099
Gain on sales of Small Business Administration ("SBA") loans 2,546
1,616
6,678
4,247
Disposition gains on Purchased Credit Impaired ("PCI") loans 979
789
1,702
3,411
Net gain on sales of securities 267
46
1,473
46
Other operating income 1,213
2,348
4,764
5,423
Total noninterest income 8,816
8,674
25,733
25,008
Noninterest expense:
Salaries and employee benefits 16,947
15,950
50,674
47,710
Occupancy and equipment 3,883
3,917
11,743
11,351
Data processing 1,779
1,330
5,148
4,219
Professional fees 1,210
1,090
3,912
4,063
Supplies and communications 755
821
2,135
2,266
Advertising and promotion 1,147
1,153
2,964
2,769
OREO expense (income) (16 ) 73
402
721
Merger and integration costs (income) —
—
(40 ) —
Other operating expenses 2,955
4,003
7,905
9,170
Total noninterest expense 28,660
28,337
84,843
82,269
Income before income tax expense 24,813
21,369
70,738
65,361
Income tax expense 9,890
8,248
27,576
23,288
Net income $ 14,923
$ 13,121
$ 43,162
$ 42,073
Basic earnings per share $ 0.46
$ 0.41
$ 1.34
$ 1.31
Diluted earnings per share $ 0.46
$ 0.41
$ 1.33
$ 1.31
Weighted-average shares outstanding:
Basic 32,095,286
31,912,470
32,058,705
31,880,466
Diluted 32,255,814
32,088,233
32,230,319
32,031,295

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

Hanmi Financial Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

(in thousands)

	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Net income	$	9,175		$	2,656		$	11,526		$	17,328
Other comprehensive income (loss), net of tax:
Unrealized gain on securities:
Unrealized holding gain (loss) arising during period		(493	)		6,548			11,431			13,167
Less: reclassification adjustment for net gain included in net income		(15,712	)		(570	)		(15,712	)		(1,295	)
Income tax expense (benefit) related to items of other comprehensive income		4,673			(1,721	)		1,234			(3,418	)
Other comprehensive income (loss), net of tax		(11,532	)		4,257			(3,047	)		8,454
Comprehensive income (loss)	$	(2,357	)	$	6,913		$	8,479		$	25,782

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
Net income $ 14,923
$ 13,121
$ 43,162
$ 42,073
Other comprehensive income, net of tax:
Unrealized gain on securities:
Unrealized holding gain (loss) arising during period 529
(2,629 ) 6,059
13,518
Less: reclassification adjustment for net gain included in net income (267 ) (46 ) (1,473 ) (46 )
Unrealized loss on interest-only strip of servicing assets —
—
—
(9 )
Income tax expense related to items of other comprehensive income (109 ) 1,109
(1,902 ) (5,593 )
Other comprehensive income, net of tax 153
(1,566 ) 2,684
7,870
Comprehensive income $ 15,076
$ 11,555
$ 45,846
$ 49,943

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

Hanmi Financial Corporation and Subsidiaries

ConsolidatedStatementsofChangesinStockholders’Equity(Unaudited)

For the Three Months Ended June 30, 2020

(in thousands, except share data)

	Common Stock - Number of Shares								Stockholders' Equity
													Accumulated
											Additional		Other						Treasury			Total
	Shares		Treasury			Shares			Common		Paid-in		Comprehensive			Retained			Stock,			Stockholders'
	Issued		Shares			Outstanding			Stock		Capital		Income (Loss)			Earnings			at Cost			Equity
Balance at April 1, 2019		33,153,888		(2,293,355	)		30,860,533		$	33	$	570,432	$	(1,882	)	$	104,771		$	(109,062	)	$	564,292
Stock options exercised		1,250		—			1,250			—		13		—			—			—			13
Restricted stock awards, net of forfeitures		116,694		—			116,694			—		—		—			—			—			—
Share-based compensation expense		—		—			—			—		660		—			—			—			660
Restricted stock surrendered due to employee tax liability		—		(3,314	)		(3,314	)		—		—		—			—			(14	)		(14	)
Cash dividends declared (common stock, $0.24/share)		—		—			—			—		—		—			(7,406	)		—			(7,406	)
Net income		—		—			—			—		—		—			2,656			—			2,656
Change in unrealized gain (loss) on securities available for sale, net of income taxes		—		—			—			—		—		4,257			—			—			4,257
Balance at June 30, 2019		33,271,832		(2,296,669	)		30,975,163		$	33	$	571,105	$	2,375		$	100,021		$	(109,076	)	$	564,458

Balance at April 1, 2020		33,448,214		(2,825,473	)		30,622,741		$	33	$	576,585	$	11,867		$	83,355		$	(118,882	)	$	552,958
Restricted stock awards, net of forfeitures		47,699		—			47,699			—		—		—			—			—			—
Share-based compensation expense		—		—			—			—		626		—			—			—			626
Restricted stock surrendered due to employee tax liability		—		(12,811	)		(12,811	)		—		—		—			—			(120	)		(120	)
Cash dividends declared (common stock, $0.12/share)		—		—			—			—		—		—			(3,671	)		—			(3,671	)
Net income		—		—			—			—		—		—			9,175			—			9,175
Change in unrealized gain (loss) on securities available for sale, net of income taxes		—		—			—			—		—		(11,532	)		—			—			(11,532	)
Balance at June 30, 2020		33,495,913		(2,838,284	)		30,657,629		$	33	$	577,211	$	335		$	88,859		$	(119,002	)	$	547,436

Common Stock - Number of Shares Stockholders’ Equity
Shares Issued Treasury Shares Shares Outstanding Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings Treasury Stock, at Cost Total Stockholders’ Equity
Balance at January 1, 2016 32,566,522
(592,163 ) 31,974,359
$ 257
$ 557,761
$ (315 ) $ 6,422
$ (70,207 ) $ 493,918
Correction of accounting for the 2011 1-for-8 stock split —
—
—
(224 ) 224
—
—
—
—
Stock options exercised 42,584
—
42,584
—
592
—
—
—
592
Restricted stock awards, net of forfeitures 256,287
—
256,287
—
—
—
—
—
—
Share-based compensation expense —
—
—
—
2,329
—
—
—
2,329
Restricted stock surrendered due to employee tax liability —
(20,456 ) (20,456 ) —
—
—
—
(502 ) (502 )
Cash dividends declared —
—
—
—
—
—
(15,082 ) —
(15,082 )
Net income —
—
—
—
—
—
42,073
—
42,073
Change in unrealized gain (loss) on securities available for sale, net of income taxes —
—
—
—
—
7,870
—
—
7,870
Balance at September 30, 2016 32,865,393
(612,619 ) 32,252,774
$ 33
$ 560,906
$ 7,555
$ 33,413
$ (70,709 ) $ 531,198

Balance at January 1, 2017 32,946,197
(615,450 ) 32,330,747
$ 33
$ 562,446
$ (2,394 ) $ 41,726
$ (70,786 ) $ 531,025
Stock options exercised 22,125
—
22,125
—
270
—
—
—
270
Restricted stock awards, net of forfeitures 90,844
—
90,844
—
—
—
—
—
—
Share-based compensation expense —
—
—
—
2,071
—
—
—
2,071
Restricted stock surrendered due to employee tax liability —
(30,634 ) (30,634 ) —
—
—
—
(935 ) (935 )
Cash dividends declared —
—
—
—
—
—
(19,030 ) —
(19,030 )
Net income —
—
—
—
—
—
43,162
—
43,162
Change in unrealized gain (loss) on securities available for sale, net of income taxes —
—
—
—
—
2,684
—
—
2,684
Balance at September 30, 2017 33,059,166
(646,084 ) 32,413,082
$ 33
$ 564,787
$ 290
$ 65,858
$ (71,721 ) $ 559,247

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

Hanmi Financial Corporation and Subsidiaries

ConsolidatedStatementsof ~~Cash Flows~~ ChangesinStockholders’Equity(Unaudited)

For the Six Months Ended June 30, 2020

(in ~~thousands)~~thousands, except share data)

	Common Stock - Number of Shares								Stockholders' Equity
													Accumulated
											Additional		Other						Treasury			Total
	Shares		Treasury			Shares			Common		Paid-in		Comprehensive			Retained			Stock,			Stockholders'
	Issued		Shares			Outstanding			Stock		Capital		Income (Loss)			Earnings			at Cost			Equity
Balance at January 1, 2019		33,202,369		(2,273,932	)		30,928,437		$	33	$	569,712	$	(6,079	)	$	97,539		$	(108,637	)	$	552,568
Stock options exercised		1,900		—			1,900			—		22		—			—			—			22
Restricted stock awards, net of forfeitures		67,563		—			67,563			—		—		—			—			—			-
Share-based compensation expense		—		—			—			—		1,371		—			—			—			1,371
Restricted stock surrendered due to employee tax liability		—		(22,737	)		(22,737	)		—		—		—			—			(439	)		(439	)
Repurchase of common stock		—		—			—			—		—		—			—			—			-
Cash dividends declared (common stock, $0.48/share)		—		—			—			—		—		—			(14,846	)		—			(14,846	)
Net income		—		—			—			—		—		—			17,328			—			17,328
Change in unrealized gain (loss) on securities available for sale, net of income taxes		—		—			—			—		—		8,454			—			—			8,454
Balance at June 30, 2019		33,271,832		(2,296,669	)		30,975,163		$	33	$	571,105	$	2,375		$	100,021		$	(109,076	)	$	564,458

Balance at January 1, 2020		33,475,402		(2,675,778	)		30,799,624		$	33	$	575,816	$	3,382		$	100,551		$	(116,515	)	$	563,267
Adjustment related to adopting of new accounting standards
ASU 2016-13 (See Notes 1 and 3)		—		—			—			—		—		—			(12,167	)		—			(12,167	)
Adjusted balance at January 1, 2020		33,475,402		(2,675,778	)		30,799,624			33		575,816		3,382			88,385			(116,515	)		551,101
Restricted stock awards, net of forfeitures		20,511		—			20,511			—		—		—			—			—			—
Share-based compensation expense		—		—			—			—		1,395		—			—			—			1,395
Restricted stock surrendered due to employee tax liability		—		(27,106	)		(27,106	)		—		—		—			—			(291	)		(291	)
Repurchase of common stock		—		(135,400	)		(135,400	)		—		—		—			—			(2,196	)		(2,196	)
Cash dividends declared (common stock, $0.36/share)		—		—			—			—		—		—			(11,052	)		—			(11,052	)
Net income		—		—			—			—		—		—			11,526			—			11,526
Change in unrealized gain (loss) on securities available for sale, net of income taxes		—		—			—			—		—		(3,047	)		—			—			(3,047	)
Balance at June 30, 2020		33,495,913		(2,838,284	)		30,657,629		$	33	$	577,211	$	335		$	88,859		$	(119,002	)	$	547,436

Nine Months Ended September 30,
2017 2016
Cash flows from operating activities:
Net income $ 43,162
$ 42,073
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 9,353
10,848
Share-based compensation expense 2,071
2,329
Loan and lease loss provision (income) 611
(4,490 )
Gain on sales of securities (1,473 ) (46 )
Gain on sales of SBA loans (6,678 ) (4,247 )
Loss (gain) on sale of premises and equipment —
(1,053 )
Disposition gains on PCI loans (1,702 ) (3,411 )
Gain on sales of OREO (482 ) —
Valuation adjustment on OREO 884
721
Origination of SBA loans held for sale (81,716 ) (60,248 )
Proceeds from sales of SBA loans 92,715
61,494
Change in accrued interest receivable (1,111 ) (659 )
Change in bank-owned life insurance (828 ) (809 )
Change in prepaid expenses and other assets 1,894
3,791
Change in income tax asset (65 ) 1,436
Change in accrued interest payable 1,504
(733 )
Change in accrued expenses and other liabilities (2,316 ) (10,121 )
Net cash provided by operating activities 55,823
36,875
Cash flows from investing activities:
Proceeds from redemption of FRB stock —
14,423
Proceeds from matured, called and repayment of securities 51,117
98,771
Proceeds from sales of securities available for sale 70,333
78,282
Proceeds from sales of OREO 5,710
2,306
Change in loans and leases receivable, excluding purchases (191,594 ) (229,063 )
Purchases of securities (201,398 ) (19,992 )
Purchases of premises and equipment (147 ) 982
Purchases of loans receivable (161,253 ) (143,189 )
Purchases of FRB stock —
(325 )
Net cash used in investing activities (427,232 ) (197,805 )
Cash flows from financing activities:
Change in deposits 489,273
261,231
Change in overnight FHLB borrowings (205,000 ) (115,000 )
Issuance of subordinated debentures 97,735
—
Proceeds from exercise of stock options 270
592
Cash paid for treasury shares acquired in respect of share-based compensation (935 ) (502 )
Cash dividends paid (19,030 ) (19,558 )
Net cash provided by financing activities 362,313
126,763
Net decrease in cash and cash equivalents (9,096 ) (34,167 )
Cash and cash equivalents at beginning of year 147,235
164,364
Cash and cash equivalents at end of period $ 138,139
$ 130,197

Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest $ 23,078
$ 13,759
Income taxes $ 25,146
$ 21,654
Non-cash activities:
Transfer of loans receivable to OREO $ 143
$ 4,318
Income tax expense related to items in other comprehensive income $ (1,902 ) $ (5,593 )
Change in unrealized gain in accumulated other comprehensive income $ (6,059 ) $ (13,518 )
Cash dividends declared $ (19,030 ) $ (15,082 )

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

Hanmi Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

	Six Months Ended June 30,
	2020			2019
Cash flows from operating activities:
Net income	$	11,526		$	17,328
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		5,018			4,694
Share-based compensation expense		1,395			1,371
Credit loss expense		40,333			17,816
Gain on sales of securities		(15,712	)		(1,295	)
Gain on sales of SBA loans		(1,154	)		(1,986	)
Origination of SBA loans held for sale		(30,139	)		(27,523	)
Proceeds from sales of SBA loans		19,366			32,856
Change in bank-owned life insurance		(552	)		(561	)
Change in prepaid expenses and other assets		(34,409	)		(3,267	)
Change in income tax assets		4,930			—
Change in accrued expenses and other liabilities		23,324			(1,501	)
Net cash provided by operating activities		23,926			37,932
Cash flows from investing activities:
Purchases of securities available for sale		(615,454	)		(230,112	)
Proceeds from matured, called and repayment of securities		108,444			63,528
Proceeds from sales of securities available for sale		495,566			113,306
Purchases of premises and equipment		(2,279	)		(515	)
Proceeds from disposition of premises and equipment		51			3,055
Proceeds from sales of other real estate owned ("OREO")		—			22
Change in loans receivable, excluding purchases		(244,973	)		43,689
Net cash provided by (used in) investing activities		(258,645	)		(7,027	)
Cash flows from financing activities:
Change in deposits		510,819			14,833
Change in overnight borrowings		(15,000	)		(55,000	)
Proceeds from borrowings		176,808			—
Proceeds from exercise of stock options		—			22
Cash paid for surrender of vested shares due to employee tax liability		(291	)		(439	)
Repurchase of common stock		(2,196	)		—
Cash dividends paid		(11,052	)		(14,846	)
Net cash provided by (used in) financing activities		659,088			(55,430	)
Net increase (decrease) in cash and due from banks		424,370			(24,525	)
Cash and due from banks at beginning of year		121,678			155,376
Cash and due from banks at end of period	$	546,048		$	130,851

Supplemental disclosures of cash flow information:
Interest expense paid	$	28,804		$	35,959
Income taxes paid	$	99		$	(3,587	)
Non-cash activities:
Transfer of loans receivable to other real estate owned	$	85		$	—
Income tax (expense) benefit related to items of other comprehensive income	$	1,234		$	(3,418	)
Change in unrealized (gain) loss in accumulated other comprehensive income	$	4,281		$	(11,872	)
Change in right-of-use asset obtained in exchange for lease liability	$	17,333		$	43,110

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

~~Nine~~

Hanmi Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Three and Six Months Ended ~~September~~June 30, ~~2017~~2020 and ~~2016~~

2019

Note 1 — Organization and Basis of Presentation

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

In management’s opinion, the accompanying unaudited consolidated financial statements of Hanmi Financial and its subsidiaries reflect all adjustments of a normal and recurring nature that are necessary for a fair presentation of the results for the interim ~~period~~periods ended ~~September~~June 30, ~~2017,~~2020, but are not necessarily indicative of the results that will be reported for the entire year or any other interim period. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted. The ~~aforementioned~~ unaudited consolidated financial statements are prepared in conformity with ~~GAAP. Such interim consolidated financial statements have been prepared~~GAAP and in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission. The interim information should be read in conjunction with our Annual Report on Form 10-K for the ~~fiscal~~ year ended December 31, ~~2016~~2019 (the ~~“2016~~“2019 Annual Report on Form 10-K”).

The preparation of interim unaudited consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. ~~Actual~~These estimates and assumptions affect the amounts reported in the unaudited financial statements and disclosures provided, and actual results could differ from those estimates. Material estimates subject to change include, among other items, the determination of allowance for loan and lease losses and various other assets and liabilities measured at fair value.

differ.

Descriptions of our significant accounting policies are included in Note 1 -Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements in ~~our 2016~~the 2019 Annual Report on Form 10-K.

FASB ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, On January 1, 2020, the Company adopted ASU 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842 on leases. In addition, ASU 2016-13 made changes to the accounting for available-for sale debt securities.

The Company adopted ASU 2016-13 using the prospective transition approach for debt securities for which the Company would have recognized other-than-temporary impairment prior to January 1, 2020. However, the Company had no such securities and as a result, there was no effect on the balance sheet related to securities from the adoption of ASU 2016-13. As a result, the amortized cost basis remained the same before and after the effective date of ASU 2016-13.

The adoption of ASU 2016-13 resulted in a $17.4 million increase to the beginning balance of the allowance for credit losses, a $0.3 million decrease to the beginning balance of the allowance for off-balance sheet items, and an after-tax charge of $12.2 million to the beginning balance of retained earnings.

According to ASU 2016-13, the Bank was required to measure its expected credit losses of financial assets on a collective (pool) basis when similar risk characteristic(s) exist. The Bank segmented the loans primarily by loan types, considering that the same type of loans share considerable similar risk characteristics, including the collateral type, loan purpose, contract term, amortization and payment structure.

The Company measured expected credit losses of financial assets on a collective (pool) basis, when the financial assets share similar risk characteristics. Depending on the nature of the pool of financial assets with similar risk characteristics, the Company used a discounted cash flow (“DCF”) method, Probability of Default / Loss Given Default method (“PD/LGD”), or a Weighted Average Remaining Maturity (“WARM”) method to estimate expected credit losses.

The Company’s methodologies for estimating the allowance for credit losses considered available relevant information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts. The methodologies applied historical loss information, adjusted for asset-specific characteristics, economic conditions at the measurement date, and forecasts about future economic conditions expected to exist through the contractual lives of the financial assets that were reasonable and supportable, to the identified pools of financial assets with similar risk characteristics for which the historical loss experience was observed. The Company’s methodologies revert to historical loss information on a straight-line basis over twelve quarters when it can no longer develop reasonable and supportable forecasts.

The Company has disaggregated the portfolios of financial assets into the following material segments of like-kind loans or leases with similar risk characteristics using the following methodologies:

The Company used the discounted cash flow (DCF) method to estimate allowances for credit losses for the commercial property, construction, and residential real estate loan portfolios, the commercial and industrial loan portfolio, and the consumer loan portfolio. For all loan pools utilizing the DCF method, the Company utilized and forecasted the national unemployment rate as the primary loss driver. The Company also utilized and forecasted either the annualized average return rate from the National Council of Real Estate Investment Fiduciaries (NCREIF) Property Index for commercial real estate loans or the one-year percentage change in the S&P/Case-Shiller U.S National Home Price Index (NHPI) for residential real estate loans as a second loss driver depending on the nature of the underlying loan pool and how well that loss driver correlates to expected future losses.

For all DCF models at January 1, 2020, 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. The Company leveraged economic projections from the quarterly Federal Open Market Committee (FOMC) and the Federal Reserve Economic Database (FRED) to inform its loss driver forecasts over the four-quarter forecast period. For each of these loan segments, the Company applied an expected loss ratio based on the discounted cash flows adjusted as appropriate for qualitative factors. Qualitative loss factors are based on the Company's judgment of company, market, industry or business specific data, changes in the underlying loan composition of specific portfolios, trends relating to credit quality, delinquency, nonperforming and adversely rated loans, and reasonable and supportable forecasts of economic conditions.

The Company used the Probability of Default/Loss Given Default (PD/LGD) method for the SBA portfolio to accommodate the unique nature of these loans. Although the PD/LGD methodology is an element of the DCF model, the stand-alone PD/LGD methodology minimizes complications related to the characteristics of SBA loans. A uniqueness of the SBA portfolio is that the U.S. Small Business Administration policy requires servicers to undertake all reasonable collection efforts before charging-off the loan. As a result, the recovery rate for SBA loans tend to be more volatile and not intuitively correlated to economic factors.

The Company used a Weighted Average Remaining Maturity (WARM) method to estimate expected credit losses for equipment financing agreements or the equipment lease receivables portfolio. The Company applied an expected loss ratio based on internal historical losses adjusted as appropriate for qualitative factors. The Company's evaluation of market, industry or business specific data, changes in the underlying portfolio composition, trends relating to credit quality, delinquency, nonperforming and adversely rated leases, and reasonable and supportable forecasts of economic conditions informed the estimate of qualitative factors.

As allowed by ASU 2016-13, the Company elected to maintain pools of loans accounted for under ASC 310-30. In accordance with the standard, management did not reassess whether modifications to individual acquired financial assets accounted for in pools were troubled debt restructurings as of the date of adoption.

The Company estimated the allowance for credit losses on loans based on the underlying assets’ amortized cost basis, which was the amount at which the financing receivable is originated or acquired, adjusted for applicable accretion or amortization of premium, discount, and net deferred fees or costs, collection of cash, and charge-offs. In the event that collection of principal becomes uncertain, the Company has policies in place to reverse accrued interest in a timely manner. Therefore, the Company has made a policy election to exclude accrued interest from the measurement of allowance for credit losses.

Expected credit losses are reflected in the allowance for credit losses through a charge to credit loss expense. When the Company deems all or a portion of a financial asset to be uncollectible, the appropriate amount is written off and the allowance for credit losses is reduced by the same amount. The Company applies judgment to determine when a financial asset is deemed uncollectible; however, generally speaking, an asset will be considered uncollectible no later than when all efforts at collection have been exhausted. Subsequent recoveries, if any, are credited to the allowance for credit losses when received.

The following table illustrates the allowance for credit losses and the related impact under ASU 2016-13 to the Company as of January 1, 2020.

	As Reported Under ASU 2016-13		Pre-ASU 2016-13 Adoption		Impact of ASU 2016-13 Adoption
Real estate loans:
Commercial property
Retail	$	6,785	$	4,911	$	1,873
Hospitality		12,387		6,686		5,702
Other		13,415		8,060		5,355
Total commercial property loans		32,587		19,657		12,930
Construction loans		15,590		15,003		587
Residential property loans		2,150		1,695		455
Total real estate loans		50,327		36,355		13,972
Commercial and industrial loans:
Commercial term loans		12,175		14,077		(1,903	)
Commercial lines of credit		1,358		1,887		(529	)
International loans		176		242		(65	)
Total commercial loans		13,709		16,206		(2,497	)
Leases receivable		14,669		8,767		5,902
Consumer loans		135		80		55
Allowance for credit losses on loans receivable	$	78,841	$	61,408	$	17,433

Allowance for credit losses on off-balance sheet items	$	2,062	$	2,398	$	(336	)

The Company used the methodologies described above in the implementation of CECL at January 1, 2020 and through March 31, 2020. The Company, however, adjusted the methodologies for the commercial property, construction, and residential real estate portfolios during the three months ended June 30, 2020 to reflect better the forecast of potential losses arising from the more unstable economic environment due to the COVID-19 pandemic. See Note 3 - Loans for a more detailed description of the changes in the allowance for credit losses methodologies.

FASB ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, Effective January 1, 2020, the Company adopted this standard, which simplifies the subsequent measurement of goodwill impairment by eliminating the requirement to calculate the implied fair value of goodwill (i.e., the current Step 2 of the goodwill impairment test) to measure a goodwill impairment charge. Under this ASU, the impairment test is simply the comparison of the fair value of a reporting unit with its carrying amount (the current Step 1), with the impairment charge being the deficit in fair value but not exceeding the total amount of goodwill allocated to that reporting unit. The simplified one-step impairment test applies to all reporting units (including those with zero or negative carrying amounts). An entity was to apply the amendments in this ASU on a prospective basis and was required to disclose the nature of and reason for the change in accounting principle upon transition. The Company’s goodwill arose from the purchase of an equipment leasing portfolio in 2016. The equipment leasing portfolio has grown since acquisition, and the Company has concluded no impairment has occurred.

The outbreak of the novel coronavirus, also known as COVID-19 has resulted in orders for individuals to shelter-in place and restricted business activities. As a result, the operations and business results of the Company could be materially adversely affected. The extent to which the COVID-19 crisis may impact business activity or investment results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus and the actions required to contain the coronavirus or treat its impact, among others. This uncertainty may impact the accuracy of our significant estimates, which includes the allowance for credit losses, the allowance for credit losses related to off-balance sheet items, and the valuation of intangible assets including deferred tax assets, goodwill, and servicing assets.

Note 2 — Securities

The following is a summary of securities available for sale as of ~~September 30, 2017 and December 31, 2016:~~the datesindicated:

			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gain		Loss			Value
	(in thousands)
June 30, 2020
U.S. Treasury securities	$	44,982	$	280	$	—		$	45,262
U.S. government agency and sponsored agency obligations:
Mortgage-backed securities		413,278		422		(437	)		413,263
Collateralized mortgage obligations		120,080		390		(176	)		120,294
Debt securities		77,160		9		(17	)		77,152
Total U.S. government agency and sponsored agency obligations		610,518		821		(630	)		610,709
Total securities available for sale	$	655,500	$	1,101	$	(630	)	$	655,971

December 31, 2019
U.S. Treasury securities	$	34,947	$	259	$	—			35,206
U.S. government agency and sponsored agency obligations:
Mortgage-backed securities		406,813		4,334		(347	)	$	410,800
Collateralized mortgage obligations		164,232		792		(432	)		164,592
Debt securities		23,733		168		(22	)		23,879
Total U.S. government agency and sponsored agency obligations		594,778		5,294		(801	)		599,271
Total securities available for sale	$	629,725	$	5,553	$	(801	)	$	634,477

Amortized Cost Gross Unrealized Gain Gross Unrealized Loss Estimated Fair Value
(in thousands)
September 30, 2017
Mortgage-backed securities ^{(1) (2)}
$ 310,111
$ 793
$ 1,154
$ 309,750
Collateralized mortgage obligations ⁽¹⁾
107,052
16
944
106,124
U.S. government agency securities 7,499
—
42
7,457
SBA loan pool securities 4,036
—
140
3,896
Municipal bonds-tax exempt 146,177
2,424
77
148,524
U.S. treasury securities 153
—
—
153
Mutual funds 22,916
—
380
22,536
Total securities available for sale $ 597,944
$ 3,233
$ 2,737
$ 598,440

December 31, 2016
Mortgage-backed securities ^{(1) (2)}
$ 230,489
$ 598
$ 1,457
$ 229,630
Collateralized mortgage obligations ⁽¹⁾
77,447
6
1,002
76,451
U.S. government agency securities 7,499
—
58
7,441
SBA loan pool securities 4,356
—
210
4,146
Municipal bonds-tax exempt 159,789
236
1,995
158,030
Municipal bonds-taxable 13,391
319
9
13,701
Corporate bonds 5,010
5
—
5,015
U.S. treasury securities 156
—
—
156
Mutual funds 22,916
—
522
22,394
Total securities available for sale $ 521,053
$ 1,164
$ 5,253
$ 516,964


⁽¹⁾	~~Collateralized by residential mortgages and guaranteed by U.S. government sponsored entities.~~


⁽²⁾	~~Includes securities collateralized by home equity conversion mortgages with an estimated fair value of $8.1 million and $52.9 million as of September 30, 2017 and December 31, 2016, respectively.~~

The amortized cost and estimated fair value of securities as of ~~September~~June 30, ~~2017,~~2020, by contractual or expected maturity, are shown below. Collateralized mortgage obligations are included in the table shown below based on their expected maturities. ~~Mutual funds do not have contractual maturities. However, they are included in the table shown below as over ten years since the Company intends to hold these securities for at least this duration.~~ All other securities are included based on their contractual maturities.

	Available for Sale
	Amortized		Estimated
	Cost		Fair Value
	(in thousands)
Within one year	$	45,358	$	45,379
Over one year through five years		121,596		122,202
Over five years through ten years		48,702		48,812
Over ten years		439,844		439,578
Total	$	655,500	$	655,971

CECL (ASU 2016-13) requires the Company to assess its available-for-sales securities portfolio for impairment on an at least quarterly basis. The Company performed an impairment assessment of the Bank’s investment in debt securities in accordance with this standard. This assessment took into account the credit quality of these debt securities and determined that since all were U.S. Treasury obligations, U.S. government agency securities, and U.S. government sponsored agency securities, they all have the backing of the U.S. government, and thus no credit impairment is expected.

Available for Sale
Amortized Cost Estimated Fair Value
(in thousands)
Within one year $ 24,537
$ 24,452
Over one year through five years 64,646
64,519
Over five years through ten years 256,367
257,279
Over ten years 252,394
252,190
Total $ 597,944
$ 598,440

Gross unrealized losses on securities available for sale, the estimated fair value of the related securities and the number of securities aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows as of ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016:~~2019:

	Holding Period
	Less than 12 Months							12 Months or More							Total
	Gross			Estimated		Number		Gross			Estimated		Number		Gross			Estimated		Number
	Unrealized			Fair		of		Unrealized			Fair		of		Unrealized			Fair		of
	Loss			Value		Securities		Loss			Value		Securities		Loss			Value		Securities
	(in thousands, except number of securities)
June 30, 2020
U.S. Treasury securities	$	—		$	29,988		4	$	—		$	—		—	$	—		$	29,988		4
U.S. government agency and sponsored agency obligations:
Mortgage-backed securities		(437	)		192,403		23		—			—		—		(437	)		192,403		23
Collateralized mortgage obligations		(176	)		46,693		12		—			—	��	—		(176	)		46,693		12
Debt securities		(17	)		32,483		5		—			—		—		(17	)		32,483		5
Total U.S. government agency and sponsored agency obligations		(630	)		271,579		40		—			—		—		(630	)		271,579		40
Total	$	(630	)	$	301,567		44	$	—		$	—		—	$	(630	)	$	301,567		44

December 31, 2019
U.S. government agency and sponsored agency obligations:
Mortgage-backed securities	$	(186	)	$	51,261		17	$	(161	)	$	18,757		14	$	(347	)	$	70,018		31
Collateralized mortgage obligations		(112	)		41,419		14		(320	)		39,936		36		(432	)		81,355		50
Debt securities		(20	)		8,235		2		(3	)		2,997		1		(22	)		11,233		3
Total U.S. government agency and sponsored agency obligations		(318	)		100,916		33		(483	)		61,690		51		(801	)		162,606		84
Total	$	(318	)	$	100,916		33	$	(483	)	$	61,690		51	$	(801	)	$	162,606		84

Holding Period
Less Than 12 Months 12 Months or More Total
Gross Unrealized Loss Estimated Fair Value Number of Securities Gross Unrealized Loss Estimated Fair Value Number of Securities Gross Unrealized Loss Estimated Fair Value Number of Securities
(in thousands, except number of securities)
September 30, 2017
Mortgage-backed securities $ 787
$ 171,919
53
$ 367
$ 21,430
9
$ 1,154
$ 193,349
62
Collateralized mortgage obligations 320
62,309
23
624
38,940
24
944

101,249

47
U.S. government agency securities 42
7,457
3
—
—
—
42

7,457

3
SBA loan pool securities —
—
—
140
3,896
2
140

3,896

2
Municipal bonds-tax exempt 60
3,459
3
17
1,704
4
77

5,163

7
U.S. treasury securities —
—
—
—
—
—
—

—

—
Mutual funds 254
20,632
2
126
1,899
4
380

22,531

6
Total $ 1,463
$ 265,776
84
$ 1,274
$ 67,869
43
$ 2,737
$ 333,645
127

December 31, 2016
Mortgage-backed securities $ 1,345
$ 102,647
38
$ 112
$ 11,350
3
$ 1,457
$ 113,997
41
Collateralized mortgage obligations 676
60,786
27
326
10,579
7
1,002
71,365
34
U.S. government agency securities 58
7,441
3
—
—
—
58
7,441
3
SBA loan pool securities —
—
—
210
4,146
2
210
4,146
2
Municipal bonds-tax exempt 1,995
125,004
54
—
—
—
1,995
125,004
54
Municipal bonds-taxable 9
2,904
2
—
—
—
9
2,904
2
Mutual funds 413
21,478
4
109
916
3
522
22,394
7
Total $ 4,496
$ 320,260
128
$ 757
$ 26,991
15
$ 5,253
$ 347,251
143

~~All individual~~

The unrealized losses in the U.S. government agency and sponsored agency obligations, were caused by fluctuations in interest rates. These securities ~~that~~are not deemed to have been in a continuous unrealized loss position for 12 months or longer as of September 30, 2017 and December 31, 2016 had investment grade ratings upon purchase. The issuers of these securities have not established any cause for default on these securitiescredit risk due to their long history with no credit losses, and the ~~various rating agencies have reaffirmed these securities’ long-term investment grade status as~~explicit guarantee of ~~September 30, 2017~~the U.S. government of timely payment of principal and ~~December 31, 2016. These securities have fluctuated in value since their purchase dates as market~~ interest ~~rates have fluctuated.~~

to investors. The Company does not intend to sell ~~these~~the securities and it is not more likely than not that weit will ~~not~~ be required to sell ~~the securities~~them before ~~the~~ recovery of their amortized cost basis. Interest payments have been made as scheduled, and management believes this will continue in the future and that the bonds will be repaid in full as scheduled. Therefore, in management’s opinion, all securities that have been in a continuous unrealized loss position for the past 12 months or longer as of September 30, 2017 and December 31, 2016 were not other-than-temporarily impaired, and therefore, no impairment charges as of September 30, 2017 and December 31, 2016 were warranted.

cost.

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

	Three Months Ended June 30,					Six Months Ended June 30,
	2020		2019			2020		2019
	(in thousands)
Gross realized gains on sales of securities	$	15,712	$	634		$	15,712	$	1,359
Gross realized losses on sales of securities		—		(64	)		—		(64	)
Net realized gains on sales of securities	$	15,712	$	570		$	15,712	$	1,295
Proceeds from sales of securities	$	495,566		44,119		$	495,566		113,306

Three Months Ended
September 30, Nine Months Ended
September 30,
2017 2016 2017 2016
(in thousands)
Gross realized gains on sales of securities $ 267
$ 396
$ 1,473
$ 396
Gross realized losses on sales of securities —
(350 ) —
(350 )
Net realized gains on sales of securities $ 267
$ 46
$ 1,473
$ 46
Proceeds from sales of securities $ 17,644
$ 78,282
$ 70,333
$ 78,282

~~For~~

During the three months ended ~~September~~June 30, ~~2017,~~2020 and 2019, there was a ~~$267,000~~$15.7 million and $570,000 net gain in earnings resulting from ~~sales~~the sale of ~~securities. Net~~securities, respectively. A net unrealized ~~gains~~gain of ~~$227,000~~$15.3 million and $792,000 related to these ~~sold~~ securities had previously been recorded in accumulated other comprehensive income as of the beginning of the ~~period. There was a $46,000~~period in 2020 and 2019, respectively.

During the six months ended June 30, 2020, there were $15.7 million securities sales transactions in net ~~gain~~gains in earnings resulting from ~~sales of securities during~~$15.3 million previously recorded for unrealized gains in accumulated other comprehensive income. During the ~~three~~six months ended ~~September~~June 30, ~~2016, that had previously been recorded as~~2019, there were $1.3 million in net ~~unrealized~~ gains ~~of $321,000 in comprehensive income.~~

~~For the nine months ended September 30, 2017, there was a $1.5 million net gain~~ in earnings resulting from the sale of ~~securities. Net~~securities which had $586,000 in previously recorded unrealized gains ~~of $971,000 related to these sold securities had previously been recorded~~ in accumulated other comprehensive income as of the beginning of the period. There was a $46,000 net gain in earnings resulting from sales of securities during the nine months ended September 30, 2016, that had previously been recorded as net unrealized gains of $314,000 in comprehensive income.

Securities available for sale with market values of ~~$130.7~~$50.0 million and ~~$133.0~~$30.2 million as of ~~September~~June 30, ~~2017~~2020 and ~~December 31, 2016,~~2019, respectively, were pledged to secure public deposits and for other purposes as required or permitted by law.

Note 3 — Loans ~~and leases~~

Loans ~~and Leases~~ Receivable ~~Net~~

Loans ~~and leases receivable~~ consisted of the following as of the dates indicated:

	June 30, 2020			December 31, 2019
	(in thousands)
Real estate loans:
Commercial property
Retail	$	808,157		$	869,302
Hospitality		882,812			922,288
Other ⁽¹⁾		1,504,916			1,358,432
Total commercial property loans		3,195,885			3,150,022
Construction		70,357			76,455
Residential property		354,064			402,028
Total real estate loans		3,620,306			3,628,505
Commercial and industrial loans		730,399			484,093
Leases receivable		462,811			483,879
Consumer loans ⁽²⁾		12,126			13,670
Loans receivable		4,825,642			4,610,147
Allowance for credit losses		(86,330	)		(61,408	)
Loans receivable, net	$	4,739,312		$	4,548,739

September 30, 2017 December 31, 2016
Non-PCI Loans and Leases PCI Loans Total Non-PCI Loans and Leases PCI Loans Total
(in thousands)
Real estate loans:
Commercial property
Retail $ 916,236
$ 1,587
$ 917,823
$ 857,629
$ 2,324
$ 859,953
Hospitality 731,562
1,664
733,226
649,540
1,618
651,158
Gas station 245,042
2,388
247,430
260,187
2,692
262,879
Other ⁽¹⁾
1,144,176
2,013
1,146,189
1,107,589
2,067
1,109,656
Construction 64,263
—
64,263
55,962
—
55,962
Residential property 429,669
958
430,627
337,791
976
338,767
Total real estate loans 3,530,948
8,610
3,539,558
3,268,698
9,677
3,278,375
Commercial and industrial loans:
Commercial term 170,891
51
170,942
138,032
136
138,168
Commercial lines of credit 149,937
—
149,937
136,231
—
136,231
International loans 43,577
—
43,577
25,821
—
25,821
Total commercial and industrial loans 364,405
51
364,456
300,084
136
300,220
Leases receivable 272,271
—
272,271
243,294
—
243,294
Consumer loans ⁽²⁾
19,027
43
19,070
22,830
50
22,880
Loans and leases receivable 4,186,651
8,704
4,195,355
3,834,906
9,863
3,844,769
Allowance for loan and lease losses (31,698 ) (794 ) (32,492 ) (31,458 ) (971 ) (32,429 )
Loans and leases receivable, net $ 4,154,953
$ 7,910
$ 4,162,863
$ 3,803,448
$ 8,892
$ 3,812,340

⁽¹⁾
⁽¹⁾	Includes, among other types, mixed-use, apartment, office, industrial, gas stations, faith-based facilities and warehouse; all other property types ~~which individually~~ represent less than one percent of total loans ~~and leases receivable; other property types include mixed-use, apartment, office, industrial, faith-based facilities and warehouse.~~receivable.


⁽²⁾	Consumer loans include home equity lines of credit of ~~$14.7~~$7.6 million and ~~$17.7~~$8.2 million as of ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016,~~2019, respectively.

The CARES Act (the Coronavirus Aid, Relief, and Economic Security Act) was passed by Congress and signed into law by President Trump on March 27, 2020. Among other benefits, the CARES Act allows financial institutions to assist customers in dealing with financial hardship by (a) providing federal funding so that financial institutions can originate SBA loans to borrowers at a low interest rate under the Paycheck Protection Program (PPP loans) with eventual debt forgiveness should the borrower continue to meet certain criteria after the COVID-19 crisis has abated; and (b) allowing financial institutions to temporarily modify loan terms by deferring loan payments, loan fees, etc. on a short-term basis without considering them Troubled Debt Restructures.

At June 30, 2020, there were $301.8 million of PPP loans included in commercial and industrial loans in the table above. In addition, at June 30, 2020, there were $1.4 billion of loans modified under Section 4013 of the CARES Act.

Accrued interest on loans ~~and leases receivable~~ was ~~$9.5~~$20.3 million and ~~$8.2~~$10.0 million at ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016,~~2019, respectively. At ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016,~~2019, loans ~~receivable~~ of ~~$1.1~~$2.4 billion and ~~$1.0~~$1.4 billion, respectively, were pledged to secure ~~borrowing facilities~~advances from the FHLB.

Loans Held for Sale

The following is the activity for SBA loans held for sale for the three months ended ~~September~~June 30, ~~2017~~2020 and ~~2016:~~2019:

	Real Estate			Commercial and Industrial			Total
	(in thousands)
June 30, 2020
Balance at beginning of period	$	—		$	—		$	—
Originations and transfers		12,661			5,281			17,942
Balance at end of period	$	12,661		$	5,281		$	17,942

June 30, 2019
Balance at beginning of period	$	6,500		$	640		$	7,140
Originations		6,650			7,650			14,300
Sales		(10,474	)		(4,937	)		(15,411	)
Balance at end of period	$	2,676		$	3,353		$	6,029

SBA Loans Held for Sale
Real Estate Commercial and Industrial Total
(in thousands)
September 30, 2017
Balance at beginning of period $ 8,817
$ 2,132
$ 10,949
Originations 16,326
11,723
28,049
Sales (20,593 ) (11,926 ) (32,519 )
Principal payoffs and amortization (4 ) (6 ) (10 )
Balance at end of period $ 4,546
$ 1,923
$ 6,469

September 30, 2016
Balance at beginning of period $ 9,293
$ 3,540
$ 12,833
Originations 11,272
6,417
17,689
Sales (15,968 ) (8,122 ) (24,090 )
Principal payoffs and amortization (2 ) (5 ) (7 )
Balance at end of period $ 4,595
$ 1,830
$ 6,425

The following is the activity for SBA loans held for sale for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016:~~2019:

	Real Estate			Commercial and Industrial			Total
	(in thousands)
June 30, 2020
Balance at beginning of period	$	2,943		$	3,077		$	6,020
Originations and transfers		19,155			10,984			30,139
Sales		(9,432	)		(8,780	)		(18,212	)
Principal payoffs and amortization		(5	)		—			(5	)
Balance at end of period	$	12,661		$	5,281		$	17,942

June 30, 2019
Balance at beginning of period	$	5,194		$	4,196		$	9,390
Originations		15,713			11,810			27,523
Sales		(18,229	)		(12,641	)		(30,870	)
Principal payoffs and amortization		(2	)		(12	)		(14	)
Balance at end of period	$	2,676		$	3,353		$	6,029

SBA Loans Held for Sale
Real Estate Commercial and Industrial Total
(in thousands)
September 30, 2017
Balance at beginning of period $ 7,410
$ 1,906
$ 9,316
Originations 51,090
30,626
81,716
Sales (53,930 ) (30,586 ) (84,516 )
Principal payoffs and amortization (24 ) (23 ) (47 )
Balance at end of period $ 4,546
$ 1,923
$ 6,469

September 30, 2016
Balance at beginning of period $ 840
$ 2,034
$ 2,874
Originations 40,120
20,128
60,248
Sales (36,361 ) (20,304 ) (56,665 )
Principal payoffs and amortization (4 ) (28 ) (32 )
Balance at end of period $ 4,595
$ 1,830
$ 6,425

Allowance for ~~Loan and Lease~~Credit Losses

~~Activity in~~

The Company’s estimate of the allowance for ~~loan and lease~~credit losses ~~was as follows~~at June 30, 2020 reflects losses expected over the remaining contractual life of the assets. The contractual term does not consider extensions, renewals or modifications unless the Company has identified an expected troubled debt restructuring.

At June 30, 2020, the Company used the discounted cash flow (DCF) method to estimate allowances for credit losses for the ~~periods indicated:~~

As of and for the Three Months Ended
September 30, 2017 September 30, 2016
Non-PCI Loans and Leases PCI Loans Total Non-PCI Loans and Leases PCI Loans Total
(in thousands)
Allowance for loan and lease losses:
Balance at beginning of period $ 33,038
$ 720
$ 33,758
$ 34,259
$ 5,448
$ 39,707
Charge-offs (2,405 ) —
(2,405 ) (111 ) (5 ) (116 )
Recoveries on loans and leases previously charged off 871
—
871
831
—
831
Net loan and lease (charge-offs) recoveries (1,534 ) —
(1,534 ) 720
(5 ) 715
Loan and lease loss provision (income) 194
74
268
(1,540 ) 90
(1,450 )
Balance at end of period $ 31,698
$ 794
$ 32,492
$ 33,439
$ 5,533
$ 38,972

commercial and industrial loan portfolio and the consumer loan portfolio. For all loan pools utilizing the DCF method, the Company utilizes and forecasts the national unemployment rate as the primary loss driver. In addition, 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. As of and for the quarter ended June 30, 2020, the Company leveraged the economic projections from Moody’s Analytics Economic Scenarios and Forecasts to inform its loss driver forecasts over the four-quarter forecast period. For each of these loan segments, the Company applied an annualized historical Probability of Default/Loss Given Default (PD/LGD) using all available historical periods. The reason for the change from relying on the FRED economic data to Moody’s data was because Moody’s data is updated more frequently and timely than FOMC or FRED, and thus provides a better forecast for PD/LGD models. Since reasonable and supportable forecasts of economic conditions are imbedded directly to DCF model, qualitative adjustments are reduced but considered. Qualitative adjustments were based on the Company's judgment of company, market, industry or business specific data, changes in the underlying loan composition of specific portfolios.

Management determined that, due to model limitations, the regression model that supports the DCF calculation for the SBA and commercial property, construction, and residential real estate portfolios does not take into account the volatile nature of

As of and for the Nine Months Ended
September 30, 2017 September 30, 2016
Non-PCI Loans and Leases PCI Loans Total Non-PCI Loans and Leases PCI Loans Total
(in thousands)
Allowance for loan and lease losses:
Balance at beginning of period $ 31,458
$ 971
$ 32,429
$ 37,494
$ 5,441
$ 42,935
Charge-offs (3,256 ) —
(3,256 ) (1,410 ) (142 ) (1,552 )
Recoveries on loans and leases previously charged off 2,709
—
2,709
2,079
—
2,079
Net loan and lease (charge-offs) recoveries (547 ) —
(547 ) 669
(142 ) 527
Loan and lease loss provision (income) 787
(177 ) 610
(4,724 ) 234
(4,490 )
Balance at end of period $ 31,698
$ 794
$ 32,492
$ 33,439
$ 5,533
$ 38,972

COVID-19 on these portfolios, as well as the government assistance programs based on the maturities. As a result, at June 30, 2020, the Company utilized the Probability of Default/Loss Given Default (PD/LGD) method for the SBA and commercial property, construction, and residential real estate portfolios. The Company previously applied the DCF method to the real estate secured portfolios in the implementation of CECL at January 1, 2020 and through March 31, 2020 and determined that the change from DCF to PD/LGD was not material. See Note 1 – Organization and Basis of Presentation for a further description of the methodologies applied at the inception of CECL and during the three months ended March 31, 2020. The Company used historical periods that included an economic downturn to derive historical losses for better alignment in the estimation of expected losses. The Company leveraged Frye-Jacobs modeled LGD rates for loan segments with no historical losses. In addition, for those loans granted a loan modification due to COVID-19, the Company used historical periods under PD/LGD as of March 31, 2020 to reflect the moratorium on TDRs under Section 4013 of the CARES Act. The PD/LGD method incorporates a forecast into loss estimates using a qualitative adjustment. Qualitative loss factors were based on the Company's judgment of company, market, industry or business specific data, changes in the underlying loan composition of specific portfolios, trends relating to credit quality, delinquency, nonperforming and adversely rated loans, and reasonable and supportable forecasts of economic conditions.

Management believes the allowance for ~~loan and lease~~credit losses is appropriate to provide for ~~probable~~estimated losses inherent in the ~~loan and lease~~loans receivable portfolio. However, the allowance is an estimate that is inherently uncertain and depends on the outcome of future events. Management’s methodologies for determining such estimates ~~are based~~consists of measuring expected credit losses of financial assets on ~~previous loss experience; volume, growth~~a collective (pool) basis when similar risk characteristic(s) exist. The Bank segments the loans primarily by loan types, considering that the same type of loans share considerable similar risk characteristics, including the collateral type, loan purpose, contract term, amortization and ~~composition of the loan and lease portfolio; the value of collateral; and current economic conditions.~~payment structure. Our lending is concentrated generally in real estate loans, commercial loans and leases and SBA ~~and trade finance lending~~loans to small and middle market businesses primarily in California, Texas, Illinois and ~~Illinois.~~

New York. Further, our regulators, in reviewing our loans receivable portfolio may require us to increase our allowance for credit losses.

The following ~~tables detail~~table details the information on the allowance for ~~loan and lease~~credit losses by portfolio segment as of and for the three ~~and nine~~ months ended ~~September~~June 30, ~~2017~~2020 and ~~2016:~~2019:

	Real Estate			Commercial and Industrial			Leases Receivable			Consumer			Unallocated			Total
	(in thousands)
June 30, 2020
Balance at beginning of period	$	38,983		$	11,588		$	15,780		$	149		$	—			66,500
Less loans charged off		91			438			1,044			—			—			1,573
Recoveries on loans receivable previously charged off		(98	)		(60	)		(114	)		—			—			(272	)
Provision for credit losses		17,226			2,178			1,674			53			—			21,131
Ending balance	$	56,216		$	13,388		$	16,524		$	202		$	—		$	86,330
Individually evaluated for impairment	$	2,807		$	123		$	2,262		$	2		$	—		$	5,194
Collectively evaluated for impairment	$	53,409		$	13,265		$	14,262		$	200		$	—		$	81,136

Loans receivable	$	3,620,306		$	730,399		$	462,811		$	12,126		$	—		$	4,825,642
Individually evaluated for impairment	$	48,302		$	13,771		$	8,456		$	1,280		$	—		$	71,809
Collectively evaluated for impairment	$	3,572,004		$	716,628		$	454,355		$	10,846		$	—		$	4,753,833

June 30, 2019
Balance at beginning of period	$	18,306		$	8,711		$	5,580		$	89		$	210		$	32,896
Less loans charged off		—			562			974			—			—			1,536
Recoveries on loans receivable previously charged off		(1,133	)		(89	)		(105	)		—			—			(1,327	)
Provision for credit losses		14,565			997			1,357			(10	)		(210	)		16,699
Ending balance	$	34,004		$	9,235		$	6,068		$	79		$	—		$	49,386
Individually evaluated for impairment	$	14,724		$	3,072		$	662		$	1		$	—		$	18,459
Collectively evaluated for impairment	$	19,280		$	6,163		$	5,406		$	78		$	—		$	30,927

Loans receivable	$	3,671,463		$	409,502		$	460,519		$	14,318		$	—		$	4,555,802
Individually evaluated for impairment	$	39,885		$	21,706		$	3,233		$	1,351		$	—		$	66,175
Collectively evaluated for impairment	$	3,631,578		$	387,796		$	457,286		$	12,967		$	—		$	4,489,627

The following table details the information on the allowance for credit losses by portfolio segment as of and for the six months ended June 30, 2020 and 2019:

Real Estate
Commercial
and Industrial

Leases
Receivable
Consumer Unallocated Total
(In thousands)
As of and for the Three Months Ended September 30, 2017
Allowance for loan and lease losses on non-PCI loans and leases:
Beginning balance $ 22,762
$ 6,979
2,033
$ 87
$ 1,177
$ 33,038
Charge-offs (146 ) (1,976 ) (283 ) —
—
(2,405 )
Recoveries on loans and leases previously charged off 343
308
220
—
—
871
Loan and lease loss provision (income) (3,374 ) 1,183
2,867
(23 ) (459 ) 194
Ending balance $ 19,585
$ 6,494
$ 4,837
$ 64
$ 718
$ 31,698
Ending balance: individually evaluated for impairment $ 3,882
$ 531
$ 2,008
$ —
$ —
$ 6,421
Ending balance: collectively evaluated for impairment $ 15,703
$ 5,963
$ 2,829
$ 64
$ 718
$ 25,277

Non-PCI loans and leases receivable:
Ending balance $ 3,530,948
$ 364,405
$ 272,271
$ 19,027
$ —
$ 4,186,651
Ending balance: individually evaluated for impairment $ 19,466
$ 3,610
$ 3,378
$ 1,045
$ —
$ 27,499
Ending balance: collectively evaluated for impairment $ 3,511,482
$ 360,795
$ 268,893
$ 17,982
$ —
$ 4,159,152

Allowance for loan losses on PCI loans:
Beginning balance $ 671
$ 41
$ —
$ 8
$ —
$ 720
Charge-offs —
—
—
—
—
—
Loan loss provision (income) 81
—
—
(7 ) —
74
Ending balance $ 752
$ 41
$ —
$ 1
$ —
$ 794

PCI loans receivable:
Ending balance: acquired with deteriorated credit quality $ 8,610
$ 51
$ —
$ 43
$ —
$ 8,704

	Real Estate			Commercial and Industrial			Leases Receivable			Consumer			Unallocated			Total
	(in thousands)
June 30, 2020
Balance at beginning of period	$	36,355		$	16,206		$	8,767		$	80		$	—		$	61,408
Adjustment related to adoption of ASU 2016-13		13,972			(2,497	)		5,902			56			—			17,433
Adjusted balance as of January 1, 2020		50,327			13,709			14,669			136			—			78,841
Less loans charged off		14,233			12,589			2,224			—			—			29,046
Recoveries on loans receivable previously charged off		(156	)		(144	)		(188	)		—			—			(488	)
Provision for credit losses		19,966			12,124			3,891			66			—			36,047
Ending balance	$	56,216		$	13,388		$	16,524		$	202		$	—		$	86,330
Individually evaluated for impairment	$	2,807		$	123		$	2,262		$	2		$	—		$	5,194
Collectively evaluated for impairment	$	53,409		$	13,265		$	14,262		$	200		$	—		$	81,136

Loans receivable	$	3,620,306		$	730,399		$	462,811		$	12,126		$	—		$	4,825,642
Individually evaluated for impairment	$	48,302		$	13,771		$	8,456		$	1,280		$	—		$	71,809
Collectively evaluated for impairment	$	3,572,004		$	716,628		$	454,355		$	10,846		$	—		$	4,753,833

June 30, 2019
Balance at beginning of period	$	18,384		$	7,162		$	6,303		$	98		$	27		$	31,974
Less loans charged off		113			695			1,826			—			—			2,634
Recoveries on loans receivable previously charged off		(1,563	)		(471	)		(196	)		—			—			(2,230	)
Provision for credit losses		14,170			2,297			1,395			(19	)		(27	)		17,816
Ending balance	$	34,004		$	9,235		$	6,068		$	79		$	—		$	49,386
Individually evaluated for impairment	$	14,724		$	3,072		$	662		$	1		$	—		$	18,459
Collectively evaluated for impairment	$	19,280		$	6,163		$	5,406		$	78		$	—		$	30,927

Loans receivable	$	3,671,463		$	409,502		$	460,519		$	14,318		$	—		$	4,555,802
Individually evaluated for impairment	$	39,885		$	21,706		$	3,233		$	1,351		$	—		$	66,175
Collectively evaluated for impairment	$	3,631,578		$	387,796		$	457,286		$	12,967		$	—		$	4,489,627

The table below illustrates the allowance for credit losses by portfolio segment as a percentage of the recorded total allowance for credit losses and as a percentage of the aggregate recorded investment of loans receivable.

	June 30, 2020										December 31, 2019
	Allowance					Total					Allowance					Total
	Amount		Percentage			Loans		Percentage			Amount		Percentage			Loans		Percentage
	(in thousands)
Real estate loans:
Commercial property
Retail	$	7,341		8.5	%	$	808,157		16.7	%	$	4,911		8.0	%	$	869,302		18.9	%
Hospitality		11,984		13.9	%		882,812		18.3	%		6,686		10.9	%		922,288		20.0	%
Other		24,920		28.9	%		1,504,916		31.2	%		8,060		13.1	%		1,358,432		29.4	%
Total commercial property loans		44,245		51.3	%		3,195,885		66.2	%		19,657		32.0	%		3,150,022		68.3	%
Construction		9,331		10.8	%		70,357		1.5	%		15,003		24.4	%		76,455		1.7	%
Residential property		2,640		3.1	%		354,064		7.3	%		1,695		2.8	%		402,028		8.7	%
Total real estate loans		56,216		65.2	%		3,620,306		75.0	%		36,355		59.2	%		3,628,505		78.7	%
Commercial and industrial loans		13,387		15.5	%		730,399		15.1	%		16,206		26.4	%		484,093		10.5	%
Leases receivable		16,525		19.1	%		462,811		9.6	%		8,767		14.3	%		483,879		10.5	%
Consumer loans		202		0.2	%		12,126		0.3	%		80		0.1	%		13,670		0.3	%
Total	$	86,330		100.0	%	$	4,825,642		100.0	%	$	61,408		100.0	%	$	4,610,147		100.0	%

Real Estate
Commercial
and Industrial

Leases
Receivable
Consumer Unallocated Total
(In thousands)
As of and for the Three Months Ended September 30, 2016
Allowance for loan and lease losses on non-PCI loans and leases:
Beginning balance $ 28,116
$ 5,502
—
$ 242
$ 399
$ 34,259
Charge-offs (18 ) (93 ) —
—
—
(111 )
Recoveries on loans and leases previously charged off 337
494
—
—
—
831
Loan and lease loss provision (income) (479 ) (622 ) —
(40 ) (399 ) (1,540 )
Ending balance $ 27,956
$ 5,281
$ —
$ 202
$ —
$ 33,439
Ending balance: individually evaluated for impairment $ 2,723
$ 495
$ —
$ —
$ —
$ 3,218
Ending balance: collectively evaluated for impairment $ 25,233
$ 4,786
$ —
$ —
$ 202
$ —
$ 30,221

Non-PCI loans and leases receivable:
Ending balance $ 3,195,332
$ 319,521
$ —
$ 22,266
$ —
$ 3,537,119
Ending balance: individually evaluated for impairment $ 18,522
$ 4,705
$ —
$ 680
$ —
$ 23,907
Ending balance: collectively evaluated for impairment $ 3,176,810
$ 314,816
$ —
$ 21,586
$ —
$ 3,513,212

Allowance for loan losses on PCI loans:
Beginning balance $ 5,400
$ 41
$ —
$ 7
$ —
$ 5,448
Charge-offs (5 ) —
—
—
—
(5 )
Loan loss provision (income) 89
1
—
—
—
90
Ending balance $ 5,484
$ 42
$ —
$ 7
$ —
$ 5,533

PCI loans receivable:
Ending balance: acquired with deteriorated credit quality $ 15,355
$ 135
$ —
$ 50
$ —
$ 15,540

Real Estate
Commercial
and Industrial

Leases
Receivable
Consumer Unallocated Total
(In thousands)
As of and for the Nine Months Ended September 30, 2017
Allowance for loan and lease losses on non-PCI loans and leases:
Beginning balance $ 25,212
$ 5,582
307
$ 191
$ 166
$ 31,458
Charge-offs (289 ) (2,017 ) (950 ) —
—
(3,256 )
Recoveries on loans and leases previously charged off 1,434
1,021
239
15
—
2,709
Loan and lease loss provision (income) (6,772 ) 1,908
5,241
(142 ) 552
787
Ending balance $ 19,585
$ 6,494
$ 4,837
$ 64
$ 718
$ 31,698
Ending balance: individually evaluated for impairment $ 3,882
$ 531
$ 2,008
$ —
$ —
$ 6,421
Ending balance: collectively evaluated for impairment $ 15,703
$ 5,963
$ 2,829
$ 64
$ 718
$ 25,277

Non-PCI loans and leases receivable:
Ending balance $ 3,530,948
$ 364,405
$ 272,271
$ 19,027
$ —
$ 4,186,651
Ending balance: individually evaluated for impairment $ 19,466
$ 3,610
$ 3,378
$ 1,045
$ —
$ 27,499
Ending balance: collectively evaluated for impairment $ 3,511,482
$ 360,795
$ 268,893
$ 17,982
$ —
$ 4,159,152

Allowance for loan losses on PCI loans:
Beginning balance $ 922
$ 41
$ —
$ 8
$ —
$ 971
Charge-offs —
—
—
—
—
—
Loan loss provision (income) (170 ) —
—
(7 ) —
(177 )
Ending balance $ 752
$ 41
$ —
$ 1
$ —
$ 794

PCI loans receivable:
Ending balance: acquired with deteriorated credit quality $ 8,610
$ 51
$ —
$ 43
$ —
$ 8,704

Real Estate
Commercial
and Industrial

Leases
Receivable
Consumer Unallocated Total
(In thousands)
As of and for the Nine Months Ended
September 30, 2016
Allowance for loan and lease losses on non-PCI loans and leases:
Beginning balance $ 29,800
$ 7,081
—
$ 242
$ 371
$ 37,494
Charge-offs (709 ) (701 ) —
—
—
(1,410 )
Recoveries on loans and leases previously charged off 527
1,499
—
53
—
2,079
Loan and lease loss provision (income) (1,662 ) (2,598 ) —
(93 ) (371 ) (4,724 )
Ending balance $ 27,956
$ 5,281
$ —
$ 202
$ ��
$ 33,439
Ending balance: individually evaluated for impairment $ 2,723
$ 495
$ —
$ —
$ —
$ 3,218
Ending balance: collectively evaluated for impairment $ 25,233
$ 4,786
$ —
$ 202
$ —
$ 30,221

Non-PCI loans and leases receivable:
Ending balance $ 3,195,332
$ 319,521
$ —
$ 22,266
$ —
$ 3,537,119
Ending balance: individually evaluated for impairment $ 18,522
$ 4,705
$ —
$ 680
$ —
$ 23,907
Ending balance: collectively evaluated for impairment $ 3,176,810
$ 314,816
$ —
$ 21,586
$ —
$ 3,513,212

Allowance for loan losses on PCI loans:
Beginning balance $ 5,397
$ 42
$ —
$ 2
$ —
$ 5,441
Charge-offs (142 ) —
—
—
—
(142 )
Loan loss provision (income) 229
—
—
5
—
234
Ending balance $ 5,484
$ 42
$ —
$ 7
$ —
$ 5,533

PCI loans receivable:
Ending balance: acquired with deteriorated credit quality $ 15,355
$ 135
$ —
$ 50
$ —
$ 15,540

~~Loan~~

The following table represents the amortized cost basis of collateral-dependent loans by class of loans as of June 30, 2020, for which repayment is expected to be obtained through the sale of the underlying collateral and ~~Lease~~any collateral dependent loans that are still accruing but are considered impaired.

	Amortized Cost
June 30, 2020	(in thousands)
Real estate loans:
Commercial property	$	16,796
Construction		25,854
Residential property		2,761
Total real estate loans		45,411
Commercial and industrial loans		288
Consumer Loans		1,208
Total ⁽¹⁾	$	46,907

⁽¹⁾	All loans are secured by real estate, except for one commercial term loan secured by $264,000 in cash.

Loan Quality Indicators

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

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

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

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

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

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

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

loans.

The tables below provide a comparison as of ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016,~~2019 of the pass/pass-watch, special mention and classified loans, ~~and leases (excluding PCI loans),~~ disaggregated by loan ~~class, were as follows:~~segment:

	Pass/Pass- Watch		Special Mention		Classified		Total
	(in thousands)
June 30, 2020
Real estate loans:
Commercial property
Retail	$	800,437	$	1,182	$	6,538	$	808,157
Hospitality		879,131		—		3,681		882,812
Other		1,469,272		6,059		29,585		1,504,916
Total commercial property		3,148,840		7,241		39,804		3,195,885
Construction		44,503		—		25,854		70,357
Residential property		350,520		784		2,760		354,064
Total real estate loans		3,543,863		8,025		68,418		3,620,306
Commercial and industrial loans		702,443		12,423		15,533		730,399
Leases receivable		453,528		—		9,283		462,811
Consumer loans		10,752		686		688		12,126
Total loans receivable	$	4,710,586	$	21,134	$	93,922	$	4,825,642

December 31, 2019
Real estate loans:
Commercial property
Retail	$	859,739	$	2,835	$	6,728	$	869,302
Hospitality		915,834		939		5,515		922,288
Other		1,329,817		7,807		20,809		1,358,432
Total commercial property		3,105,390		11,580		33,052		3,150,022
Construction		36,956		1,613		37,886		76,455
Residential property		398,737		2,512		779		402,028
Total real estate loans		3,541,082		15,705		71,718		3,628,505
Commercial and industrial loans		458,184		10,222		15,687		484,093
Leases receivable		477,977		—		5,902		483,879
Consumer loans		12,247		705		718		13,670
Total loans receivable	$	4,489,491	$	26,632	$	94,025	$	4,610,147

Loans by Vintage Year and Risk Rating

	Term Loans
	Amortized Cost Basis by Origination Year ⁽¹⁾
	2020		2019		2018		2017		2016		Prior		Revolving Loans Amortized Cost Basis		Total
	(in thousands)
June 30, 2020
Commercial property
Risk Rating
Pass / Pass Watch	$	438,577	$	539,598	$	555,748	$	429,415	$	483,511	$	671,096	$	30,895	$	3,148,840
Special Mention		—		2,757		455		2,351		1,271		407		—		7,241
Classified		15,592		1,113		2,965		709		3,992		15,433		—		39,804
Total commercial property		454,169		543,468		559,168		432,475		488,774		686,936		30,895		3,195,885

Construction
Risk Rating
Pass / Pass Watch		18,025		5,633		—		—		20,845		—		—		44,503
Special Mention		—		—		—		—		—		—		—		—
Classified		—		12,808		13,046		—		—		—		—		25,854
Total construction		18,025		18,441		13,046		—		20,845		—		—		70,357

Residential property
Risk Rating
Pass / Pass Watch		274		954		40,468		149,532		100,367		58,925		—		350,520
Special Mention		—		—		—		—		—		784		—		784
Classified		—		—		—		1,890		754		116		—		2,760
Total residential property		274		954		40,468		151,422		101,121		59,825		—		354,064

Total real estate loans
Risk Rating
Pass / Pass Watch		456,876		546,185		596,216		578,947		604,723		730,021		30,895		3,543,863
Special Mention		—		2,757		455		2,351		1,271		1,191		—		8,025
Classified		15,592		13,921		16,011		2,599		4,746		15,549		—		68,418
Total real estate loans		472,468		562,863		612,682		583,897		610,740		746,761		30,895		3,620,306

Commercial and industrial loans:
Risk Rating
Pass / Pass Watch		369,101		124,141		60,742		21,613		5,586		14,952		106,308		702,443
Special Mention		4,281		800		503		78		1,733		1,585		3,443		12,423
Classified		8,969		3,894		568		148		140		1,614		200		15,533
Total commercial and industrial loans		382,351		128,835		61,813		21,839		7,459		18,151		109,951		730,399

Leases receivable:
Risk Rating
Pass / Pass Watch		67,994		203,034		119,213		44,150		18,292		845		—		453,528
Special Mention		—		—		—		—		—		—		—		—
Classified		11		3,554		2,807		1,191		1,299		421		—		9,283
Total leases receivable		68,005		206,588		122,020		45,341		19,591		1,266		—		462,811

Consumer loans:
Risk Rating
Pass / Pass Watch		121		25		15		86		7		2,610		7,888		10,752
Special Mention		—		—		—		—		—		686		—		686
Classified		—		—		661		27		—		—		—		688
Total commercial term loans		121		25		676		113		7		3,296		7,888		12,126

Total loans receivable:
Risk Rating
Pass / Pass Watch		894,092		873,385		776,186		644,796		628,608		748,428		145,091		4,710,586
Special Mention		4,281		3,557		958		2,429		3,004		3,462		3,443		21,134
Classified		24,572		21,369		20,047		3,965		6,185		17,584		200		93,922
Total loans receivable	$	922,945	$	898,311	$	797,191	$	651,190	$	637,797	$	769,474	$	148,734	$	4,825,642

Pass/Pass-Watch Special Mention Classified Total
(in thousands)
September 30, 2017
Real estate loans:
Commercial property
Retail $ 910,890
$ 1,577
$ 3,769
$ 916,236
Hospitality 718,244
4,979
8,339
731,562
Gas station 240,952
2,274
1,816
245,042
Other 1,131,423
8,840
3,913
1,144,176
Construction 64,263
—
—
64,263
Residential property 429,048
326
295
429,669
Total real estate loans 3,494,820
17,996
18,132
3,530,948
Commercial and industrial loans:
Commercial term 167,492
1,623
1,776
170,891
Commercial lines of credit 149,646
110
181
149,937
International loans 43,577
—
—
43,577
Total commercial and industrial loans 360,715
1,733
1,957
364,405
Leases receivable 268,893
—
3,378
272,271
Consumer loans 17,930
—
1,097
19,027
Total Non-PCI loans and leases $ 4,142,358
$ 19,729
$ 24,564
$ 4,186,651

December 31, 2016
Real estate loans:
Commercial property
Retail $ 851,147
$ 2,275
$ 4,207
$ 857,629
Hospitality 634,397
5,497
9,646
649,540
Gas station 252,123
1,911
6,153
260,187
Other 1,100,070
1,645
5,874
1,107,589
Construction 55,962
—
—
55,962
Residential property 337,227
—
564
337,791
Total real estate loans 3,230,926
11,328
26,444
3,268,698
Commercial and industrial loans:
Commercial term 133,811
2,060
2,161
138,032
Commercial lines of credit 135,699
464
68
136,231
International loans 23,406
2,415
—
25,821
Total commercial and industrial loans 292,916
4,939
2,229
300,084
Leases receivable 242,393
—
901
243,294
Consumer loans 22,139
—
691
22,830
Total Non-PCI loans and leases $ 3,788,374
$ 16,267
$ 30,265
$ 3,834,906

⁽¹⁾	Includes extensions, renewals, or modifications of credit contracts, which consist of a new credit decision.

Loans by Vintage Year and Payment Performance

	Term Loans
	Amortized Cost Basis by Origination Year ⁽¹⁾
	2020		2019		2018		2017		2016		Prior		Revolving Loans Amortized Cost Basis		Total
	(in thousands)
June 30, 2020
Real estate loans:
Commercial property
Payment performance
Performing	$	453,569	$	543,468	$	559,015	$	432,475	$	488,673	$	681,933	$	30,895	$	3,190,028
Nonperforming		600		—		153		—		101		5,003		—		5,857
Total commercial property		454,169		543,468		559,168		432,475		488,774		686,936		30,895		3,195,885

Construction
Payment performance
Performing		18,025		5,633		—		—		20,845		—		—	$	44,503
Nonperforming		—		12,808		13,046		—		—		—		—		25,854
Total construction		18,025		18,441		13,046		—		20,845		—		—		70,357

Residential property
Payment performance
Performing		274		954		40,468		149,532		100,366		59,677		—		351,271
Nonperforming		—		—		—		1,890		755		148		—		2,793
Total residential property		274		954		40,468		151,422		101,121		59,825		—		354,064

Total real estate loans
Payment performance
Performing		471,868		550,055		599,483		582,007		609,884		741,610		30,895		3,585,802
Nonperforming		600		12,808		13,199		1,890		856		5,151		—		34,504
Total real estate loans		472,468		562,863		612,682		583,897		610,740		746,761		30,895		3,620,306

Commercial and industrial loans:
Payment performance
Performing		373,382		124,940		61,377		21,691		7,459		18,015		109,751		716,615
Nonperforming		8,969		3,895		436		148		—		136		200		13,784
Total commercial and industrial loans		382,351		128,835		61,813		21,839		7,459		18,151		109,951		730,399

Leases receivable:
Payment performance
Performing		67,994		203,034		119,213		44,150		18,292		846		—		453,529
Nonperforming		11		3,554		2,807		1,191		1,299		420		—		9,282
Total leases receivable		68,005		206,588		122,020		45,341		19,591		1,266		—		462,811

Consumer loans:
Payment performance
Performing		121		25		15		86		7		3,296		7,888		11,438
Nonperforming		—		—		661		27		—		—		—		688
Total commercial term loans		121		25		676		113		7		3,296		7,888		12,126

Total loans receivable:
Payment performance
Performing		913,365		878,054		780,088		647,934		635,642		763,767		148,534		4,767,384
Nonperforming		9,580		20,257		17,103		3,256		2,155		5,707		200		58,258
Total loans receivable	$	922,945	$	898,311	$	797,191	$	651,190	$	637,797	$	769,474	$	148,734	$	4,825,642

⁽¹⁾	Includes extensions, renewals, or modifications of credit contracts, which consist of a new credit decision.

The following is an aging analysis of loans, ~~and leases (excluding PCI loans),~~ disaggregated by loan class, as of the dates indicated:

	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total		Accruing 90 Days or More Past Due
	(in thousands)
June 30, 2020
Real estate loans:
Commercial property
Retail	$	—	$	—	$	—	$	—	$	808,157	$	808,157	$	—
Hospitality		—		—		—		—		882,812		882,812		—
Other		—		—		1,645		1,645		1,503,271		1,504,916		—
Total commercial property loans		—		—		1,645		1,645		3,194,240		3,195,885		—
Construction		—		—		—		—		70,357		70,357		—
Residential property		2,682		—		2,645		5,327		348,737		354,064		—
Total real estate loans		2,682		—		4,290		6,972		3,613,334		3,620,306		—
Commercial and industrial loans		212		—		12,632		12,844		717,555		730,399		—
Leases receivable		3,684		5,095		5,113		13,893		448,918		462,811		—
Consumer loans		—		—		27		27		12,099		12,126		—
Total loans receivable	$	6,578	$	5,095	$	22,062	$	33,736	$	4,791,906	$	4,825,642	$	—

December 31, 2019
Real estate loans:
Commercial property
Retail	$	6	$	132	$	111	$	249	$	869,053	$	869,302	$	—
Hospitality		907		—		—		907		921,381		922,288		—
Other		51		—		38		89		1,358,344		1,358,432		—
Total commercial property loans		964		132		149		1,245		3,148,778		3,150,022		—
Construction		—		—		—		—		76,455		76,455		—
Residential property		540		1,627		309		2,477		399,551		402,028		—
Total real estate loans		1,504		1,759		458		3,721		3,624,784		3,628,505		—
Commercial and industrial loans		635		133		143		911		483,183		484,093		—
Leases receivable		5,358		2,138		3,493		10,990		472,889		483,879		—
Consumer loans		—		30		—		30		13,639		13,670		—
Total loans receivable	$	7,497	$	4,060	$	4,094	$	15,652	$	4,594,496	$	4,610,147	$	—

30-59 Days Past Due 60-89 Days Past Due 90 Days or More Past Due Total Past Due Current Total
(in thousands)
September 30, 2017
Real estate loans:
Commercial property
Retail $ 7
$ 1
$ 223
$ 231
$ 916,005
$ 916,236
Hospitality 1,869
—
975
2,844
728,718
731,562
Gas station 43
63
128
234
244,808
245,042
Other 1,043
280
739
2,062
1,142,114
1,144,176
Construction —
—
—
—
64,263
64,263
Residential property 500
—
326
826
428,843
�� 429,669
Total real estate loans 3,462
344
2,391
6,197
3,524,751
3,530,948
Commercial and industrial loans:
Commercial term 236
53
510
799
170,092
170,891
Commercial lines of credit —
—
181
181
149,756
149,937
International loans —
—
—
—
43,577
43,577
Total commercial and industrial loans 236
53
691
980
363,425
364,405
Leases receivable 3,042
476
2,033
5,551
266,720
272,271
Consumer loans —
—
—
—
19,027
19,027
Total Non-PCI loans and leases $ 6,740
$ 873
$ 5,115
$ 12,728
$ 4,173,923
$ 4,186,651

December 31, 2016
Real estate loans:
Commercial property
Retail $ 9
$ 137
$ 234
$ 380
$ 857,249
$ 857,629
Hospitality 1,037
46
600
1,683
647,857
649,540
Gas station 245
643
137
1,025
259,162
260,187
Other 432
79
1,100
1,611
1,105,978
1,107,589
Construction —
—
—
—
55,962
55,962
Residential property 730
89
423
1,242
336,549
337,791
Total real estate loans 2,453
994
2,494
5,941
3,262,757
3,268,698
Commercial and industrial loans:

Commercial term 484
42
111
637
137,395
138,032
Commercial lines of credit —
—
—
—
136,231
136,231
International loans 80
—
—
80
25,741
25,821
Total commercial and industrial loans 564
42
111
717
299,367
300,084
Leases receivable 2,090
1,043
385
3,518
239,776
243,294
Consumer loans 170
—
—
170
22,660
22,830
Total Non-PCI loans and leases $ 5,277
$ 2,079
$ 2,990
$ 10,346
$ 3,824,560
$ 3,834,906

~~There~~

As of June 30, 2020 and December 31, 2019, there were no0 loans ~~that were~~ 90 days or more past due and accruing ~~interest as of September 30, 2017 and 2016.~~

~~Impaired~~interest.

Individually Evaluated Loans ~~and Leases~~

Loans and leases are considered impaired when the Bank will be unable to collect all interest and principal payments per the contractual terms of the loan and lease agreement, unless the loan is well-collateralized and in the process of collection; or they are classified as Troubled Debt Restructurings (“TDRs”) because, due

Prior to the ~~financial difficulties~~adoption of the borrowers, we have granted concessions to the borrowers we would not otherwise consider; or when current information or events make it unlikely to collect in full according to the contractual terms of the loan or lease agreements; or there is a deterioration in the borrower’s financial condition that raises uncertainty as to timely collection of either principal or interest; or full payment of both interest and principal is in doubt according to the original contractual terms.

~~We evaluate loan and lease impairment in accordance with applicable GAAP. Impaired~~ASU 2016-13, impaired loans ~~and leases are~~were measured based on the present value of expected future cash flows discounted at the ~~receivable's~~loan's effective interest rate or, as a practical expedient, at the ~~receivable's~~loan's observable market price or the fair value of the collateral if the loan ~~or lease is~~was collateral dependent, less estimated costs to sell. If the ~~measure~~estimated value of the impaired loan ~~or lease is~~was less than the recorded investment in the loan, ~~or lease,~~we charged-off the deficiency ~~is either charged off~~ against the allowance for loan ~~and lease~~ losses or we ~~establish~~established a specific ~~allocation~~allowance in the allowance for loan ~~and lease~~ losses. Additionally, ~~loans and leases that are considered impaired are specifically~~we excluded from the quarterly migration analysis impaired loans when determining the amount of the allowance for loan ~~and lease~~ losses required for the period.

The allowance for collateral-dependent loans is determined by calculating the difference between the outstanding loan balance and the value of the collateral as determined by recent appraisals. The allowance for collateral-dependent loans varies from loan to loan based on the collateral coverage of the loan at the time of designation as nonperforming.

We ~~continue to monitor the collateral coverage, using recent appraisals, on these~~review, under ASU 2016-13, all loans on ~~a quarterly~~an individual basis ~~and adjust the allowance accordingly.~~

when they do not share similar risk characteristics with loan pools.

The following tables provide information on individually evaluated loans receivable as of June 30, 2020 and impaired loans ~~and leases (excluding PCI loans),~~receivable as of December 31, 2019 disaggregated by loan class, as of the dates indicated:

	Recorded Investment		Unpaid Principal Balance		With No Related Allowance Recorded		With an Allowance Recorded		Related Allowance
	(in thousands)
June 30, 2020
Real estate loans:
Commercial property
Retail	$	1,355	$	1,355	$	1,355	$	—	$	—
Other		18,299		19,725		17,679		620		20
Total commercial property loans		19,654		21,080		19,034		620		20
Construction		25,854		27,330		13,046		12,808		2,787
Residential property		2,794		2,770		2,761		33		—
Total real estate loans		48,302		51,180		34,841		13,461		2,807
Commercial and industrial loans		13,771		14,589		12,877		893		123
Leases receivable		8,456		8,521		1,797		6,660		2,262
Consumer loans		1,280		1,599		1,208		72		2
Total	$	71,809	$	75,889	$	50,723	$	21,086	$	5,194

December 31, 2019
Real estate loans:
Commercial property
Retail	$	434	$	459	$	111	$	323	$	19
Hospitality		244		400		22		223		24
Other		14,864		15,151		14,696		167		12
Total commercial property loans		15,542		16,010		14,829		713		55
Construction		27,201		28,000		—		27,201		13,973
Residential property		1,124		1,163		1,089		35		—
Total real estate loans		43,867		45,173		15,918		27,949		14,028
Commercial and industrial loans		13,700		14,090		143		13,557		8,885
Leases receivable		5,902		5,909		1,112		4,790		2,863
Consumer loans		1,297		1,588		1,220		77		1
Total	$	64,766	$	66,760	$	18,393	$	46,373	$	25,778

Recorded
Investment Unpaid
Principal
Balance With No
Related
Allowance
Recorded With an
Allowance
Recorded Related
Allowance
(in thousands)
September 30, 2017
Real estate loans:
Commercial property
Retail $ 1,475
$ 1,495
$ 124
$ 1,351
$ 61
Hospitality 6,288
7,233
2,165
4,123
3,057
Gas station 4,260
4,732
4,155
105
—
Other 4,777
5,170
1,881
2,897
764
Residential property 2,666
2,812
2,666
—
—
Total real estate loans 19,466
21,442
10,991
8,476
3,882
Commercial and industrial loans:
Commercial term 3,429
3,482
361
3,068
531
Commercial lines of credit 181
181
181
—
—
Total commercial and industrial loans 3,610
3,663
542
3,068
531
Leases receivable 3,378
3,482
658
2,720
2,008
Consumer loans 1,045
1,221
1,045
—
—
Total Non-PCI loans and leases $ 27,499
$ 29,808
$ 13,236
$ 14,264
$ 6,421

December 31, 2016
Real estate loans:
Commercial property
Retail $ 1,678
$ 1,684
$ 151
$ 1,527
$ 120
Hospitality 6,227
6,823
2,243
3,984
3,078
Gas station 4,984
5,092
4,984
—
—
Other 6,070
6,808
3,127
2,943
782
Residential property 2,798
2,851
2,798
—
—
Total real estate loans 21,757
23,258
13,303
8,454
3,980
Commercial and industrial loans:
Commercial term 4,106
4,171
1,229
2,877
347
Commercial lines of credit 68
68
68
—
—
Total commercial and industrial loans 4,174
4,239
1,297
2,877
347
Consumer loans 419
489
419
—
—
Total Non-PCI loans and leases $ 26,350
$ 27,986
$ 15,019
$ 11,331
$ 4,327

Nonaccrual Loans and Nonperforming Assets

The following table represents the amortized cost basis of loans on nonaccrual status and loans past due 90 days and still accruing as of June 30, 2020.

	June 30, 2020
	Nonaccrual Loans With No Allowance for Credit Losses		Nonaccrual Loans With Allowance for Credit Losses		Loans Past Due 90 Days Still Accruing		Total Nonperforming Loans
	(in thousands)
Real estate loans:
Retail	$	1,355	$	—	$	—	$	1,355
Other		3,883		620		—		4,503
Commercial property loans		5,238		620		—		5,858
Construction loans		13,046		12,808		—		25,854
Residential property loans		2,761		33		—		2,794
Total real estate loans		21,045		13,461		—		34,506
Commercial and industrial loans		12,878		907		—		13,785
Leases receivable		1,797		7,488		—		9,285
Consumer loans		688		—		—		688
Total	$	36,408	$	21,856	$	—	$	58,264

Three Months Ended Nine Months Ended
Average Recorded Investment
Interest
Income
Recognized
Average Recorded Investment
Interest
Income
Recognized
(in thousands)
September 30, 2017
Real estate loans:
Commercial property
Retail $ 1,487
$ 24
$ 1,551
$ 85
Hospitality 6,476
143
6,268
309
Gas station 4,603
85
4,764
297
Other 4,886
117
4,917
304
Residential property 2,794
26
2,797
87
Total real estate loans 20,246
395
20,297
1,082
Commercial and industrial loans:
Commercial term 3,495
54
3,739
165
Commercial lines of credit 1,060
—
853
16
Total commercial and industrial loans 4,555
54
4,592
181
Leases receivable 3,560
12
4,044
36
Consumer loans 1,201
15
917
21
Total Non-PCI loans and leases $ 29,562
$ 476
$ 29,850
$ 1,320

September 30, 2016
Real estate loans:
Commercial property
Retail $ 1,985
$ 31
$ 2,430
$ 117
Hospitality 3,222
66
4,429
367
Gas station 4,557
134
4,772
395
Other 6,541
138
7,438
533
Residential property 2,512
28
2,606
85
Total real estate loans 18,817
397
21,675
1,497
Commercial and industrial loans:
Commercial term 4,792
71
5,032
235
Commercial lines of credit 15
3
29
12
International loans —
—
420
—
Total commercial and industrial loans 4,807
74
5,481
247
Consumer loans 682
7
688
22
Total Non-PCI loans and leases $ 24,306
$ 478
$ 27,844
$ 1,766

The following is a summary of interest foregone on ~~impaired~~nonaccrual loans ~~and leases (excluding PCI loans)~~ for the periods indicated:

	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
	(in thousands)
Interest income that would have been recognized had impaired loans performed in accordance with their original terms	$	1,386		$	1,120		$	2,998		$	2,009
Less: Interest income recognized on impaired loans		(508	)		(696	)		(1,085	)		(1,378	)
Interest foregone on impaired loans	$	878		$	424		$	1,913		$	631

Three Months Ended
September 30, Nine Months Ended
September 30,
2017 2016 2017 2016
(in thousands)
Interest income that would have been recognized had impaired loans and leases performed in accordance with their original terms $ 696
$ 695
$ 1,934
$ 2,306
Less: Interest income recognized on impaired loans and leases (476 ) (478 ) (1,320 ) (1,766 )
Interest foregone on impaired loans and leases $ 220
$ 217
$ 614
$ 540

There were no commitments to lend additional funds to borrowers whose loans are included ~~in the table~~ above.

~~Nonaccrual Loans and Leases and Nonperforming Assets~~

Loans and leases are placed on nonaccrual status when, in the opinion of management, the full timely collection of principal or interest is in doubt. Generally, the accrual of interest is discontinued when principal or interest payments become more than 90 days past due, unless management believes the receivable is adequately collateralized and in the process of collection. However, in certain instances, we may place a particular loan or lease receivable on nonaccrual status earlier, depending upon the individual circumstances surrounding the delinquency. When a receivable 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 and leases may be restored to accrual status when principal and interest payments become current and full repayment is expected.

The following table details nonaccrual loans, ~~and leases (excluding PCI loans),~~ disaggregated by loan class, as of the dates indicated:

	June 30, 2020		December 31, 2019
	(in thousands)
Real estate loans:
Commercial property
Retail	$	1,355	$	277
Hospitality		—		225
Other		4,503		14,864
Total Commercial property loans		5,858		15,366
Construction		25,854		27,201
Residential property		2,794		1,124
Total real estate loans		34,506		43,691
Commercial and industrial loans		13,785		13,479
Leases receivable		9,285		5,902
Consumer loans		688		689
Total nonaccrual loans	$	58,264	$	63,761

September 30, 2017 December 31, 2016
(in thousands)
Real estate loans:
Commercial property
Retail $ 253
$ 404
Hospitality 5,368
5,266
Gas station 742
1,025
Other 2,097
2,033
Residential property 621
564
Total real estate loans 9,081
9,292
Commercial and industrial loans:
Commercial term 984
824
Commercial lines of credit 181
—
Total commercial and industrial loans 1,165
824
Leases receivable 3,378
901
Consumer loans 934
389
Total nonaccrual Non-PCI loans and leases $ 14,558
$ 11,406

The following table details nonperforming assets ~~(excluding PCI loans)~~ as of the dates indicated:

	June 30, 2020		December 31, 2019
	(in thousands)
Nonaccrual loans	$	58,264	$	63,761
Loans receivable 90 days or more past due and still accruing		—		—
Total nonperforming loans receivable		58,264		63,761
Other real estate owned ("OREO")		148		63
Total nonperforming assets	$	58,412	$	63,824

September 30, 2017 December 31, 2016
(in thousands)
Nonaccrual Non-PCI loans and leases $ 14,558
$ 11,406
Loans and leases 90 days or more past due and still accruing —
—
Total nonperforming Non-PCI loans and leases 14,558
11,406
OREO 1,946
7,484
Total nonperforming assets $ 16,504
$ 18,890

~~As of September 30, 2017,~~

OREO ~~consisted of six properties with a combined carrying value of $1.9 million, five of which with a combined carrying value of $1.8 million were acquired~~is included in prepaid expenses and other assets in the Central Bancorp Inc. ("CBI") acquisition on August 31, 2014, or were obtained as a result of PCI loan collateral foreclosures subsequent to the acquisition date. As of December 31, 2016, OREO consisted of 12 properties with a combined carrying value of $7.5 million, including $5.7 million OREO acquired in the CBI acquisition or obtained as a result of PCI loan collateral foreclosures subsequent to the acquisition date.

~~Troubled Debt Restructurings~~

~~The following table details TDRs (excluding PCI loans)~~accompanying Consolidated Balance Sheets as of ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016:~~

Nonaccrual TDRs Accrual TDRs
Deferral
of
Principal Deferral
of
Principal
and
Interest Reduction
of
Principal
and
Interest Extension
of
Maturity Total Deferral
of
Principal Deferral
of
Principal
and
Interest Reduction
of
Principal
and
Interest Extension
of
Maturity Total
(in thousands)
September 30, 2017
Real estate loans $ 1,959
$ 3,836
$ 67
$ —
$ 5,862
$ 3,389
$ —
$ 1,399
$ 1,245
$ 6,033
Commercial and industrial loans 132
186
48
109
475
10
184
1,667
485
2,346
Consumer loans 820
—
—
—
820
—
—
111
—
111
Total Non-PCI TDR loans $ 2,911
$ 4,022
$ 115
$ 109
$ 7,157
$ 3,399
$ 184
$ 3,177
$ 1,730
$ 8,490

December 31, 2016
Real estate loans $ 1,679
$ 4,373
$ 143
$ —
$ 6,195
$ 4,795
$ —
$ 1,514
$ 1,633
$ 7,942
Commercial and industrial loans 149
71
69
419
708
22
198
2,135
730
3,085
Consumer loans —
—
—
—
—
—
—
119
—
119
Total Non-PCI TDR loans $ 1,828
$ 4,444
$ 212
$ 419
$ 6,903
$ 4,817
$ 198
$ 3,768
$ 2,363
$ 11,146

2019.

Troubled Debt Restructurings

As of ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016,~~2019, total TDRs were ~~$15.6~~$31.6 million and ~~$18.0~~$56.3 million, respectively. A debt restructuring is considered a TDR if we grant a concession that we would not have otherwise considered, to the borrower for economic or legal reasons related to the borrower’s financial difficulties. Loans are considered to be TDRs if they were restructured, ~~through payment structure modifications~~ such as reducing the amount of principal and interest due monthly, and/or allowing for interest only monthly payments for three months or ~~more.~~ more or other payment structure modifications.

The following table details TDRs as of June 30, 2020 and December 31, 2019:

	Nonaccrual TDRs										Accrual TDRs
	Deferral of Principal		Deferral of Principal and/or Interest		Reduction of Principal and/or Interest		Extension of Maturity		Total		Deferral of Principal		Deferral of Principal and/or Interest		Reduction of Principal and/or Interest		Extension of Maturity		Total
June 30, 2020
Real estate loans	$	—	$	1,483	$	13,548	$	618	$	15,649	$	—	$	—	$	—	$	13,796	$	13,796
Commercial and industrial loans		—		181		247		296		724		—		—		51		85		136
Consumer loans		661		—		—		—		661		521		—		71		—		592
Total	$	661	$	1,664	$	13,795	$	914	$	17,034	$	521	$	—	$	122	$	13,881	$	14,524

December 31, 2019
Real estate loans	$	—	$	132	$	27,740	$	13,926	$	41,798	$	—	$	—	$	—	$	—	$	—
Commercial and industrial loans		—		153		12,527		312		12,991		—		36		71		114		222
Consumer loans		689		—		—		—		689		531		—		77		—		608
Total	$	689	$	285	$	40,266	$	14,238	$	55,478	$	531	$	36	$	148	$	114	$	830

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

	Three Months ended						Twelve Months ended
	June 30, 2020						December 31, 2019
	Number of Loans		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of Loans		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
	(in thousands except for number of loans)
Real estate loans		2	$	2,002	$	1,973		5	$	40,743	$	41,798
Commercial and industrial loans		—		—		—		2		12,779		12,562
Consumer loans		—		—		—		1		549		531
Total		2	$	2,002	$	1,973		8	$	54,071	$	54,891

	Six Months ended						Twelve Months ended
	June 30, 2020						December 31, 2019
	Number of Loans		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of Loans		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
	(in thousands except for number of loans)
Real estate loans		2	$	2,002	$	1,973		5	$	40,743	$	41,798
Commercial and industrial loans		—		—		—		2		12,779		12,562
Consumer loans		—		—		—		1		549		531
Total		2	$	2,002	$	1,973		8	$	54,071	$	54,891

All TDRs are ~~impaired and are~~ individually ~~evaluated for specific impairment~~analyzed using one of these three criteria: (1) the present value of expected future cash flows discounted at the loan’s effective interest rate; (2) the loan’s observable market price; or (3) the fair value of the collateral if the loan is collateral dependent. At ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016, $2.2~~2019, TDRs were subjected to specific impairment analysis. We determined impairment allowances of $0.1 million and ~~$3.4~~$22.7 million, respectively, ~~of allowance relating~~related to these loans and such allowances were included in the allowance for credit losses.

A loan ~~and lease losses.~~

~~For the restructured loans on accrual status, we determined that, based on the financial capabilities of the borrowers at the time of the loan restructuring and the borrowers’ past performance~~is considered to be in ~~the~~ payment ~~of debt service under the previous loan terms, performance and collection under the revised terms are probable.~~

~~During the three and nine month periods ended September~~default once it is 30 2016, there was one commercial term loan with recorded investment of $53,000 that defaulted subsequent to the modifications occurring within the previous 12 months.There were no such defaults during the three and nine months periods ended September 30, 2017.

~~Purchased Credit Impaired Loans~~

~~The following table summarizes the changes in carrying value of PCI loans during the nine months ended September 30, 2017 and 2016:~~

Carrying Amount Accretable Yield
(in thousands)
Balance at January 1, 2017 $ 8,892
$ (5,677 )
Accretion 501
501
Payments received (1,770 ) —
Disposal/transfer to OREO 110
—
Change in expected cash flows, net —
(306 )
Loan loss (provision) income 177
—
Balance at September 30, 2017 $ 7,910
$ (5,482 )

Balance at January 1, 2016 $ 14,573
$ (5,944 )
Accretion 933
933
Payments received (6,408 ) —
Disposal/transfer to OREO 1,143
—
Change in expected cash flows, net —
(900 )
Loan loss (provision) income (234 ) —
Balance at September 30, 2016 $ 10,007
$ (5,911 )

~~As of September 30, 2017 and December 31, 2016, pass/pass-watch, special mention and classified PCI loans, disaggregated by loan class, were as follows:~~

Pass/Pass-Watch Special Mention Classified Total Allowance Total
(in thousands)
September 30, 2017
Real estate loans $ 1,257
$ 357
$ 6,996
$ 8,610
$ 752
$ 7,858
Commercial and industrial loans —
—
51
51
41
10
Consumer loans —
—
43
43
1
42
Total PCI loans $ 1,257
$ 357
$ 7,090
$ 8,704
$ 794
$ 7,910

December 31, 2016
Real estate loans $ 1,153
$ 1,180
$ 7,344
$ 9,677
$ 922
$ 8,755
Commercial and industrial loans —
—
136
136
41
95
Consumer loans —
—
50
50
8
42
Total PCI loans $ 1,153
$ 1,180
$ 7,530
$ 9,863
$ 971
$ 8,892

Loans accounted for as PCI are generally considered accruing and performing loans as the accretable discount is accreted to interest income over the estimated life of the loan when cash flows are reasonably estimable. Accordingly, PCI loans that aredays contractually past due ~~are still considered to be accruing~~under the modified terms. One loan for $33,000 defaulted during the three- and ~~performing loans. If~~six-months ended June 30, 2020 following modification. During the timing and amount of future cash flows is not reasonably estimable, the loans are classified as nonaccrual loans and interest income is not recognized until the timing and amount of future cash flows can be reasonably estimated. As of September 30, 2017 andyear ended December 31, ~~2016, we had no PCI loans on nonaccrual status.~~

~~The~~2019, one loan for $132,000 defaulted within the twelve-month period following ~~table presents a summary of the borrowers' underlying payment status of PCI loans as of the dates indicated:~~

30-59 Days Past Due 60-89 Days Past Due 90 Days or More Past Due Total Past Due Current Total Allowance Amount Total
(in thousands)
September 30, 2017
Real estate loans $ 689
$ —
$ 579
$ 1,268
$ 7,342
$ 8,610
$ 752
$ 7,858
Commercial and industrial loans —
—
5
5
46
51
41
10
Consumer loans —
—
—
—
43
43
1
42
Total PCI loans $ 689
$ —
$ 584
$ 1,273
$ 7,431
$ 8,704
$ 794
$ 7,910

December 31, 2016
Real estate loans $ 975
$ —
$ 361
$ 1,336
$ 8,341
$ 9,677
$ 922
$ 8,755
Commercial and industrial loans —
—
6
6
130
136
41
95
Consumer loans —
—
50
50
—
50
8
42
Total PCI loans $ 975
$ —
$ 417
$ 1,392
$ 8,471
$ 9,863
$ 971
$ 8,892

~~Below is a summary of PCI loans as of September 30, 2017 and December 31, 2016:~~

Pooled PCI Loans Non-pooled PCI Loans
Number of Loans Number of Pools
Carrying Amount
(in thousands)
Percentage of Total Number of Loans
Carrying Amount
(in thousands)
Percentage of Total
Total PCI Loans
(in thousands)
September 30, 2017
Real estate loans:
Commercial property 41
6
$ 6,788
88.7 % 1
$ 864
11.3 % $ 7,652
Residential property —
—
—
— % 1
958
100.0 % $ 958
Total real estate loans 41
6
6,788
78.8 % 2
1,822
21.2 % 8,610
Commercial and industrial loans 3
3
51
100.0 % —
—
— % 51
Consumer loans 1
1
4
9.3 % 1
39
90.4 % 43
Total acquired loans 45
10
6,843
78.6 % 3
1,861
21.4 % 8,704
Allowance for loan losses (378 ) (416 ) (794 )
Total carrying amount $ 6,465
$ 1,445
$ 7,910

Pooled PCI Loans Non-pooled PCI Loans
Number of Loans Number of Pools
Carrying Amount
(in thousands)
Percentage of Total Number of Loans
Carrying Amount
(in thousands)
Percentage of Total
Total PCI Loans
(in thousands)
December 31, 2016
Real estate loans:
Commercial property 45
6
$ 7,780
89.4 % 1
$ 921
10.6 % $ 8,701
Residential property —
—
—
— % 2
976
100.0 % $ 976
Total real estate loans 45
6
7,780
80.4 % 3
1,897
19.6 % 9,677
Commercial and industrial loans 6
3
136
100.0 % —
—
— % 136
Consumer loans 1
1
50
100.0 % —
—
— % 50
Total acquired loans 52
10
7,966
80.8 % 3
1,897
19.2 % 9,863
Allowance for loan losses (617 ) (354 ) (971 )
Total carrying amount $ 7,349
$ 1,543
$ 8,892

modification.

Note 4 — Servicing Assets ~~and Liabilities~~

The changes in servicing assets ~~and liabilities~~ for the ~~nine~~three months ended ~~September~~June 30, ~~2017~~2020 and ~~2016~~2019 were as follows:

	Three Months Ended June 30,
	2020			2019
	(in thousands)
Servicing assets:
Balance at beginning of period	$	6,727		$	7,978
Addition related to sale of SBA loans		—			344
Amortization		(540	)		(755	)
Balance at end of period	$	6,187		$	7,567

The changes in servicing assets for the six months ended June 30, 2020 and 2019 were as follows:

	Six Months Ended June 30,
	2020			2019
	(in thousands)
Servicing assets:
Balance at beginning of period	$	6,956		$	8,520
Addition related to sale of SBA loans		354			659
Amortization		(1,123	)		(1,612	)
Balance at end of period	$	6,187		$	7,567

2017 2016
(in thousands)
Servicing assets:
Balance at beginning of period $ 10,564
$ 11,744
Addition related to sale of SBA loans 1,949
1,452
Amortization (2,415 ) (2,363 )
Reversal of allowance 330
—
Balance at end of period $ 10,428
$ 10,833

Servicing liabilities:
Balance at beginning of period $ 3,143
$ 4,784
Amortization (706 ) (1,358 )
Reversal of allowance (67 ) —
Balance at end of period $ 2,370
$ 3,426

At ~~September~~June 30, ~~2017~~2020 and ~~2016,~~December 31, 2019, we serviced loans sold to unaffiliated parties in the amounts of ~~$482.0~~$412.3 million and ~~$485.1~~$422.3 million, respectively. These represented loans that have been sold for which the Bank continues to provide servicing. These loans are maintained ~~off balance~~off-balance sheet and are not included in the loans receivable balance. All of the loans serviced were SBA loans.

The Company recorded servicing fee income of $1.2 million ~~for each of the three-month periods ended September 30, 2017~~ and ~~2016, and $3.5 million and $3.6~~$1.1 million for the ~~nine~~three months ended ~~September~~June 30, ~~2017~~2020 and ~~2016,~~2019, respectively. The Company recorded servicing fee income of $2.3 million and $2.2 million for the six months ended June 30, 2020 and 2019, respectively. Servicing fee income, net of the amortization of servicing assets, ~~and liabilities,~~ is included in other operating income in the consolidated statements of income. ~~Net amortization~~Amortization expense was ~~$624,000~~$433,000 and ~~$598,000~~$573,000 for the three months ended ~~September~~June 30, ~~2017~~2020 and ~~2016,~~2019, respectively and ~~$1.7 million~~$969,000 and ~~$1.0~~$1.3 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016,~~2019, respectively.

Note 5 — Income Taxes

The Company’s income tax expense was ~~$9.9~~$4.5 million and ~~$8.2~~$1.2 million ~~for the three months ended September 30, 2017 and 2016, respectively. The~~representing an effective income tax rate ~~was 39.9~~of 32.7 percent and ~~38.6~~31.5 percent for the three months ended ~~September~~June 30, ~~2017~~2020 and ~~2016,~~2019, respectively. The Company’s income tax expense was ~~$27.6~~$5.5 million and ~~$23.3~~$7.5 million ~~for the nine months ended September 30, 2017 and 2016, respectively. The~~representing an effective income tax rate ~~was 39.0~~of 32.3 percent and ~~35.6~~30.2 percent for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016,~~2019, respectively. ~~Income tax expense for the nine months ended September 30, 2016 includes a $1.8 million tax benefit recorded as a result of finalization of the Company's 2014 amended income tax returns.~~

Management concluded that as of ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016,~~2019, a valuation allowance of ~~$1.0~~$4.9 million was appropriate against certain state net operating ~~losses.~~

losses and certain tax credits. For all other deferred tax assets, management believes it was more likely than not that these deferred tax assets will be realized principally through future taxable income and reversal of existing taxable temporary differences. The net deferred tax asset was $43.3 million and $36.8 million and the net current tax liability was $8.2 million and $0 as of June 30, 2020 and December 31, 2019, respectively.

The Company is subject to examination by ~~various~~ federal and state tax authorities for ~~the~~certain years ended December 31, ~~2008~~2015 through ~~2016. As of September 30, 2017, the Company was subject to audit or examination by Internal Revenue Service for the 2014 tax year and California Franchise Tax Board for the 2008 and 2009 tax years.~~2019. Management does not anticipate any material changes in our consolidated financial statements which may arise as a result of these audits or examinations.

During the quarter ended June 30, 2020, there was 0 material change to the Company’s uncertain tax positions. The Company does not expect its unrecognized tax positions to change significantly over the next twelve months.

The Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, was signed into law on March 27, 2020. The tax package is broad, with provisions for tax payment relief, significant business incentives, and certain corrections to the 2017 Tax Cuts and Jobs Act, or the Tax Act. The tax relief measures for entities includes a five-year net operating loss carry back, increases in interest expense deduction limits, accelerates alternative minimum tax credit refunds, provides payroll tax relief, and provides a technical correction to allow accelerated deductions for qualified improvement property. ASC Topic 740, Income Taxes, requires the effect of changes in tax law be recognized in the period in which new legislation is enacted. The enactment of the CARES Act is not material to the Company’s income taxes for the three and six months ended June 30, 2020, and is not expected to have a material impact on its financial statements for the full year ended December 31, 2020.

Note 6 — ~~Debt~~Goodwill and other intangibles

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

		June 30, 2020							December 31, 2019
	Amortization Period	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
		(in thousands)
Core deposit intangible	10 years	$	2,213	$	(1,657	)	$	556	$	2,213	$	(1,567	)	$	646
Third-party originators intangible	7 years		483		(328	)		155		483		(287	)		196
Goodwill	N/A		11,031		—			11,031		11,031		—			11,031
Total intangible assets		$	13,727	$	(1,985	)	$	11,742	$	13,727	$	(1,854	)	$	11,873

Intangible assets amortization expense for the three-month periods ended June 30, 2020 and 2019 was $65,000 and $65,000, respectively, and for the six-month periods ended June 30, 2020 and 2019 was $131,000 and $155,000, respectively. During the first quarter of 2020, the Company performed an impairment analysis on its goodwill and other intangible assets and determined there was 0 impairment.

Note 7 — Deposits

Time deposits at or exceeding the FDIC insurance limit of $250,000 at June 30, 2020 and December 31, 2019 were $308.5 million and $299.9 million, respectively.

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

At June 30, 2020	Time Deposits of $250,000 or More		Other Time Deposits		Total
	(in thousands)
2020	$	213,200	$	549,973	$	763,174
2021		94,456		514,553		609,009
2022		—		59,134		59,134
2023		796		1,841		2,636
2024 and thereafter		—		1,062		1,062
Total	$	308,453	$	1,126,562	$	1,435,015

At December 31, 2019
2020	$	291,940	$	1,098,666	$	1,390,606
2021		7,186		130,331		137,517
2022		—		25,155		25,155
2023		789		1,185		1,974
2024 and thereafter		—		669		669
Total	$	299,914	$	1,256,005	$	1,555,919

Accrued interest payable on deposits was $8.6 million and $11.2 million at June 30, 2020 and December 31, 2019, respectively. Total deposits reclassified to loans due to overdrafts at June 30, 2020 and December 31, 2019 were $442,000 and $1.5 million, respectively.

Note 8 — Borrowings

At June 30, 2020, the Bank had 0 overnight advances and $150.0 million in term advances outstanding with the FHLB ~~Borrowings~~

with a weighted average interest rate of 1.63 percent. At December 31, 2019, the Bank had $15.0 million in overnight advances with a weighted average interest rate of 1.66 percent and $75.0 million of term advances with the FHLB with a weighted average rate of 1.71 percent. The Bank had ~~$110.0~~$101.8 million ~~and $315.0 million in~~of 0.35 percent advances ~~(borrowings) from~~with the ~~FHLB~~FRB under the Paycheck Protection Program Lending Facility. The advances were repaid subsequent to the end of the second quarter. There were 0 outstanding borrowings with the FRB as of ~~September 30, 2017 and~~ December 31, ~~2016, respectively. The FHLB advances were all overnight~~2019. Interest expense on borrowings ~~at September 30, 2017 and December 31, 2016. For~~for the three months ended ~~September~~June 30, ~~2017 and 2016,~~2020 was $760,000. There was 0 interest expense on ~~FHLB advances was $198,000 and $179,000, respectively, and~~borrowings for the ~~weighted-average interest rate was 1.16 percent and 0.47 percent, respectively. For~~three-month period ended June 30, 2019. Interest expense on borrowings for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016, interest expense on~~2019 was $1.3 million and $72,000, respectively.

	June 30, 2020					December 31, 2019
	Outstanding Balance		Weighted Average Rate			Outstanding Balance		Weighted Average Rate
	(dollars in thousands)
Overnight advances	$	—		0.00	%	$	15,000		1.66	%
Advances due with 12 months		50,000		1.66	%		25,000		1.75	%
Advances due over 12 months through 24 months		50,000		1.59	%		25,000		1.66	%
Advances due over 24 months through 36 months		50,000		1.63	%		25,000		1.72	%
Outstanding advances	$	150,000		1.63	%	$	90,000		1.70	%

The following is financial data pertaining to FHLB ~~advances was $714,000 and $673,000, respectively, and the weighted-average interest rate was 0.80 percent and 0.44 percent, respectively.~~advances:

	June 30, 2020			December 31, 2019
	(dollars in thousands)
Weighted-average interest rate at end of period		1.63	%		1.70	%
Weighted-average interest rate during the period		1.39	%		1.89	%
Average balance of FHLB advances	$	163,269		$	40,374
Maximum amount outstanding at any month-end	$	300,000		$	285,000

The Bank maintains a secured credit facility with the FHLB, allowing the Bank to borrow on an overnight and term basis. The Bank had ~~$1.1~~$2.4 billion and $1.4 billion of loans pledged as collateral with the FHLB ~~which provides $808.9 million in~~as of June 30, 2020 and December 31, 2019, respectively. Remaining available borrowing capacity was $1.5 billion, subject to the FHLB statutory lending limit of ~~which $698.9~~$1.4 billion, and $878.4 million ~~remained available~~ at ~~September~~June 30, ~~2017.~~

2020 and December 31, 2019, respectively.

The Bank also ~~has~~had securities with market values of ~~$9.3~~$50.0 million and $30.2 million at June 30, 2020 and December 31, 2019, respectively, pledged with the ~~FRB,~~Federal Reserve Bank (“FRB”), which ~~provides $9.2~~provided $47.9 million and $29.6 million in available borrowing capacity through the Fed Discount ~~Window. There were no outstanding borrowings with the FRB~~Window as of ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016.~~

~~Subordinated Debentures~~

The Company issued Fixed-to-Floating Subordinated Notes (“Notes”) of $100 million on March 21, 2017, with a final maturity on March 30, 2027. The Notes will bear interest at an initial fixed rate of 5.45% per annum, payable semi-monthly on March 30 and September 30 of each year, commencing September 30, 2017. From and including March 30, 2022 and thereafter, the Notes will bear interest at a floating rate equal to the then current three-month LIBOR, as calculated on each applicable date of determination, plus 3.315% payable quarterly. If the then current three-month LIBOR is less than zero, three-month LIBOR will be deemed to be zero. Debt issuance cost was $2.3 million, which is being amortized through the Note's maturity date. At September 30, 2017, the balance of Notes included in the Company's consolidated balance sheet, net of debt issuance cost, was $97.9 million. The amortization of debt issuance cost was $43,000 and $90,000 for the three and nine months ended September 30, 2017,2019, respectively.

The Company assumed Junior Subordinated Deferrable Interest Debentures (“Subordinated Debentures”) as a result of the acquisition of CBI with an unpaid principal balance of $26.8 million and an estimated fair value of $18.5 million. The $8.3 million discount is being amortized to interest expense through the debentures' maturity date of March 15, 2036. CBI formed a trust in 2005 and issued $26.0 million of Trust Preferred Securities (“TPS”) at 6.26 percent fixed rate for the first five years and a variable rate at the 3 month LIBOR plus 140 basis points thereafter and invested the proceeds in the Subordinated Debentures. The Company may redeem the Subordinated Debentures at an earlier date if certain conditions are met. The TPS will be subject to mandatory redemption if the Subordinated Debentures are repaid by the Company. Interest is payable quarterly, and the Company has the option to defer interest payments on the Subordinated Debentures from time to time for a period not to exceed five consecutive years. At September 30, 2017 and December 31, 2016, the balance of Subordinated Debentures included in the Company's consolidated balance sheets, net of discount of $7.6 million and $7.8 million, was $19.2 million and $19.0 million, respectively. The amortization of discount was $85,000 and $67,000 for the three months ended September 30, 2017, and 2016, respectively, and $243,000 and $185,000 for the nine months ended September 30, 2017, and 2016, respectively.

Note 79 — Earnings Per Share

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

For diluted EPS, weighted-average number of common shares ~~included~~includes the impact of unvested restricted stock under the treasury method.

Unvested restricted stock containing rights to non-forfeitable dividends are considered participating securities prior to vesting and have been included in the earnings allocation in computing basic and diluted EPS under the two-class method. Basic EPS is computed by dividing net income, net of income allocated to participating securities, by the weighted-average number of common shares. For diluted EPS, weighted-average number of common shares include the diluted effect of stock options.

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Basic EPS
Net income	$	9,175	$	2,656	$	11,526	$	17,328
Less: income allocated to unvested restricted stock		55		16		80		99
Income allocated to common shares	$	9,120	$	2,640	$	11,446	$	17,229
Weighted-average shares for basic EPS		30,426,967		30,685,301		30,447,984		30,688,698
Basic EPS ⁽¹⁾	$	0.30	$	0.09	$	0.38	$	0.56

Effect of dilutive stock options		—		42,380		2,247		40,322

Income allocated to common shares	$	9,120	$	2,640	$	11,446	$	17,229
Weighted-average shares for diluted EPS		30,426,967		30,727,681		30,450,231		30,729,020
Diluted EPS ⁽¹⁾	$	0.30	$	0.09	$	0.38	$	0.56

⁽¹⁾	Per share amounts may not be able to be recalculated using net income and weighted-average shares presented above due torounding.

Three Months Ended
September 30, Nine Months Ended
September 30,
2017 2016 2017 2016
(in thousands, except for share and per share data)
Basic EPS:
Net income $ 14,923
$ 13,121
$ 43,162
$ 42,073
Less: income allocated to unvested restricted shares 93
81
270
258
Income allocated to common shares $ 14,830
$ 13,040
$ 42,892
$ 41,815
Weighted-average shares for basic EPS 32,095,286
31,912,470
32,058,705
31,880,466
Basic EPS $ 0.46
$ 0.41
$ 1.34
$ 1.31

Effect of dilutive securities - options and unvested restricted stock 160,528
175,763
171,614
150,829

Diluted EPS:

Income allocated to common shares $ 14,830
$ 13,040
$ 42,892
$ 41,815
Weighted-average shares for diluted EPS 32,255,814
32,088,233
32,230,319
32,031,295
Diluted EPS $ 0.46
$ 0.41
$ 1.33
$ 1.31

There were no0 anti-dilutive stock options ~~with an anti-dilutive effect~~outstanding for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017. For~~2020 or 2019.

Note 10 — Regulatory Matters

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

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

At June 30, ~~2016, 12,034 and 74,389 stock options, respectively, were not included in~~2020, the ~~computation of diluted EPS because their effect was anti-dilutive.~~

~~Note 8 – Accumulated Other Comprehensive Income~~

~~Activity in accumulated other comprehensive income~~Bank’s capital ratios exceeded the minimum requirements for the ~~three months ended September 30, 2017 and 2016 was as follows:~~

Unrealized Gains
and Losses on
Available for Sale
Securities
Tax Benefit (Expense) Total
(in thousands)
September 30, 2017
Balance at beginning of period $ 235
$ (98 ) $ 137
Other comprehensive income before reclassification 529
(109 ) 420
Reclassification from accumulated other comprehensive income (267 ) —
(267 )
Period change 262
(109 ) 153
Balance at end of period $ 497
$ (207 ) $ 290

September 30, 2016
Balance at beginning of period $ 13,816
$ (4,695 ) $ 9,121
Other comprehensive income before reclassification (2,629 ) 1,109
(1,520 )
Reclassification from accumulated other comprehensive income (46 ) —
(46 )
Period change (2,675 ) 1,109
(1,566 )
Balance at end of period $ 11,141
$ (3,586 ) $ 7,555

~~For the three months ended September 30, 2017, there was a $267,000 reclassification from accumulated other comprehensive income~~Bank to gains in earnings resulting from the sale of available-for-sale securities. The $267,000 reclassification adjustment out of accumulated other comprehensive income was included in net gain on sales of securities under noninterest income. Net unrealized gains of $227,000 related to these sold securities had previously been recorded in accumulated other comprehensive income as of the beginning of the period.

For the three months ended September 30, 2016, there was a $46,000 reclassification from accumulated other comprehensive income to gains in earnings resulting from the sale of available-for-sale securities. The $46,000 reclassification adjustment out of accumulated other comprehensive income was included in net gain on sales of securities under noninterest income. Net unrealized gains of $321,000 related to these sold securities had previously been recorded in accumulated other comprehensive income as of the beginning of the period.

~~Activity in accumulated other comprehensive income for the nine months ended September 30, 2017 and 2016 was as follows:~~

Unrealized Gains
and Losses on
Available for Sale
Securities

Unrealized Gains
and Losses on
Interest-Only
Strip
Tax Benefit (Expense) Total
(in thousands)
September 30, 2017
Balance at beginning of period $ (4,089 ) $ —
$ 1,695
$ (2,394 )
Other comprehensive income before reclassification 6,059
—
(1,902 ) 4,157
Reclassification from accumulated other comprehensive income (1,473 ) —
—
(1,473 )
Period change 4,586
—
(1,902 ) 2,684
Balance at end of period $ 497
$ —
$ (207 ) $ 290

September 30, 2016
Balance at beginning of period $ (2,331 ) $ 9
$ 2,007
$ (315 )
Other comprehensive income before reclassification 13,518
(9 ) (5,593 ) 7,916
Reclassification from accumulated other comprehensive income (46 ) —
—
(46 )
Period change 13,472
(9 ) (5,593 ) 7,870
Balance at end of period $ 11,141
$ —
$ (3,586 ) $ 7,555

For the nine months ended September 30, 2017, there was a $1.5 million reclassification from accumulated other comprehensive income to gains in earnings resulting from the sale of available-for-sale securities. The $1.5 million reclassification adjustment out of accumulated other comprehensive income was included in net gain on sales of securities under noninterest income. Net unrealized gains of $971,000 related to these sold securities had previously been recorded in accumulated other comprehensive income as of the beginning of the period.

For the nine months ended September 30, 2016, there was a $46,000 reclassification from accumulated other comprehensive income to gains in earnings resulting from the sale of available-for-sale securities. The $46,000 reclassification adjustment out of accumulated other comprehensive income was included in net gain on sales of securities under noninterest income. Net unrealized gains of $314,000 related to these sold securities had previously been recorded in accumulated other comprehensive income as of the beginning of the period.

~~Note 9 — Regulatory Matters~~

~~Risk-Based Capital~~

~~In July 2013, the Board of Governors of the Federal Reserve, the Office of the Comptroller of the Currency~~be considered “well capitalized” and the ~~FDIC approved the Basel III~~Company exceeded all of its applicable minimum regulatory capital framework and related changes under the Dodd-Frank Wall Street Reform and Consumer Protection Act. The rules revise minimum capital requirements and adjust prompt corrective action thresholds. The rules also revise the regulatory capital elements, add a new common equity Tier I capital ratio and increase the minimum Tier I capital ratio requirement. The revisions permit banking organizations to retain, through a one-time election, the existing treatment for accumulated other comprehensive income. Basel III rules, including certain transitional provisions, became effective January 1, 2015, and its requirements are included in the capital ratios presented in the table shown below.

~~In addition, a new~~requirements.

A capital conservation buffer of ~~2.5% began to be phased in~~2.5 percent became effective ~~January 1, 2016 through~~on January 1, 2019, and must be met to avoid limitations on the ability of the Bank to pay dividends, repurchase shares or pay

discretionary bonuses. ~~In January 2016, the new capital conservation buffer requirement was 0.625% of risk-weighted assets and will increase each year until fully implemented in January 2019.~~ The ~~Company and the~~ Bank's capital conservation buffer was ~~6.56%~~5.62 percent and ~~7.32%, respectively,~~6.64 percent and the Company's capital conservation buffer was 4.86 percent and 5.78 percent as of ~~September~~June 30, ~~2017,~~2020 and ~~5.86% and 5.64%, respectively, as of~~ December 31, ~~2016.~~

2019, respectively.

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

The capital ratios of Hanmi Financial and the Bank as of ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016~~2019 were as follows:

						Minimum					Minimum to Be
						Regulatory					Categorized as
	Actual					Requirement					“Well Capitalized”
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(in thousands)
June 30, 2020
Total capital (to risk-weighted assets):
Hanmi Financial	$	717,493		14.04	%	$	408,870		8.00	%	N/A		N/A
Hanmi Bank	$	695,899		13.62	%	$	408,716		8.00	%	$	510,895		10.00	%
Tier 1 capital (to risk-weighted assets):
Hanmi Financial	$	554,813		10.86	%	$	306,652		6.00	%	N/A		N/A
Hanmi Bank	$	631,681		12.36	%	$	306,537		6.00	%	$	408,716		8.00	%
Common equity Tier 1 capital (to risk-weighted assets)
Hanmi Financial	$	534,582		10.46	%	$	229,989		4.50	%	N/A		N/A
Hanmi Bank	$	631,681		12.36	%	$	229,903		4.50	%	$	332,082		6.50	%
Tier 1 capital (to average assets):
Hanmi Financial	$	554,813		9.69	%	$	229,116		4.00	%	N/A		N/A
Hanmi Bank	$	631,681		11.03	%	$	229,017		4.00	%	$	286,271		5.00	%

December 31, 2019
Total capital (to risk-weighted assets):
Hanmi Financial	$	714,288		15.11	%	$	378,059		8.00	%	N/A		N/A
Hanmi Bank	$	691,024		14.64	%	$	377,516		8.00	%	$	471,895		10.00	%
Tier 1 capital (to risk-weighted assets):
Hanmi Financial	$	556,820		11.78	%	$	283,544		6.00	%	N/A		N/A
Hanmi Bank	$	631,978		13.39	%	$	283,137		6.00	%	$	377,516		8.00	%
Common equity Tier 1 capital (to risk-weighted assets)
Hanmi Financial	$	536,781		11.36	%	$	212,658		4.50	%	N/A		N/A
Hanmi Bank	$	631,978		13.39	%	$	212,353		4.50	%	$	306,732		6.50	%
Tier 1 capital (to average assets):
Hanmi Financial	$	556,820		10.15	%	$	219,367		4.00	%	N/A		N/A
Hanmi Bank	$	631,978		11.56	%	$	218,748		4.00	%	$	273,435		5.00	%

Actual
Minimum
Regulatory
Requirement

Minimum to Be
Categorized as
“Well Capitalized”
Amount Ratio Amount Ratio Amount Ratio
(dollars in thousands)
September 30, 2017
Total capital (to risk-weighted assets):
Hanmi Financial $ 677,024
15.58 % $ 347,757
8.00 % N/A
N/A
Hanmi Bank $ 666,298
15.32 % $ 347,949
8.00 % $ 434,936
10.00 %
Tier 1 capital (to risk-weighted assets):
Hanmi Financial $ 545,698
12.56 % $ 260,818
6.00 % N/A
N/A
Hanmi Bank $ 632,891
14.55 % $ 260,962
6.00 % $ 347,949
8.00 %
Common equity Tier 1 capital (to risk-weighted assets):
Hanmi Financial $ 530,347
12.20 % $ 195,613
4.50 % N/A
N/A
Hanmi Bank $ 632,891
14.55 % $ 195,721
4.50 % $ 282,709
6.50 %
Tier 1 capital (to average assets):
Hanmi Financial $ 545,698
10.92 % $ 199,818
4.00 % N/A
N/A
Hanmi Bank $ 632,891
12.66 % $ 199,897
4.00 % $ 249,871
5.00 %

December 31, 2016
Total capital (to risk-weighted assets):
Hanmi Financial $ 554,089
13.86 % $ 319,901
8.00 % N/A
N/A
Hanmi Bank $ 544,759
13.64 % $ 319,520
8.00 % $ 399,399
10.00 %
Tier 1 capital (to risk-weighted assets):
Hanmi Financial $ 520,477
13.02 % $ 239,926
6.00 % N/A
N/A
Hanmi Bank $ 511,146
12.80 % $ 239,640
6.00 % $ 319,520
8.00 %
Common equity Tier 1 capital (to risk-weighted assets):
Hanmi Financial $ 509,239
12.73 % $ 179,944
4.50 % N/A
N/A
Hanmi Bank $ 511,146
12.80 % $ 179,730
4.50 % $ 259,610
6.50 %
Tier 1 capital (to average assets):
Hanmi Financial $ 520,477
11.53 % $ 180,581
4.00 % N/A
N/A
Hanmi Bank $ 511,146
11.33 % $ 180,411
4.00 % $ 225,514
5.00 %

Note 1011 — Fair Value Measurements

Fair Value Measurements

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

•

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

•

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

•

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

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

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

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

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

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

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

Loans held for sale - Loans held for sale are all SBA loans and carried at the lower of cost or fair value. Management obtains quotes, bids or pricing indication sheets on all or part of these loans directly from the purchasing financial institutions. Premiums received or to be received on the quotes, bids or pricing indication sheets are indicative of the fact that cost is lower than fair value. At ~~September~~June 30, ~~2017,~~2020 and December 31, 2019, the entire balance of SBA loans held for sale was recorded at its cost. We record SBA loans held for sale on a nonrecurring basis with Level 2 inputs.

~~Impaired~~

Individually analyzed loans ~~(excluding PCI loans)~~receivable - Nonaccrual loans receivable and performing restructured loans receivable are ~~considered impaired~~individually analyzed for reporting purposes and are measured and recorded at fair value on a non-recurring ~~basis. Nonaccrual Non-PCI~~basis to determine if they exhibit credit risk characteristics. All such loans receivable with ~~an unpaid principal~~a carrying balance over ~~$100,000 and all performing restructured loans~~$250,000 are ~~reviewed~~analyzed individually for the amount ~~of impairment,~~to determine if a reserve is required, if any. ~~Nonaccrual Non-PCI~~All such loans with ~~an unpaid principal~~a carrying balance of ~~$100,000~~$250,000 or less are evaluated for ~~impairment collectively.~~analyzed in pools to determine if they exhibit any credit risk characteristics requiring reserves. The Company does not record loans at fair value on a recurring basis. However, from time to time, nonrecurring fair value adjustments to ~~collateral dependent~~collateral-dependent impaired loans are recorded based on either the current appraised value of the collateral, a Level 2 measurement, or management’s judgment and estimation of value reported on older appraisals that are then adjusted based on recent market trends, a Level 3 measurement.

OREO - Fair value of OREO is based primarily on third party appraisals, less costs to sell and result in a Level 23 classification of the inputs for determining fair value. Appraisals are required annually and may be updated more frequently as circumstances require and the fair value adjustments are made to OREO based on the updated appraised value of the property.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

As of ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016,~~2019, assets and liabilities measured at fair value on a recurring basis are as follows:

	Level 1		Level 2		Level 3
			Significant
			Observable
	Quoted Prices in		Inputs with No
	Active Markets		Active Market		Significant
	for Identical		with Identical		Unobservable
	Assets		Characteristics		Inputs		Total Fair Value
	(in thousands)
June 30, 2020
Assets:
Securities available for sale:
U.S. Treasury securities	$	45,262	$	—	$	—	$	45,262
U.S. government agency and sponsored agency obligations:
Mortgage-backed securities		—		413,263		—		413,263
Collateralized mortgage obligations		—		120,294		—		120,294
Debt securities		—		77,152		—		77,152
Total U.S. government agency and sponsored agency obligations		—		610,709		—		610,709
Total securities available for sale	$	45,262	$	610,709	$	—	$	655,971

December 31, 2019
Assets:
Securities available for sale:
U.S. Treasury securities	$	35,205	$	—	$	—	$	35,205
U.S. government agency and sponsored agency obligations:
Mortgage-backed securities		—		410,800		—		410,800
Collateralized mortgage obligations		—		164,592		—		164,592
Debt securities		—		23,879		—		23,879
Total U.S. government agency and sponsored agency obligations		—		599,271		—		599,271
Total securities available for sale	$	35,205	$	599,271	$	—	$	634,477

Level 1 Level 2 Level 3

Quoted Prices in
Active Markets
for Identical
Assets

Significant
Observable
Inputs with No
Active Market
with Identical
Characteristics

Significant
Unobservable
Inputs
Balance
(in thousands)
September 30, 2017
Assets:
Securities available for sale:
Mortgage-backed securities $ —
$ 309,750
$ —
$ 309,750
Collateralized mortgage obligations —
106,124
—
106,124
U.S. government agency securities —
7,457
—
7,457
SBA loan pools securities —
3,896
—
3,896
Municipal bonds-tax exempt —
148,524
—
148,524
U.S. treasury securities 153
—
—
153
Mutual funds 22,536
—
—
22,536
Total securities available for sale $ 22,689
$ 575,751
$ —
$ 598,440

December 31, 2016
Assets:
Securities available for sale:
Mortgage-backed securities $ —
$ 229,630
$ —
$ 229,630
Collateralized mortgage obligations —
76,451
—
76,451
U.S. government agency securities —
7,441
—
7,441
SBA loan pools securities —
4,146
—
4,146
Municipal bonds-tax exempt —
158,030
—
158,030
Municipal bonds-taxable —
13,701
—
13,701
Corporate bonds —
5,015
—
5,015
U.S. treasury securities 156
—
—
156
Mutual funds 22,394
—
—
22,394
Total securities available for sale $ 22,550
$ 494,414
$ —
$ 516,964

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

As of ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016,~~2019, assets and liabilities measured at fair value on a non-recurring basis are as follows:

			Level 1		Level 2		Level 3
					Significant
					Observable
			Quoted Prices in		Inputs With No
			Active Markets		Active Market		Significant
			for Identical		With Identical		Unobservable
	Total		Assets		Characteristics		Inputs
	(in thousands)
June 30, 2020
Assets:
Collateral dependent impaired loans ⁽¹⁾	$	44,120	$	—	$	—	$	44,120
Other real estate owned		148		—		—		148
Bank-owned premises		1,900		—		—		1,900

December 31, 2019
Assets:
Collateral dependent impaired loans ⁽²⁾	$	31,049	$	—	$	—	$	31,049
Other real estate owned		63		—		—		63
Bank-owned premises		1,900		—		—		1,900

Level 1 Level 2 Level 3

Quoted Prices in
Active Markets
for Identical
Assets

Significant
Observable
Inputs With No
Active Market
With Identical
Characteristics

Significant
Unobservable
Inputs
Loss During the Nine Months Ended September 30, 2017
(in thousands)
September 30, 2017
Assets:
Impaired loans (excluding PCI loans) ⁽¹⁾
$ —
$ 4,920
$ 2,269
$ 149
OREO ⁽²⁾
—
1,946
—
—

Level 1 Level 2 Level 3

Quoted Prices in
Active Markets
for Identical
Assets

Significant
Observable
Inputs With No
Active Market
With Identical
Characteristics

Significant
Unobservable
Inputs
Loss During the Twelve Months Ended December 31, 2016
(in thousands)
December 31, 2016
Assets:
Impaired loans (excluding PCI loans) ⁽³⁾
$ —
$ 15,257
$ 6,767
$ 868
OREO ⁽⁴⁾
—
7,484
—
—


⁽¹⁾	~~Consist~~ Consisted of real estate loans of ~~$4.9~~$42.6 million, commercial and industrial loans of $288,000, and consumer loans of $1.2 million. $43.9 million was secured by real estate and one commercial and industrial loan for $247,000 was fully secured by cash.

(2)	Consisted of real estate loans of $27.2 million and commercial and industrial loans of ~~$2.3~~$3.9 million. $27.2 million was secured by real estate and $3.9 million was secured by personal property.

The following table represents quantitative information about Level 3 fair value comments for assets measured at fair value on a non-recurring basis at June 30, 2020 and December 31, 2019:

	Fair Value		Valuation Techniques	Unobservable Input(s)	Range (Weighted Average)
	(in thousands)
June 30, 2020
Collateral dependent impaired loans:
Real estate loans:
Commercial property
Retail	$	1,355	Market approach	Market data comparison	(30)% to (3)% /(17%)
Other		15,441	Market approach	Market data comparison	(18)% to 42% / 18% ⁽²⁾
Construction		23,067	Market approach	Market data comparison	(18)% to 43% / 21% ⁽²⁾
Residential property		2,761	Market approach	Market data comparison	(13)% to 15% / 6% ⁽²⁾
Total real estate loans		42,624
Commercial and industrial loans:
Commercial term		288	Market approach	Market data comparison	(9)% to 11% / 1% ^{(2) (3)}
Consumer loans		1,208	Market approach	Market data comparison	(13)% to 15% / 6% ⁽²⁾
Total	$	44,120

Bank-owned premises		1,900	Market approach	Market data comparison	(30)% to 55% /(2)% ⁽²⁾

December 31, 2019
Collateral dependent impaired loans:
Real estate loans:
Commercial property
Other	$	13,926	Market approach	Market data comparison	⁽¹⁾
Construction		13,228	Market approach	Market data comparison	(3)% to 43% /21% ⁽²⁾
Total real estate loans		27,154
Commercial and industrial loans:
Commercial lines of credit		3,895	Market approach	Market data comparison	(8)% to 42% /18% ⁽²⁾
Total	$	31,049

Bank-owned premises		1,900	Market approach	Market data comparison	(30)% to 55% /(2)% ⁽²⁾

⁽¹⁾

The values were estimated by current market data comparison, supplemented by cost information. The properties compared when possible, with others for sale and that have sold in the general time period. Adjustments are made for differences in equipment, mileage, cosmetics, conversions, originality, condition as well as sale terms and current economic conditions at time of sale.

⁽²⁾

~~Consist~~

Appraisal reports utilize a combination of valuation techniques including a market approach, where prices and other relevant information generated by market transactions involving similar or comparable properties ~~obtained~~are used to determine the appraised value. Appraisals may include an ‘as is’ and ‘upon completion’ valuation scenarios. Adjustments are routinely made in the appraisal process by third-party appraisers to adjust for differences between the comparable sales and income data. Adjustments also result from the ~~foreclosure~~consideration of ~~commercial~~relevant economic and demographic factors with the potential to affect property ~~loans~~values. Also, prospective values are based on the market conditions which exist at the date of ~~$237,000~~inspection combined with informed forecasts based on current trends in supply and ~~residential~~demand for the property ~~loans of $1.7 million.~~types under appraisal. Positive adjustments disclosed in this table represent increases to the sales comparison and negative adjustment represent decreases.


⁽³⁾	~~Consist of real estate loans of $17.8 million, commercial and industrial loans of $3.8 million, and consumer loans of $419,000.~~ Includes 1 loan secured by cash collateral.


⁽⁴⁾	~~Consist of properties obtained from the foreclosure of commercial property loans of $5.4 million and residential property loans of $2.1 million.~~

The fair value of the Level 3 loans receivable demonstrating credit risk characteristics at June 30, 2020 were determined utilizing the fair value measurement methodology for assets measured on a non-recurring basis. Such loans receivable measured at fair value at June 30, 2020 consisted of 7 commercial real estate loans with a fair value of $16.8 million, 2 construction

loans with a fair value of $23.1 million, 5 residential mortgages with a fair value of $2.8 million, 1 commercial term loan with a fair value of $41,000, 1 commercial term loan fully secured by cash with a fair value of $247,000, and 3 consumer loans with a fair value of $1.2 million. The fair value of collateral dependent loans is determined on a non-recurring basis using either the sales comparison approach or the income approach by obtaining third party appraisals.

ASC 825, Financial Instruments, requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured on a recurring basis or non-recurring basis are discussed above.

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

~~The estimated fair values~~

Effective January 1, 2018, the Company adopted ASU 2016-01, Recognition and Measurement of ~~financial instruments were as follows:~~

September 30, 2017
Carrying Fair Value
Amount Level 1 Level 2 Level 3
(in thousands)
Financial assets:
Cash and due from banks 138,139
138,139
—
—
Securities available for sale 598,440
22,689
575,751
—
Loans and leases receivable, net of allowance for loan and lease losses 4,162,863
—
—
4,124,666
Loans held for sale 6,469
—
6,469
—
Accrued interest receivable 12,098
12,098
—
—
FHLB stock 16,385
—
16,385
—
Financial liabilities:

Noninterest-bearing deposits 1,293,538
—
1,293,538
—
Interest-bearing deposits 3,005,472
—
—
2,956,667
Borrowings 227,140
—
—
227,140
Accrued interest payable 4,071
4,071
—
—
Off-balance sheet items:

Commitments to extend credit 301,049
—
—
301,049
Standby letters of credit 19,521
—
—
19,521
Commercial letters of credit 6,833
—
—
6,833

December 31, 2016
Carrying Fair Value
Amount Level 1 Level 2 Level 3
(in thousands)
Financial assets:
Cash and due from banks $ 147,235
$ 147,235
$ —
$ —
Securities available for sale 516,964
22,550
494,414
—
Loans and leases receivable, net of allowance for loan and lease losses 3,812,340
—
—
3,789,579
Loans held for sale 9,316
—
9,316
—
Accrued interest receivable 10,987
10,987
—
—
FHLB stock 16,385
—
16,385
—
Financial liabilities:
Noninterest-bearing deposits 1,203,240
—
1,203,240
—
Interest-bearing deposits 2,606,497
—
—
2,541,929
Borrowings 333,978
—
—
333,978
Accrued interest payable 2,567
2,567
—
—
Off-balance sheet items:
Commitments to extend credit 310,987
—
—
310,987
Standby letters of credit 15,669
—
—
15,669
Commercial letters of credit 4,215
—
—
4,215

~~The methods~~Financial Assets and ~~assumptions used~~Financial Liabilities (Topic 825). This standard, among other provisions, requires public business entities to ~~estimate~~use the exit price notion when measuring the fair value of ~~each class of~~financial instruments for disclosure purposes. Other than certain financial instruments for which ~~it was practicable to estimate~~we have concluded that ~~value are explained below:~~

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

Securities - The fair value of securities, consisting of securities available for sale, is generally obtained from market bids for similar or identical securities, from independent securities brokers or dealers, or from other model-based valuation techniques described above (Levels 1, 2 and 3).

Loans and leases receivable, net of allowance for loan and leases losses - Loans and leases receivable include Non-PCI loans and leases, PCI loans and Non-PCI impaired loans. The fair value of Non-PCI loans and leases receivable is estimated based on the discounted cash flow approach. The discount rate was derived from the associated yield curve plus spreads and reflects the offering rates offered by the Bank for loans and leases with similar financial characteristics. Yield curves are constructed by product type using the Bank’s loan and lease pricing model for like-quality credits. The discount rates used in the Bank’s model represent the rates the Bank would offer to current borrowers for like-quality credits. These rates could be different from what other financial institutions could offer for these loans and leases. No adjustments have been made for changes in credit within the loan and lease portfolio. It is our opinion that the allowance for loan and lease losses relating to performing and nonperforming loans and leases results in a fair valuation of such loans and leases. Additionally, the fair value estimates shown below are based on an exit price notion as of ~~our loans and leases may differ significantly from~~June 30, 2020, as required by ASU 2016-01. The financial instruments for which we have concluded that the ~~values that would have been used had a ready market existed for such loans and leases and may differ materially from the values that we may ultimately realize (Level 3).~~

~~The~~carrying amounts approximate fair value ~~of PCI loans receivable was estimated based on discounted expected~~include, cash ~~flows. Increases in expected cash flows~~ and improvements in the timing of cash flows over those previously estimated increase the amount of accretable yield and are recognized as an increase in yield and interest income prospectively. Decreases in the amount and delays in the timing of expected cash flows compared to those previously estimated decrease the amount of accretable yield and usually result in a provision for loan losses and the establishment of an allowance for loan losses (Level 3).

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

Loans held for sale - Loans held for sale are carried at the lower of aggregate cost or fair market value, as determined based upon quotes, bids or sales contract prices, or as may be assessed based upon the fair value of the collateral which is obtained from recent real estate appraisals (Level 2). Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in Level 3 classification of the inputs for determining fair value.

~~Accrued interest receivable - The carrying amount of~~banks, accrued interest receivable ~~approximates its fair value (Level 1).~~

~~FHLB stock - The carrying amount of FHLB stock approximates its fair value as such stock may be resold to the issuer at carrying value (Level 2).~~

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

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

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

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

~~Commitments to extend credit, standby letters of credit and commercial letters of credit -~~deposits. The fair values of ~~commitments to extend credit and letters of credit~~off-balance sheet items are based upon the difference between the current value of similar loans and the price at which the Bank has committed to make the ~~loans (Level 3).~~loans.

The estimated fair values of financial instruments were as follows:

	June 30, 2020
	Carrying		Fair Value
	Amount		Level 1		Level 2		Level 3
	(in thousands)
Financial assets:
Cash and due from banks	$	546,048	$	546,048	$	—	$	—
Securities available for sale		655,971		45,262		610,709		—
Loans held for sale		17,942		—		17,942		—
Loans receivable, net of allowance for credit losses		4,739,312		—		—		4,690,692
Accrued interest receivable		21,372		21,372		—		—
Financial liabilities:
Noninterest-bearing deposits		1,865,213		—		1,865,213		—
Interest-bearing deposits		3,344,568		—		—		3,353,585
Borrowings and subordinated debentures		370,478		—		254,116		120,139
Accrued interest payable		8,655		8,655		—		—

	December 31, 2019
	Carrying		Fair Value
	Amount		Level 1		Level 2		Level 3
	(in thousands)
Financial assets:
Cash and due from banks	$	121,678	$	121,678	$	—	$	—
Securities available for sale		634,477		35,205		599,272		—
Loans held for sale		6,020		—		6,382		—
Loans receivable, net of allowance for credit losses		4,548,739		��		—		4,520,322
Accrued interest receivable		11,742		11,742		—		—
Financial liabilities:
Noninterest-bearing deposits		1,391,624		—		1,391,624		—
Interest-bearing deposits		3,307,338		—		—		3,317,867
Borrowings and subordinated debentures		208,377		—		89,831		118,807
Accrued interest payable		11,215		11,215		—		—

~~Note 11 — Share-Based Compensation~~

~~Share-Based Compensation Expense~~

For the three months ended September 30, 2017 and 2016, share-based compensation expenses were $709,000 and $787,000, respectively, and net tax benefits recognized from stock option and restricted stock awards were $291,000 and $313,000, respectively. For the nine months ended September 30, 2017 and 2016, share-based compensation expenses were $2.1 million and $2.3 million, respectively, and net tax benefits recognized from stock option exercises and vested restricted stock awards were $666,000 and $182,000, respectively.

~~The Company adopted Accounting Standards Update ("ASU") 2016-09,~~ ~~Compensation - Stock Compensation~~, during the three months ended March 30, 2016. Adoption of this ASU did not have a material impact on the Company's financial statements. As a result of adoption of this ASU, excess tax benefits related to the Company's share-based compensation were recognized as income tax expense in the consolidated statement of income during the nine months ended September 30, 2017 and 2016.

~~Unrecognized Share-Based Compensation Expense~~

~~As of September 30, 2017, unrecognized share-based compensation expense was as follows:~~

Unrecognized
Expense Average Expected
Recognition
Period
(in thousands)
Stock option awards $ 19
0.9 years
Restricted stock awards 4,751
2.3 years
Total unrecognized share-based compensation expense $ 4,770
2.3 years

~~Stock Option Awards~~

~~The table below provides stock option information for the three months ended September 30, 2017:~~

Number of
Shares Weighted-
Average
Exercise
Price Per
Share Weighted-
Average
Remaining
Contractual
Life Aggregate
Intrinsic
Value of
In-the-
Money
Options
(in thousands)
Options outstanding at beginning of period 376,401
$ 17.68
6.3 years $ 4,168
⁽¹⁾
Options exercised (10,625 ) $ 12.21
4.5 years —

Options outstanding at end of period 365,776
$ 17.84
6.1 years $ 4,797
⁽²⁾

Options exercisable at end of period 348,105
$ 17.62
6.1 years $ 4,641
⁽²⁾


⁽¹⁾	Intrinsic value represents the excess of the closing stock price on the last trading day of the period, which was $28.45 as of June 30, 2017, over the exercise price, multiplied by the number of options.


⁽²⁾	Intrinsic value represents the excess of the closing stock price on the last trading day of the period, which was $30.95 as of September 30, 2017, over the exercise price, multiplied by the number of options.

~~The table below provides stock option information for the nine months ended September 30, 2017:~~

Number of
Shares Weighted-
Average
Exercise
Price Per
Share Weighted-
Average
Remaining
Contractual
Life Aggregate
Intrinsic
Value of
In-the-
Money
Options
(in thousands)
Options outstanding at beginning of period 387,901
$ 17.49
6.8 years $ 6,752
⁽¹⁾
Options exercised (22,125 ) $ 12.19
4.5 years —

Options outstanding at end of period 365,776
$ 17.84
6.1 years $ 4,797
⁽²⁾

Options exercisable at end of period 348,105
$ 17.62
6.1 years $ 4,641
⁽²⁾


⁽¹⁾	Intrinsic value represents the excess of the closing stock price on the last trading day of the period, which was $34.90 as of December 31, 2016, over the exercise price, multiplied by the number of options.


⁽²⁾	Intrinsic value represents the excess of the closing stock price on the last trading day of the period, which was $30.95 as of September 30, 2017, over the exercise price, multiplied by the number of options.

There were 10,625 and 2,375 stock options exercised during the three months ended September 30, 2017 and 2016, respectively. There were 22,125 and 42,584 stock options exercised during the nine months ended September 30, 2017 and 2016, respectively.

~~Restricted Stock Awards~~

Restricted stock awards under the Company’s 2007 and 2013 Equity Compensation Plans typically vest over three years and are subject to forfeiture if employment terminates prior to the lapse of restrictions. Hanmi Financial becomes entitled to an income tax deduction in an amount equal to the taxable income reported by the holders of the restricted shares when the restrictions are released and the shares are issued. Forfeited shares of restricted stock become available for future grants upon forfeiture.

~~The table below provides information for restricted stock awards for the three and nine months ended September 30, 2017:~~

Three Months Ended
September 30, 2017 Nine Months Ended
September 30, 2017
Number of
Shares Weighted-
Average
Grant Date
Fair Value
Per Share
Number of
Shares

Weighted-
Average
Grant Date
Fair Value
Per Share
Restricted stock at beginning of period 305,951
$ 20.21
343,958
$ 16.60
Restricted stock granted 13,173
28.79
104,179
31.04
Restricted stock vested (2,666 ) 20.52
(122,010 ) 18.12
Restricted stock forfeited (3,667 ) 28.60
(13,336 ) 24.73
Restricted stock at end of period 312,791
20.47
312,791
20.47

Note 12 — Off-Balance Sheet Commitments

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

items.

The Bank’s exposure to losses in the event of non-performance by the other party to commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for extending loan facilities to customers. The Bank

evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, was based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, premises and equipment, and income-producing or borrower-occupied properties.

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

	June 30,		December 31,
	2020		2019
	(in thousands)
Commitments to extend credit	$	486,852	$	371,287
Standby letters of credit		45,574		31,372
Commercial letters of credit		12,335		11,133
Total undisbursed loan commitments	$	544,761	$	413,792

September 30, 2017 December 31, 2016
(in thousands)
Commitments to extend credit $ 301,049
$ 310,987
Standby letters of credit 19,521
15,669
Commercial letters of credit 6,833
4,215
Total undisbursed loan commitments $ 327,403
$ 330,871

The allowance for credit losses related to off-balance sheet items is maintained at a level believed to be sufficient to absorb probable losses related to these unfunded credit facilities. The determination of the allowance adequacy is based on periodic evaluations of the unfunded credit facilities including an assessment of the probability of commitment usage, credit risk factors for loans outstanding to these same customers, and the terms and expiration dates of the unfunded credit facilities. ~~Net adjustments to the allowance for off-balance sheet items are included in other operating expenses.~~

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020			2019
	(in thousands)
Balance at beginning of period	$	2,885	$	1,100	$	2,397		$	1,439
Adjustment related to adoption of ASU 2016-13		—		—		(335	)		—
Adjusted balance at beginning of period		2,885		1,100		2,062			1,439
Provision expense (income) for credit losses		3,462		233		4,285			(106	)
Balance at end of period	$	6,347	$	1,333	$	6,347		$	1,333

Three Months Ended
September 30, Nine Months Ended
September 30,
2017 2016 2017 2016
(in thousands)
Balance at beginning of period $ 1,135
$ 1,475
$ 1,184
$ 986
Provision (income) (220 ) 16
(269 ) 505
Balance at end of period $ 915
$ 1,491
$ 915
$ 1,491

Note 13 — Leases

The Company adopted ASU 2016-02, Leases (Topic 842), effective January 1, 2019. We had approximately 44 operating leases for real estate and other assets at June 30, 2020. These included various leases for our branch and office locations as well as those for postage and copier machines and an advertising billboard. Our leases had initial lease terms of two to twenty-five years. Most leases included one or more options to renew, with renewal terms that can extend the lease term from two to twelve years.

For leases where we were reasonably certain to renew, those option periods were included within the lease term and, therefore, the measurement of the right-of-use asset and lease liability. Certain leases included options to terminate the lease, which allows the contract parties to terminate their obligations under the lease contract, typically in return for an agreed financial consideration. The terms and conditions of the termination options vary by contract. Leases with an initial term of 12 months or less were not recognized on the balance sheet. We recognized lease expense for these leases on a straight- line basis over the lease term. Certain lease agreements included payments based on Consumer Price Index (CPI) on which variable lease payments were determined and included in the right-of-use asset and liability. Variable lease payments that were not based on CPI were excluded from the right-of-use asset and lease liability and recognized in the period in which the obligations for those payments were incurred. Our lease agreements did not contain any material residual value guarantees, restrictions or covenants.

In determining whether a contract contained a lease, we determined whether an arrangement was or included a lease at contract inception. Operating lease right-of-use asset and liability were recognized at commencement date and initially measured based on the present value of lease payments over the defined lease term. The opening balance for both our right-of-use asset and lease liability were $40.9 million as of the adoption date of January 1, 2019.

We had real estate lease agreements with lease and non-lease components, which are generally accounted for separately. However, we elected the practical expedient to not separate non-lease components from lease components for all classes of underlying assets. For certain equipment leases, such as machine equipment, we accounted for the lease and associated non-lease components as a single lease component.

In determining the discount rates, since most of our leases do not provide an implicit rate, we used our incremental borrowing rate provided by the FHLB of San Francisco based on the information available at the commencement date to calculate the present value of lease payments. In order to apply the incremental borrowing rate, a portfolio approach with a collateralized rate was utilized. Assets were grouped based on similar lease terms and economic environments in a manner whereby the Company reasonably expects that the application does not differ materially from a lease-by-lease approach.

The Company's right-of-use asset is included in prepaid expenses and other assets and our lease liability is included in accrued expenses and other liabilities in the accompanying consolidated balance sheet.

As of June 30, 2020, the right-of-use asset and lease liability balances were $50.4 million and $51.4 million, respectively. As of December 31, 2019, the right-of-use asset and lease liability were $36.5 million and $37.2 million, respectively. For the three-month period ended June 30, 2020 and 2019, net lease expense recorded under such leases amounted to $2.0 million and $1.9 million, respectively. For the six-month period ended June 30, 2020 and 2019, net lease expense recorded under such leases amounted to $4.1 million and $3.8 million, respectively.

The following table presents the Company's remaining lease liability by maturity as of June 30, 2020:

	Amount
	(in thousands)
2020	$	6,975
2021		6,733
2022		6,631
2023		6,485
2024		6,075
Thereafter		24,825
Remaining lease commitments		57,725
Interest		(6,306	)
Present value of lease liability	$	51,419

Weighted average remaining lease terms for the Company's operating leases were 8.07 and 8.57 years as of June 30, 2020 and December 31, 2019, respectively.WeightedaveragediscountratesusedfortheCompany'soperatingleaseswas2.56percent and 3.23 percent asofJune 30, 2020 and 2019, respectively.The Company chose the practical expedients and reviewed the lease

and non-lease components for any impairment or otherwise, subsequently determining that no cumulative-effect adjustment to equity was necessary as part of implementing the modified retrospective approach for its adoption of ASC842.

Cash paid and included in cash flows from operating activities for amounts used in the measurement of the lease liability of the Company's operating leases was $1.8 million and $3.7 million for the three and six months ended June 30, 2020 and 2019, respectively.

Note 14 — Liquidity

Hanmi Financial

As of June 30, 2020, Hanmi Financial had $20.3 million in cash on deposit with its bank subsidiary. Management believes that Hanmi Financial, on a stand-alone basis, had adequate liquid assets to meet its current debt obligations.

Hanmi Bank

The principal objective of our liquidity management program is to maintain the Bank’s ability to meet the day-to-day cash flow requirements of our customers who wish either to withdraw funds or to draw upon credit facilities to meet their cash needs. Management believes that the Bank, on a stand-alone basis, has adequate liquid assets to meet its current obligations. The Bank’s primary funding source will continue to be deposits originating from its branch platform. The Bank’s wholesale funds historically consisted of FHLB advances and brokered deposits. As of June 30, 2020 and December 31, 2019, the Bank had $150.0 million and $90.0 million of FHLB advances and $235.2 million and $264.2 million, respectively, of brokered deposits.The Bank had $101.8 million of 0.35 percent advances with the FRB under the Paycheck Protection Program Lending Facility as of June 30, 2020. These advances were repaid subsequent to the end of the second quarter. There were 0 outstanding borrowings with the FRB as of December 31, 2019.

We monitor the sources and uses of funds on a regular basis to maintain an acceptable liquidity position. The Bank’s primary source of borrowings is the FHLB, from which the Bank is eligible to borrow up to 30.0 percent of its assets. As of June 30, 2020, the remaining available borrowing capacity was $1.5 billion compared with $878.4 million, as of December 31, 2019.

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

Note 15 — Derivatives and Hedging Activities

Accounting Policy for Derivative Instruments and Hedging Activities

FASB ASC 815, Derivatives and Hedging (“ASC 815”), provides the disclosure requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how the entity accounts for derivative instruments and related hedged items, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Further, qualitative disclosures are required that explain the Company’s objectives and strategies for using derivatives, as well as quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.

As required by ASC 815, the Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.

Risk Management Objective of Using Derivatives

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s borrowings.

Non-Designated Hedges

Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting derivatives that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings.

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Balance Sheet as of June 30, 2020. NaN such instruments were outstanding as of December 31, 2019.

Derivative Assets

Derivative Liabilities

As of June 30, 2020

As of December 31, 2019

As of June 30, 2020

As of December 31, 2019

Notional Amount

Balance Sheet Location

Fair Value

Balance Sheet Location

Fair Value

Notional Amount

Balance Sheet Location

Fair Value

Balance Sheet Location

Fair Value

(in thousands)

Derivatives not designated as hedging instruments

Interest rate products

29,492

Other Assets

1,085

Other Assets

N/A

29,492

Other Liabilities

1,183

Other Liabilities

N/A

Total derivatives not designated as hedging instruments

1,085

N/A

1,183

N/A

The table below presents the effect of the Company’s derivative financial instruments that are not designated as hedging instruments on the Income Statement as of June 30, 2020. NaN such instruments were outstanding as of December 31, 2019.

Derivatives Not Designated as Hedging Instruments under Subtopic 815-20	Location of Gain or (Loss) Recognized in Income on Derivative	Amount of Gain or (Loss) Recognized in Income on Derivative
		Quarter Ended June 30, 2020
		(in thousands)
Interest rate products	Other income	$	(98	)
Total		$	(98	)

Fee income recognized from the Company's derivative financial instruments for the three and six months ended June 30, 2020 was $512,000.

The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives as of June 30, 2020. The net amounts of derivative assets or liabilities can be reconciled to the tabular disclosure of fair value. The tabular disclosure of fair value provides the location that derivative assets and liabilities are presented on the Balance Sheet.

Offsetting of Derivative Assets
As of June 30, 2020
							Gross Amounts Not Offset in the Statement of Financial Position
	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Statement of Financial Position		Net Amounts of Assets presented in the Statement of Financial Position		Financial Instruments		Cash Collateral Received		Net Amount
	(in thousands)
Derivatives	$	1,085	$	—	$	1,085	$	1,085	$	—	$	1,085


Offsetting of Derivative Liabilities
As of June 30, 2020
							Gross Amounts Not Offset in the Statement of Financial Position
	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Statement of Financial Position		Net Amounts of Liabilities presented in the Statement of Financial Position		Financial Instruments		Cash Collateral Provided		Net Amount
	(in thousands)
Derivatives	$	1,183	$	—	$	1,183	$	—	$	1,120	$	63

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

As of June 30, 2020, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $1.2 million. As of June 30, 2020, the Company had posted $1.1 million of collateral related to these agreements and is essentially over-collateralized since its net liability position is $98,000 ($1.1 million fair value of assets less $1.2 million fair value of liabilities) as of the end of the period. If the Company had breached any of these provisions at June 30, 2020, it could have been required to settle its obligations under the agreements at their termination value of $1.2 million.

Note 16 — Subsequent Events

~~Management has evaluated subsequent events through~~

At the date of issuance of ~~the financial data included herein. There have been~~this report, no subsequent events that occurred during such period that would require disclosure in this Quarterly Report on Form 10-Q for the period ended September 30, 2017, or would be required to be recognized in the Consolidated Financial Statements (Unaudited) as of September 30, 2017.

were noted.

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

The following is management’s discussion and analysis of ~~the major factors that influenced~~ our results of operations and financial condition as of and for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2020. This analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, ~~2016~~2019 (the ~~“2016~~“2019 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~~June 30, ~~2017~~2020 (this “Report”).

The COVID-19 pandemic has caused significant economic dislocation in the United States as many state and local governments have ordered non-essential businesses to close and residents to shelter in place at home. This has resulted in an unprecedented slow-down in economic activity, a dramatic increase in unemployment and extreme volatility in the stock market, and in particular, bank stocks, have significantly declined in value. In response to the COVID-19 outbreak, the Federal Reserve reduced the benchmark Federal funds rate to a target range of 0 percent to 0.25 percent, and the yields on 10- and 30-year treasury notes have declined to historic lows. Various state governments and federal agencies are requiring lenders to provide forbearance and other relief to borrowers (e.g., waiving late payment and other fees). The federal banking agencies have encouraged financial institutions to prudently work with affected borrowers and recently passed legislation has provided relief from reporting loan classifications due to modifications related to the COVID-19 outbreak. Certain industries have been particularly hard-hit, including the travel and hospitality industry, the restaurant industry and the retail industry. Finally, the spread of the coronavirus has caused us to modify our business practices, including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences. We have many employees working remotely and we may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers and business partners.

Forward-Looking Statements

Some of the statements ~~under this item and elsewhere~~contained in this Report ~~constitute~~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~~“forward–looking statements” for purposes of federal and state securities laws, including, but not limited to, statements about anticipated future operating and financial performance, financial position and liquidity, business strategies, regulatory and competitive outlook, investment and expenditure plans, capital and financing needs, ~~and availability, developments regarding our capital plans,~~ plans and objectives of management for future operations, ~~strategic alternatives for a possible business combination, merger or sale transactions,~~ and other similar forecasts and statements of expectation and statements of ~~assumption~~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. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance, strategies, outlook, needs, plans, objectives or achievements to differ from those expressed or implied by the forward-looking statement. These factors include the following: failure to maintain adequate levels of capital and liquidity to support our operations; the effect of potential future supervisory action against us or Hanmi Bank; general economic and business conditions internationally, nationally and in those areas in which we ~~operate, including, but not limited to, California, Illinois and Texas;~~operate; volatility and deterioration in the credit and equity markets; changes in consumer spending, borrowing and savings habits; availability of capital from private and government sources; demographic changes; competition for loans and deposits and failure to attract or retain loans and deposits; fluctuations in interest rates and a decline in the level of our interest rate spread; risks of natural ~~disasters related~~disasters; a failure in or breach of our operational or security systems or infrastructure, including cyber-attacks; the failure to maintain current technologies; inability to successfully implement future information technology enhancements; difficult business and economic conditions that can adversely affect our ~~real estate portfolio;~~industry and business, including competition, fraudulent activity and negative publicity; risks associated with Small Business Administration ~~("SBA")~~ loans; failure to attract or retain key employees; our ability to access cost-effective funding; fluctuations in real estate values; changes in accounting policies and practices; the imposition of tariffs or other domestic or international governmental policies impacting the value of the products of our borrowers; changes in governmental ~~regulation; enforcement actions against us and litigation we may become a party to;~~regulation, including, but not limited to, any increase in Federal Deposit Insurance Corporation insurance premiums; the ability of Hanmi Bank to make distributions to Hanmi Financial Corporation, which is restricted by certain factors, including Hanmi ~~Bank's~~Bank’s retained earnings, net income, prior distributions made, and certain other financial tests; ability to ~~successfully and efficiently integrate the operations of banks and other institutions we acquire;~~identify a suitable strategic partner or to consummate a strategic transaction; adequacy of our allowance for ~~loan and lease~~credit losses; credit quality and the effect of credit quality on our ~~provision for loan and lease~~credit losses expense and allowance for ~~loan and lease~~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 ~~leases and~~ other terms of credit agreements; our ability to control expenses; ~~and~~ changes in securities ~~markets. In addition, for a discussion~~markets; and risks as it relates to cyber security against our information technology infrastructure and those of ~~some~~our third party providers and vendors.

Given the ongoing and dynamic nature of the ~~other factors that might~~circumstances, it is difficult to predict the full impact of the COVID-19 outbreak on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and when and how the economy may be reopened. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations: demand for our products and services may decline, making it difficult to grow assets and income; if the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income; collateral for loans, especially real estate, may decline in value, which could cause ~~such~~credit loss expense to increase; our allowance for credit losses may have to be increased if borrowers experience financial difficulties beyond forbearance periods, which will adversely affect our net income; the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; as the result of the decline in the Federal Reserve Board’s target federal funds rate, the yield on our assets may decline to a ~~difference, see~~greater extent than the ~~discussion contained~~decline in our ~~2016~~cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income; a material decrease in net income or a net loss over several quarters could result in a decrease in the rate of our quarterly cash dividend; our cyber security risks are increased as the result of an increase in the number of employees working remotely; we rely on third party vendors for certain services and the unavailability of a critical service due to the COVID-19 outbreak could have an adverse effect on us; Federal Deposit Insurance Corporation premiums may increase if the agency experiences additional resolution costs; potential goodwill impairment charges could result if acquired assets and operations are adversely affected and remain at reduced levels; due to recent legislation and government action limiting foreclosure of real property and reduced governmental capacity to effect business transactions and property transfers, we may have more difficulty taking possession of collateral supporting our loans, which may negatively impact our ability to minimize our losses, which could adversely impact our financial results; and we face litigation, regulatory enforcement and reputation risk as a result of our participation in the Paycheck Participation Program (“PPP”) and the risk that the Small Business Administration may not fund some or all PPP loan guaranties. Moreover, our future success and profitability substantially depends on the management skills of our executive officers and directors, many of whom have held officer and director positions with us for many years. The unanticipated loss or unavailability of key employees due to the outbreak could harm our ability to operate our business or execute our business strategy. We may not be successful in finding and integrating suitable successors in the event of key employee loss or unavailability.

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 2019 Annual Report on Form ~~10-K, as well as other factors we identify from time to time in our filings with the SEC.~~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 ~~Consolidated Financial Statements~~consolidated financial statements in our ~~2016~~2019 Annual Report on Form 10-K. We had no significant changes in our accounting policies since the filing of our ~~2016~~2019 Annual Report on Form ~~10-K.~~

10-K, except for the adoption of ASU 2016-13 as described in Note 1 of the June 30, 2020 unaudited condensed consolidated financial statements.

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 ~~2016~~2019 Annual Report on Form 10-K. ~~We use estimates and assumptions based on historical experience and other factors that we believe to be reasonable under the circumstances.~~ 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 developmentandselectionofthesecriticalaccountingpolicieswiththeAuditCommitteeof ~~Hanmi Financial’s~~ theCompany’sBoardofDirectors.

Selected Financial Data

The following table sets forth certain selected financial data for the periods indicated:

	As of or for the Three Months Ended June 30,						As of or for the Six Months Ended June 30,
	2020			2019			2020			2019
	(in thousands, except per share data)
Summary balance sheets:
Cash and due from banks	$	546,048		$	130,851		$	546,048		$	130,851
Securities		655,971			639,995			655,971			639,995
Loans receivable, net ⁽¹⁾		4,739,312			4,506,416			4,739,312			4,506,416
Assets		6,218,163			5,511,752			6,218,163			5,511,752
Deposits		5,209,781			4,762,068			5,209,781			4,762,068
Liabilities		5,670,727			4,947,294			5,670,727			4,947,294
Stockholders’ equity		547,436			564,458			547,436			564,458
Tangible stockholders' equity ⁽⁴⁾		535,694			552,430			535,694			552,430
Average loans receivable ⁽²⁾		4,680,048			4,491,377			4,599,222			4,512,134
Average securities		589,932			629,062			606,821			609,414
Average assets		5,895,445			5,499,649			5,700,549			5,467,208
Average deposits		4,817,776			4,746,777			4,722,082			4,731,585
Average stockholders’ equity		548,338			568,753			554,147			563,411
Per share data:
Earnings per share – basic	$	0.30		$	0.09		$	0.38		$	0.56
Earnings per share – diluted	$	0.30		$	0.09		$	0.38		$	0.56
Book value per share ⁽³⁾	$	17.86		$	18.22		$	17.86		$	18.22
Tangible book value per share ⁽⁴⁾	$	17.47		$	17.83		$	17.47		$	17.83
Cash dividends per share	$	0.12		$	0.24		$	0.36		$	0.48
Common shares outstanding		30,657,629			30,975,163			30,657,629			30,975,163

Performance ratios:
Return on average assets ^{(5) (12)}		0.63	%		0.19	%		0.41	%		0.64	%
Return on average stockholders’ equity ^{(6) (12)}		6.73	%		1.87	%		4.18	%		6.20	%
Net interest margin ⁽⁷⁾		3.15	%		3.30	%		3.25	%		3.41	%
Efficiency ratio ⁽⁸⁾		41.51	%		59.43	%		50.36	%		58.13	%
Dividend payout ratio ⁽⁹⁾		40.00	%		266.67	%		94.74	%		85.71	%
Average stockholders’ equity to average assets		9.30	%		10.34	%		9.72	%		10.31	%

Asset quality ratios:
Non-performing loans to loans ⁽¹⁰⁾		1.21	%		1.40	%		1.21	%		1.40	%
Non-performing assets to assets ⁽¹¹⁾		0.94	%		1.15	%		0.94	%		1.15	%
Net loan charge-offs (recoveries) to average loans, annualized		0.11	%		0.02	%		1.24	%		0.02	%
Allowance for credit losses to loans		1.79	%		1.08	%		1.79	%		1.08	%
Allowance for credit losses to nonperforming loans		148.17	%		78.35	%		148.17	%		78.35	%
Capital ratios:
Total risk-based capital:
Hanmi Financial		14.04	%		14.99	%		14.04	%		14.99	%
Hanmi Bank		13.62	%		14.62	%		13.62	%		14.62	%
Tier 1 risk-based capital:
Hanmi Financial		10.86	%		11.83	%		10.86	%		11.83	%
Hanmi Bank		12.36	%		13.54	%		12.36	%		13.54	%
Common equity tier 1 capital
Hanmi Financial		10.46	%		11.41	%		10.46	%		11.41	%
Hanmi Bank		12.36	%		13.54	%		12.36	%		13.54	%
Tier 1 leverage:
Hanmi Financial		9.69	%		10.20	%		9.69	%		10.20	%
Hanmi Bank		11.03	%		11.67	%		11.03	%		11.67	%

As of or for the
Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
(dollars in thousands, except per share data)
Summary balance sheets:
Cash and due from banks $ 138,139
$ 130,197
$ 138,139
$ 130,197
Securities 598,440
548,961
598,440
548,961
Loans and leases receivable, net ⁽¹⁾
4,162,863
3,513,687
4,162,863
3,513,687
Assets 5,111,396
4,402,180
5,111,396
4,402,180
Deposits 4,299,010
3,771,207
4,299,010
3,771,207
Liabilities 4,552,149
3,870,982
4,552,149
3,870,982
Stockholders’ equity 559,247
531,198
559,247
531,198
Tangible equity 546,619
529,742
546,619
529,742
Average loans and leases receivable ⁽¹⁾
4,092,131
3,447,428
3,976,021
3,333,419
Average securities 611,538
589,832
574,801
643,125
Average interest-earning assets 4,759,035
4,130,145
4,608,870
4,045,480
Average assets 5,027,704
4,397,703
4,881,527
4,315,062
Average deposits 4,260,349
3,669,419
4,101,640
3,544,389
Average borrowings 185,000
171,779
207,340
222,889
Average interest-bearing liabilities 3,187,395
2,651,505
3,084,094
2,600,851
Average stockholders’ equity 551,763
528,581
543,503
515,403
Average tangible equity 539,087
527,072
530,740
513,813
Per share data:
Earnings per share – basic ⁽²⁾
$ 0.46
$ 0.41
$ 1.34
$ 1.31
Earnings per share – diluted ⁽²⁾
$ 0.46
$ 0.41
$ 1.33
$ 1.31
Book value per share ⁽³⁾
$ 17.25
$ 16.47
$ 17.25
$ 16.47
Tangible book value per share ⁽⁴⁾
$ 16.86
$ 16.42
$ 16.86
$ 16.42
Cash dividends per share $ 0.21
$ 0.19
$ 0.59
$ 0.47
Common shares outstanding 32,413,082
32,252,774
32,413,082
32,252,774
Performance ratios:
Return on average assets ^{(5) (6)}
1.18 % 1.19 % 1.18 % 1.30 %
Return on average stockholders’ equity ^{(5) (7)}
10.73 % 9.88 % 10.62 % 10.90 %
Return on average tangible equity ^{(5) (8)}
10.98 % 9.90 % 10.87 % 10.94 %
Net interest margin ⁽⁹⁾
3.79 % 3.86 % 3.83 % 3.95 %
Net interest margin excluding acquisition accounting ⁽⁹⁾
3.76 % 3.75 % 3.79 % 3.76 %
Efficiency ratio ⁽¹⁰⁾
53.33 % 58.72 % 54.32 % 57.47 %
Dividend payout ratio ⁽¹¹⁾
45.45 % 46.50 % 53.66 % 35.83 %
Average stockholders’ equity to average assets 10.97 % 12.02 % 11.13 % 11.94 %

Capital ratios⁽¹⁵⁾:

Total risk-based capital:
Hanmi Financial 15.58 % 14.99 % 15.58 % 14.99 %
Hanmi Bank 15.32 % 14.61 % 15.32 % 14.61 %
Tier 1 risk-based capital:
Hanmi Financial 12.56 % 13.89 % 12.56 % 13.89 %
Hanmi Bank 14.55 % 13.50 % 14.55 % 13.50 %
Common equity Tier 1 capital:
Hanmi Financial 12.20 % 13.73 % 12.20 % 13.73 %
Hanmi Bank 14.55 % 13.50 % 14.55 % 13.50 %
Tier 1 leverage:
Hanmi Financial 10.92 % 11.68 % 10.92 % 11.68 %
Hanmi Bank 12.66 % 11.36 % 12.66 % 11.36 %
Asset quality ratios:
Nonperforming Non-PCI loans and leases to loans and leases ⁽¹²⁾
0.35 % 0.31 % 0.35 % 0.31 %
Nonperforming assets to assets ⁽¹³⁾
0.32 % 0.50 % 0.32 % 0.50 %
Net loan and lease charge-offs (recoveries) to average loans and leases 0.15 % (0.08 )% — % (0.02 )%
Allowance for loan lease losses to loans and leases 0.77 % 1.10 % 0.77 % 1.10 %
Allowance for loan and lease losses to non-performing loans and leases ⁽¹²⁾ ⁽¹⁴⁾
217.74 % 305.43 % 217.74 % 305.43 %
Acquired loans:
PCI loans, net of discounts $ 8,704
$ 15,540
$ 8,704
$ 15,540
Allowance for loan losses on PCI loans 794
5,533
794
5,533
Non-PCI loans, net of discounts 91,013
108,434
91,013
108,434
Unamortized acquisition discounts on Non-PCI loans 4,999
7,087
4,999
7,087


⁽¹⁾	~~Loans~~ Excludes loans held for sale and ~~leases receivable,~~ net of allowance for ~~loan~~creditlosses.

⁽²⁾	Includes loans held for sale and ~~lease losses~~before allowance for creditlosses.

⁽³⁾
⁽²⁾	~~Calculation based on net income allocated to~~ Stockholders’ equity divided by shares of common ~~shares~~stockoutstanding.

⁽⁴⁾
⁽³⁾	~~Stockholders’~~ Tangible stockholder’s equity divided by common shares ~~outstanding~~outstanding. Tangible stockholders’ equity is a “Non-GAAP” financial measure, as discussed in the following section.


⁽⁴⁾	~~Tangible equity divided by common shares outstanding~~


⁽⁵⁾	~~Calculation based on annualized net income~~


⁽⁶⁾	Net income divided by average ~~assets~~assets.

⁽⁶⁾
⁽⁷⁾	Net income divided by average stockholders’ ~~equity~~equity.

⁽⁷⁾
⁽⁸⁾	Net interest income divided by average ~~tangible equity~~


⁽⁹⁾	~~Net interest income~~interest-earning assets. Computed on a ~~taxable equivalent~~tax-equivalent basis ~~before provision for loan and lease losses divided by average interest-earning assets~~using thestatutory federal taxrate.

⁽⁸⁾
⁽¹⁰⁾	Noninterest ~~expenses~~expense divided by the sum of net interest income ~~before provision for loan and lease losses~~ and noninterest ~~income~~income.

⁽⁹⁾
⁽¹¹⁾	~~Dividend~~ Dividends declared per share divided by basic earnings per ~~share~~share.

⁽¹⁰⁾
⁽¹²⁾	~~Excludes PCI~~ Nonperforming loans receivable, excluding loans held for sale, consist of nonaccrual loans receivable, and loans receivable past due 90 days or more still accruing interest.

⁽¹¹⁾
⁽¹³⁾	Nonperforming assets consist of nonperforming loans receivable and ~~leases (see footnote (12) above) and OREO~~real estate owned.

⁽¹²⁾
⁽¹⁴⁾	~~Excludes allowance for loan and lease losses allocated to PCI loans~~ Amounts calculated on annualized net income.


⁽¹⁵⁾	~~Basel III rules, including certain transitional provisions, became effective January 1, 2015~~

Non-GAAP Financial Measures

The Company ~~calculates~~provides certain supplemental financial information ~~determined~~ by methods other than in accordance with U.S. GAAP, including tangible assets, tangible stockholders' equity and tangible book value per ~~share, core interest income and yield, and net interest income and margin excluding acquisition accounting.~~share. These non-GAAP measures are used by management in analyzing Hanmi Financial’s capital ~~strength, core loan and lease interest income and yield, and net interest income and margin without the impact of the CBI acquisition.~~

strength.

Tangible equity is calculated by subtracting goodwill ~~created from acquisition of the Commercial Equipment Leasing Division~~ and other intangible assets (principally core deposit ~~intangible~~intangibles) from stockholders’ equity. Banking and financial institution regulators also exclude goodwill and core deposit ~~intangible~~intangibles from stockholders’ equity when assessing the capital adequacy of a financialinstitution. Core loan and lease interest income and yield are calculated by subtracting accretion of discount on purchased loans. Net interest income and net interest margin are calculated by adjusting the reported amounts and rates for the impact of the CBI acquisition, including accretion of discount on purchased loans, accretion of time deposit premium and amortization of subordinated debentures discount.

Management believes the presentation of these financial measures excluding the impact of the items described in the preceding paragraph provide useful supplemental information that are essential to a proper understanding of the capital strength of Hanmi ~~Financial and our core interest income and margin.~~Financial. These disclosures should not be viewed as a substitution for results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.

Tangible Assets, Tangible Stockholders’ Equity and Tangible Book Value Per Share

The following table reconciles these non-GAAP performance measures to the most comparable GAAP performance measures as of the dates indicated:

	As of
	June 30, 2020			June 30, 2019			December 31, 2019
	(in thousands, except per share data)
Total assets	$	6,218,163		$	5,511,752		$	5,538,184
Less goodwill and other intangible assets		(11,742	)		(12,028	)		(11,873	)
Tangible assets	$	6,206,421		$	5,499,724		$	5,526,311
Total stockholders' equity	$	547,436		$	564,458		$	563,267
Less goodwill and other intangible assets		(11,742	)		(12,028	)		(11,873	)
Tangible stockholders' equity	$	535,694		$	552,430		$	551,394

Stockholders' equity to assets		8.80	%		10.24	%		10.17	%
Tangible common equity to tangible assets ⁽¹⁾		8.63	%		10.04	%		9.98	%
Common shares outstanding		30,657,629			30,975,163			30,799,624

Book value per share	$	17.86		$	18.22		$	18.29
Effect of goodwill and other intangible assets		(0.38	)		(0.39	)		(0.39	)
Tangible common equity per common share ⁽¹⁾	$	17.47		$	17.83		$	17.90

September 30,
2017 2016
(in thousands, except per share data)
Total assets $ 5,111,396
$ 4,402,180
Less goodwill (11,031 ) —
Less other intangible assets, net (1,597 ) (1,456 )
Tangible assets $ 5,098,768
$ 4,400,724

Total stockholders’ equity $ 559,247
$ 531,198
Less goodwill (11,031 ) —
Less other intangible assets, net (1,597 ) (1,456 )
Tangible stockholders' equity $ 546,619
$ 529,742

Book value per share $ 17.25
$ 16.47
Effect of goodwill (0.34 ) —
Effect of other intangible assets (0.05 ) (0.05 )
Tangible book value per share $ 16.86
$ 16.42

⁽¹⁾	There were no preferred shares outstanding at the periods indicated.

~~Core Loan and Lease Yield and Net Interest Margin~~

~~The impact of acquisition accounting adjustments on core loan and lease interest income and yield and net interest margin are summarized in the following table:~~

Three Months Ended
September 30, 2017 September 30, 2016
Amount Rate Amount Rate
(dollars in thousands)
Core loan and lease interest income and yield $ 49,924
4.84 % $ 40,476
4.63 %
Accretion of discount on purchased loans 341
0.03 % 674
0.08 %
As reported $ 50,265
4.87 % $ 41,150
4.71 %

Net interest income and net interest margin excluding acquisition accounting ⁽¹⁾
$ 45,048
3.76 % $ 38,874
3.75 %
Accretion of discount on Non-PCI loans and leases 303
0.03 % 648
0.06 %
Accretion of discount on PCI loans and leases 38
— % 26
— %
Accretion of time deposits premium 116
0.01 % 610
0.06 %
Amortization of subordinated debentures discount (85 ) (0.01 )% (67 ) (0.01 )%
Net impact 372
0.03 % 1,217
0.11 %
As reported on a fully taxable equivalent basis $ 45,420
3.79 % $ 40,091
3.86 %


⁽¹⁾	~~Amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate.~~

Nine Months Ended
September 30, 2017 September 30, 2016
Amount Rate Amount Rate
(dollars in thousands)
Core loan and lease interest income and yield $ 142,183
4.78 % $ 117,066
4.69 %
Accretion of discount on purchased loans 1,431
0.05 % 3,796
0.15 %
As reported $ 143,614
4.83 % $ 120,862
4.84 %

Net interest income and net interest margin excluding acquisition accounting ⁽¹⁾
$ 130,409
3.79 % $ 113,710
3.76 %
Accretion of discount on Non-PCI loans and leases 1,287
0.04 % 3,396
0.11 %
Accretion of discount on PCI loans and leases 144
— % 400
0.01 %
Accretion of time deposits premium 358
0.01 % 2,343
0.08 %
Amortization of subordinated debentures discount (243 ) (0.01 )% (185 ) (0.01 )%
Net impact 1,546
0.04 % 5,954
0.19 %
As reported on a fully taxable equivalent basis $ 131,955
3.83 % $ 119,664
3.95 %


⁽¹⁾	~~Amounts calculated on a fully taxable equivalent basis using the current statutory federal tax rate.~~

Executive Overview

~~For the three months ended September 30, 2017, net~~

Net income was ~~$14.9~~$9.2 million, or ~~$0.46 per diluted share, compared with $13.1 million, or $0.41~~$0.30 per diluted share, for the three months ended ~~September~~June 30, 2016. Net income for the third quarter of 2017 increased 13.7%, or $1.8 million. Income before the provision for income taxes for the third quarter of 2017 increased 16.1%, or $3.4 million principally because of the 13.5%, or $5.3 million, increase in net interest income driven by an increase in loans and leases receivable. The increase in net interest income however was partially offset by an increase in the loan and lease loss provision of $1.7 million and a $0.3 million increase in non-interest expenses.

~~For the nine months ended September 30, 2017, net income was $43.2~~2020 compared with $2.7 million, or ~~$1.33 per diluted share, compared with $42.1 million, or $1.31~~$0.09 per diluted share, for the ~~nine months ended September 30, 2016.~~ same period a year ago. The increase in net income for the 2020 second quarter reflects primarily the $15.7 million gain on sale of securities offset by a higher credit loss expense.

Net income for the ~~first nine~~six months ended June 30, 2020 and 2019 was $11.5 million, or $0.38 per diluted share and $17.3 million, or $0.56 per diluted share, respectively. The decline in net income for the 2020 six-month period reflects primarily an increase in credit loss expense offset by the gain on the sale of ~~2017 increased 2.6%, or $1.1 million. Income before~~securities.

The Company adopted effective January 1, 2020, Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses, which replaced the incurred loss methodology for estimating credit losses with a forward-looking current expected credit losses (“CECL”) methodology. The adoption resulted in a $17.4 million increase to the beginning balance of the allowance for credit losses, a $0.3 million decrease to the beginning balance of the allowance for off-balance sheet-items and an after-tax charge of $12.2 million to the beginning balance of retained earnings.

For the second quarter of 2020, credit loss expense was $24.6 million compared with $16.7 million for the second quarter of 2019. The 2020 second quarter credit loss expense included a $21.1 million provision for loan losses and a $3.5 million provision for off-balance sheet items. The 2020 second quarter credit loss expense reflects the change in the macroeconomic assumptions in determining the allowance for credit losses including a higher unemployment rate for the subsequent four quarters and a lower projected annual GDP growth rate.

For the six months ended 2020, credit loss expense was $40.3 million compared with loan loss provision of $17.8 million for the same period in 2019. The credit loss expense for the six-months ended June 30, 2020 included a $36.0 million provision for loan losses and a $4.3 million provision for off-balance sheet items.

Second quarter noninterest income ~~taxes~~increased to $20.9 million from $6.2 million for the first ~~nine months~~quarter, primarily due to $479.9 million in sales of ~~2017 increased 8.2%, or $5.4~~securities resulting in $15.7 million ~~principally because~~in gains. The gains on sales of securities reflect the repositioning of the ~~10.4%, or $12.3 million, increase in net interest income driven by an increase in loans~~securities portfolio to capture the high-level of unrealized gains arising from the very low rate environment. Hanmi reinvested the proceeds into U.S. Treasuries and ~~leases receivable. The increase in net interest income however was partially offset by an increase in the loan~~U.S. Government agencies mortgage-backed securities, collateralized mortgage obligations, and ~~lease loss provision of $5.1 million and a $2.6 million increase in non-interest expenses.~~

notes.

Other financial highlights include the following:

~~Loans~~

Cash and ~~leases~~due from banks increased $424.4 million to $546.0 million as of June 30, 2020 from $121.7 million at December 31, 2019, primarily from a higher volume of non-interest bearing deposits and increased borrowings. The increase in borrowings was largely intended to boost bank liquidity amid disruptions caused to businesses and individuals by the outbreak of COVID-19. The increase in deposits reflects depositors placing proceeds from PPP loans and proceeds from other government assistance programs with the Bank, as well as an increase from our marketing efforts and depositors seeking safety for their funds.

Loans receivable, before the allowance for ~~loan and lease~~credit losses, were ~~$4.20~~$4.83 billion at June 30, 2020 compared with $4.61 billion at December 31, 2019. The increase reflects strong loan production which included $308.8 million of PPP loans and $225.3 million in new loan production. Loans held for sale, representing the ~~end~~guaranteed portion of SBA 7(a) loans, were $17.9 million and $6.0 million at June 30, 2020 and December 31, 2019, respectively. We did not sell any SBA loans during the second quarter because of the ~~third quarter of 2017, up $350.6 million, or 9.1 percent,~~disruptions in the secondary market resulting from ~~$3.84~~the COVID-19 crisis. Secondary market activity resumed late in the second quarter.

Deposits were $5.21 billion at ~~the end of 2016.~~

~~Deposits at September~~June 30, ~~2017 were $4.30 billion, an increase of $89.3 million, or 12.8 percent, from $3.81~~2020 compared with $4.70 billion at December 31, 2019. The increase reflects principally the ~~end of 2016.~~

~~Non-performing~~$473.6 million increase in non-interest bearing demand deposits.

Return on average assets ~~were $16.5 million, or 0.32~~for the three months ended June 30, 2020 and 2019 was 0.63 percent ofand 0.19 percent respectively, while the return on average stockholders’ equity was 6.73 percent and 1.87 percent for the same respective periods. Return on average assets for the six months ended June 30, 2020 and 2019 was 0.41 percent and 0.64 percent, respectively, while the return on average stockholders’ equity was 4.18 percent and 6.20 percent for the same respective periods.

Tangible book value per share was $17.47 at ~~the end of the third quarter of 2017~~June 30, 2020 compared with ~~$18.9 million, or 0.40~~$17.90 at December 31, 2019; tangible stockholders’ equity to tangible assets was 8.63 percent ~~of total assets~~ at ~~the end of 2016.~~

June 30, 2020 compared with 9.98 percent at December 31, 2019.

The Bank continues to be well-capitalized at June 30, 2020 with a Total risk-based capital ratio of 13.62 percent, a Tier-1 risk-based capital ratio of 12.36 percent, a Common Equity Tier 1 capital ratio of 12.36 percent and a Tier 1 leverage ratio of 11.03 percent.

Results of Operations

Net Interest Income

Our primary source of revenue is net interest income, which is the difference between interest and fees derived from earning assets, and interest paid on liabilities obtained to fund those assets. Our net interest income is affected by changes inthe 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 ~~and leases~~receivable are affected principally by changes to interest rates, the demand for ~~such~~ loans ~~and leases,~~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 FederalReserve.

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

	Three Months Ended
	June 30, 2020								June 30, 2019
				Interest		Average						Interest		Average
	Average			Income /		Yield /			Average			Income /		Yield /
	Balance			Expense		Rate			Balance			Expense		Rate
Assets	(in thousands)
Interest-earning assets:
Loans receivable ⁽¹⁾	$	4,680,048		$	52,230		4.49	%	$	4,491,377		$	56,872		5.08	%
Securities ⁽²⁾		589,932			3,225		2.19	%		629,062			3,774		2.40	%
FHLB stock		16,385			203		5.00	%		16,385			283		6.93	%
Interest-bearing deposits in other banks		386,956			78		0.08	%		92,753			557		2.41	%
Total interest-earning assets		5,673,321			55,736		3.95	%		5,229,577			61,486		4.72	%

Noninterest-earning assets:
Cash and due from banks		69,667								100,916
Allowance for credit losses		(66,926	)							(34,714	)
Other assets		219,383								203,870
Total assets	$	5,895,445							$	5,499,649

Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Deposits:
Demand: interest-bearing	$	92,676		$	18		0.08	%	$	83,932		$	32		0.15	%
Money market and savings		1,677,081			2,309		0.55	%		1,541,976			6,083		1.58	%
Time deposits		1,458,351			6,562		1.81	%		1,863,685			10,613		2.28	%
Total interest-bearing deposits		3,228,108			8,889		1.11	%		3,489,593			16,728		1.92	%
Borrowings		342,437			760		0.89	%		59			—		0.00	%
Subordinated debentures		118,583			1,645		5.55	%		118,007			1,764		5.96	%
Total interest-bearing liabilities		3,689,128			11,294		1.23	%		3,607,659			18,492		2.06	%

Noninterest-bearing liabilities and equity:
Demand deposits: noninterest-bearing		1,589,668								1,257,184
Other liabilities		68,311								66,053
Stockholders' equity		548,338								568,753
Total liabilities and stockholders' equity	$	5,895,445							$	5,499,649

Net interest income (taxable equivalent basis)				$	44,442							$	42,994

Cost of deposits ⁽³⁾							0.74	%							1.41	%
Net interest spread (taxable equivalent basis) ⁽⁴⁾							2.72	%							2.66	%
Net interest margin (taxable equivalent basis) ⁽⁵⁾							3.15	%							3.30	%

Three Months Ended
September 30, 2017 September 30, 2016

Average
Balance

Interest
Income /
Expense

Average
Yield /
Rate

Average
Balance

Interest
Income /
Expense

Average
Yield /
Rate
(dollars in thousands)
Assets
Interest-earning assets:
Loans and leases receivable⁽¹⁾
$ 4,092,131
$ 50,265
4.87 % $ 3,477,428
$ 41,150
4.71 %
Securities ⁽²⁾
611,538
3,683
2.41 % 589,832
3,210
2.18 %
FRB and FHLB stock 16,385
286
6.93 % 19,207
419
8.73 %
Interest-bearing deposits in other banks 38,981
123
1.25 % 43,678
55
0.50 %
Total interest-earning assets 4,759,035
54,357
4.53 % 4,130,145
44,834
4.32 %
Noninterest-earning assets:
Cash and due from banks 114,108
116,779

Allowance for loan and lease losses (34,252 ) (40,214 )
Other assets 188,813
190,993

Total assets $ 5,027,704
$ 4,397,703

Liabilities and Stockholders’ Equity
Interest-bearing liabilities:
Deposits:
Demand: interest-bearing $ 90,720
$ 18
0.08 % $ 93,852
$ 19
0.08 %
Money market and savings 1,526,951
3,311
0.86 % 1,141,747
1,834
0.64 %
Time deposits 1,384,724
3,742
1.07 % 1,244,127
2,505
0.80 %
Total interest-bearing deposits 3,002,395
7,071
0.93 % 2,479,726
4,358
0.70 %
FHLB advances 67,935
198
1.16 % 152,935
179
0.47 %
Subordinated debentures 117,065
1,667
5.68 % 18,844
206
4.35 %
Total interest-bearing liabilities 3,187,395
8,936
1.11 % 2,651,505
4,743
0.71 %
Noninterest-bearing liabilities and equity:
Demand deposits: noninterest-bearing 1,257,954
1,189,693

Other liabilities 30,592
27,924

Stockholders’ equity 551,763
528,581

Total liabilities and stockholders’ equity $ 5,027,704
$ 4,397,703

Net interest income (taxable equivalent) $ 45,421
$ 40,091

Cost of deposits ⁽³⁾
0.66 % 0.47 %
Net interest spread ⁽⁴⁾
3.42 % 3.61 %
Net interest margin ⁽⁵⁾
3.79 % 3.86 %

(1)
⁽¹⁾	Loans ~~and leases~~ receivable include ~~LHFS~~loans held for sale and exclude the allowance for ~~loan and lease~~credit losses. Nonaccrual loans ~~and leases~~ receivable areincluded in the average loans receivablebalance.

~~included in the average loan and lease balance.~~

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

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

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

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

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

	Three Months Ended
	June 30, 2020 vs June 30, 2019
	Increases (Decreases) Due to Change In
	Volume			Rate			Total
	(in thousands)
Interest and dividend income:
Loans receivable ⁽¹⁾	$	2,273		$	(6,915	)	$	(4,642	)
Securities ⁽²⁾		(228	)		(321	)		(549	)
FHLB stock		—			(80	)		(80	)
Interest-bearing deposits in other banks		458			(937	)		(479	)
Total interest and dividend income		2,503			(8,253	)		(5,750	)

Interest expense:
Demand: interest-bearing	$	3		$	(17	)	$	(14	)
Money market and savings		493			(4,267	)		(3,774	)
Time deposits		(2,073	)		(1,978	)		(4,051	)
Borrowings		761			(1	)		760
Subordinated debentures		9			(128	)		(119	)
Total interest expense		(807	)		(6,391	)		(7,198	)
Change in net interest income	$	3,310		$	(1,862	)	$	1,448

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

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

Three Months Ended
September 30, 2017 vs. September 30, 2016
Increases (Decreases) Due to Change In
Volume Rate Total
(in thousands)
Interest and dividend income:
Loans and leases receivable $ 7,646
$ 1,469
$ 9,115
Securities 122
351
473
FRB and FHLB stock (55 ) (78 ) (133 )
Interest-bearing deposits in other banks (7 ) 75
68
Total interest and dividend income $ 7,706
$ 1,817
$ 9,523
Interest expense:
Demand: interest-bearing $ (1 ) $ —
$ (1 )
Money market and savings 732
745
1,477
Time deposits 310
927
1,237
FHLB advances (140 ) 159
19
Subordinated debentures 1,380
81
1,461
Total interest expense $ 2,281
$ 1,912
$ 4,193
Change in net interest income (taxable equivalent) $ 5,425
$ (95 ) $ 5,330

Interest and dividend income, on a taxable equivalent basis, ~~increased $9.5~~decreased $5.7 million, or ~~21.2~~9.4 percent, to ~~$54.4~~$55.7 million for the three months ended ~~September~~June 30, ~~2017~~2020 from ~~$44.8~~$61.5 million for the same period in ~~2016.~~2019. Interest expense ~~increased $4.2~~decreased $7.2 million, or ~~88.4~~38.9 percent, to ~~$8.9~~$11.3 million for the three months ended ~~September~~June 30, ~~2017~~2020 from ~~$4.7~~$18.5 million for the same period in ~~2016.~~2019. For the three months ended ~~September~~June 30, ~~2017~~2020 and ~~2016,~~2019, net interest income, on a taxable equivalent basis, was ~~$45.4~~$44.4 million and ~~$40.1~~$43.0 million, respectively. ~~The increase in net~~Net interest income ~~was primarily attributable~~increased during the three months ended June 30, 2020 compared with the same period in 2019 mainly due to ~~the 17.7 percent growth~~decreases in average loans and leases and the change in the mix of interest earning assets with average loans and leases at 86.0 percent of average interest-earning assets for the third quarter of 2017, up from 84.2 percent for the third quarter of 2016, offset by higher rates paid on ~~interest-bearing deposit~~money market, savings, and ~~increases~~time deposits, offset by decreases in ~~other borrowings balances and rates.~~yields earned on loans. The net interest spread and net interest margin, on a taxable equivalent basis, for the three months ended ~~September~~June 30, ~~2017~~2020 were ~~3.42~~2.72 percent and ~~3.79~~3.15 percent, respectively, compared with ~~3.61~~2.66 percent and ~~3.86~~3.30 percent, respectively, for the same period in ~~2016. Excluding the effects~~2019.

The average balance of ~~acquisition accounting adjustments, net interest margin was 3.76 percent and 3.75 percent for the three months ended September 30, 2017 and 2016, respectively.~~

~~Average loans and leases~~interest-earning assets increased ~~$614.7~~$443.7 million, or ~~17.7~~8.49 percent, to ~~$4.10~~$5.67 billion for the three months ended ~~September~~June 30, ~~2017~~2020 from ~~$3.48~~$5.23 billion for the same period in ~~2016. Average securities~~2019. The average balance of loans receivable increased ~~$21.7~~$188.7 million, or ~~3.7~~4.20 percent, to ~~$611.5 million for the three months ended September 30, 2017 from $589.8 million for the same period in 2016. Average interest-earning assets increased $628.9 million, or 15.2 percent, to $4.76~~$4.68 billion for the three months ended ~~September~~June 30, ~~2017~~2020 from ~~$4.13~~$4.49 billion for the same period in ~~2016.~~2019. The ~~increase in~~ average ~~loans and leases was due mainly to new loan production and the commencement~~balance of ~~the Commercial Equipment Leasing Division in the fourth quarter of 2016. Average~~ interest-bearing liabilities increased ~~$535.9~~$81.5 million, or ~~20.2~~2.26 percent, to ~~$3.19~~$3.69 billion for the three months ended ~~September~~June 30, ~~2017,~~2020, compared with ~~$2.65~~$3.61 billion for the same period in 2016. The increase in average interest-bearing liabilities resulted primarily from an increase in money market and savings deposits, time deposits and the $100 million of subordinated debt issued in the first quarter of 2017. In addition, average noninterest-bearing demand deposits increased $68.3 million, or 5.7 percent, to $1.26 billion for the third quarter of 2017 from $1.19 billion in the same period in 2016.

The average yield on loans and leases increased to 4.87 percent for the three months ended September 30, 2017 from 4.71 percent for the same period in 2016, primarily due to new loan production and the commencement of the Commercial Equipment Leasing Division in the fourth quarter of 2016. The average yield on securities, on a taxable equivalent basis, increased to 2.41 percent for the three months ended September 30, 2017 from 2.18 percent for the same period in 2016, attributable primarily to purchasing higher yielding U.S. Government agency mortgage-backed securities. 2019.

The average yield on interest-earning assets, on a taxable equivalent basis, ~~increased 21~~decreased 77 basis points to ~~4.53~~3.95 percent for the three months ended ~~September~~June 30, ~~2017~~2020 from ~~4.32~~4.72 percent for the same period in ~~2016,~~2019, primarily due ~~mainly~~ to the ~~higher percentage of loans~~decrease in the ~~mix~~general level of ~~interest-earning assets.~~interest rates but was partially offset by higher volume in interest-bearing deposits at other banks. The average cost of interest-bearing liabilities ~~increased~~decreased by 4083 basis points to ~~1.11~~1.23 percent for the three months ended ~~September~~June 30, ~~2017~~2020 from ~~0.71~~2.06 percent for the same period in ~~2016.~~

2019, mainly due to lower market interest rates and a smaller percentage of higher-costing time deposits in theportfolio.

	Six Months Ended June 30,
	2020								2019
				Interest		Average						Interest		Average
	Average			Income /		Yield /			Average			Income /		Yield /
	Balance			Expense		Rate			Balance			Expense		Rate
Assets	(in thousands)
Interest-earning assets:
Loans receivable ⁽¹⁾	$	4,599,222		$	106,878		4.67	%	$	4,512,134		$	115,206		5.15	%
Securities ⁽²⁾		606,821			6,880		2.27	%		609,414			7,371		2.42	%
FHLB stock		16,385			492		6.05	%		16,385			572		7.04	%
Interest-bearing deposits in other banks		245,734			411		0.34	%		72,997			892		2.46	%
Total interest-earning assets		5,468,162			114,661		4.22	%		5,210,930			124,041		4.80	%

Noninterest-earning assets:
Cash and due from banks		83,782								104,932
Allowance for credit losses		(63,990	)							(33,356	)
Other assets		212,595								184,702
Total assets	$	5,700,549							$	5,467,208

Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Deposits:
Demand: interest-bearing	$	87,805		$	39		0.09	%	$	84,608		$	61		0.15	%
Money market and savings		1,682,047			7,088		0.85	%		1,534,385			11,760		1.55	%
Time deposits		1,490,548			14,504		1.96	%		1,858,155			20,589		2.23	%
Total interest-bearing deposits		3,260,400			21,631		1.33	%		3,477,148			32,410		1.88	%
Borrowings		236,548			1,256		1.07	%		5,306			72		2.74	%
Subordinated debentures		118,513			3,357		5.67	%		117,935			3,536		5.99	%
Total interest-bearing liabilities		3,615,461			26,244		1.46	%		3,600,389			36,018		2.02	%

Noninterest-bearing liabilities and equity:
Demand deposits: noninterest-bearing		1,461,682								1,254,437
Other liabilities		69,259								48,971
Stockholders' equity		554,147								563,411
Total liabilities and stockholders' equity	$	5,700,549							$	5,467,208

Net interest income (taxable equivalent basis)				$	88,417							$	88,023

Cost of deposits ⁽³⁾							0.92	%							1.38	%
Net interest spread (taxable equivalent basis) ⁽⁴⁾							2.76	%							2.78	%
Net interest margin (taxable equivalent basis) ⁽⁵⁾							3.25	%							3.41	%

Nine Months Ended
September 30, 2017 September 30, 2016

Average
Balance

Interest
Income /
Expense

Average
Yield /
Rate

Average
Balance

Interest
Income /
Expense

Average
Yield /
Rate
(dollars in thousands)
Assets
Interest-earning assets:
Loans and leases receivable⁽¹⁾
$ 3,976,021
$ 143,614
4.83 % $ 3,333,419
$ 120,862
4.84 %
Securities ⁽²⁾
574,801
10,153
2.36 % 643,125
10,136
2.10 %
FRB and FHLB stock 16,385
943
7.69 % 26,809
1,540
7.66 %
Interest-bearing deposits in other banks 41,663
323
1.04 % 42,127
152
0.48 %
Total interest-earning assets 4,608,870
155,033
4.50 % 4,045,480
132,690
4.38 %
Noninterest-earning assets:
Cash and due from banks 116,206
115,235

Allowance for loan and lease losses (33,550 ) (41,401 )
Other assets 190,001
195,748

Total assets $ 4,881,527
$ 4,315,062

Liabilities and Stockholders’ Equity
Interest-bearing liabilities:
Deposits:
Demand: interest-bearing $ 94,040
$ 56
0.08 % $ 95,264
$ 56
0.08 %
Money market and savings 1,489,302
9,200
0.83 % 996,578
4,130
0.55 %
Time deposits 1,293,412
9,431
0.97 % 1,286,120
7,583
0.79 %
Total interest-bearing deposits 2,876,754
18,687
0.87 % 2,377,962
11,769
0.66 %
FHLB advances 118,736
714
0.80 % 204,106
673
0.44 %
Subordinated debentures 88,604
3,677
5.52 % 18,783
584
4.15 %
Total interest-bearing liabilities 3,084,094
23,078
1.00 % 2,600,851
13,026
0.67 %
Noninterest-bearing liabilities and equity:
Demand deposits: noninterest-bearing 1,224,886
1,166,427

Other liabilities 29,044
32,381

Stockholders’ equity 543,503
515,403

Total liabilities and stockholders’ equity $ 4,881,527
$ 4,315,062

Net interest income (taxable equivalent) $ 131,955
$ 119,664

Cost of deposits ⁽³⁾
0.61 % 0.44 %
Net interest spread ⁽⁴⁾
3.50 % 3.71 %
Net interest margin ⁽⁵⁾
3.83 % 3.95 %

(1)
⁽¹⁾	Loans ~~and leases~~ receivable include ~~LHFS~~loans held for sale and exclude the allowance for ~~loan and lease~~credit losses. Nonaccrual loans ~~and leases~~ receivable are included in the average ~~loan and lease~~ loans receivablebalance.

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

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

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

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

	Six Months Ended June 30,
	June 30, 2020 vs June 30, 2019
	Increases (Decreases) Due to Change In
	Volume			Rate			Total
	(in thousands)
Interest and dividend income:
Loans receivable ⁽¹⁾	$	2,272		$	(10,600	)	$	(8,328	)
Securities ⁽²⁾		(31	)		(460	)		(491	)
FHLB stock		—			(80	)		(80	)
Interest-bearing deposits in other banks		781			(1,262	)		(481	)
Total interest and dividend income		3,022			(12,402	)		(9,380	)

Interest expense:
Demand: interest-bearing	$	2		$	(24	)	$	(22	)
Money market and savings		1,052			(5,724	)		(4,672	)
Time deposits		(3,754	)		(2,331	)		(6,085	)
Borrowings		1,255			(71	)		1,184
Subordinated debentures		16			(195	)		(179	)
Total interest expense		(1,429	)		(8,345	)		(9,774	)
Change in net interest income	$	4,451		$	(4,057	)	$	394

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

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

Nine Months Ended
September 30, 2017 vs. September 30, 2016
Increases (Decreases) Due to Change In
Volume Rate Total
(in thousands)
Interest and dividend income:
Loans and leases receivable $ 23,006
$ (254 ) $ 22,752
Securities (1,152 ) 1,169
17
FRB and FHLB stock (603 ) 6
(597 )
Interest-bearing deposits in other banks (2 ) 173
171
Total interest and dividend income $ 21,249
$ 1,094
$ 22,343
Interest expense:
Money market and savings $ 2,499
$ 2,571
$ 5,070
Time deposits 44
1,804
1,848
FHLB advances (110 ) 151
41
Subordinated debentures 2,840
253
3,093
Total interest expense $ 5,273
$ 4,779
$ 10,052
Change in net interest income (taxable equivalent) $ 15,976
$ (3,685 ) $ 12,291

Interest and dividend income, on a taxable equivalent basis, ~~increased $22.3~~decreased $9.4 million, or ~~16.8~~7.6 percent, to ~~$155.0~~$114.7 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 from ~~$132.7~~$124.0 million for the same period in ~~2016.~~2019. Interest expense ~~increased $10.1~~decreased $9.8 million, or ~~77.2~~27.1 percent, to ~~$23.1~~$26.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 from ~~$13.0~~$36.0 million for the same period in ~~2016.~~2019. For the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016,~~2019, net interest income, on a taxable equivalent basis, was ~~$132.0~~$88.4 million and ~~$119.7~~$88.0 million, respectively. ~~The increase in net~~Net interest income ~~was primarily attributable to~~increased during the ~~19.3 percent growth in average loans and leases and the change in the mix of interest earning assets~~six months ended June 30, 2020 compared with ~~average loans and leases at 86.3 percent of average interest-earning assets for the first nine months of 2017, up from 82.4 percent for~~ the same period in ~~2016.~~2019 mainly due to decreases on rates paid for money market, savings and time deposits, as well as lower average balances on time deposits, offset by decreases in the average yields on loans receivable. The net interest spread and net interest margin, on a taxable equivalent basis, for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 were ~~3.50~~2.76 percent and ~~3.83~~3.25 percent, respectively, compared with ~~3.71~~2.78 percent and ~~3.95~~3.41 percent, respectively, for the same period in ~~2016. Excluding the effects~~2019.

The average balance of ~~acquisition accounting adjustments, net interest margin was 3.79 percent and 3.76 percent for the nine months ended September 30, 2017 and 2016, respectively.~~

~~Average loans and leases~~interest-earning assets increased ~~$642.6~~$257.2 million, or ~~19.3~~4.90 percent, to ~~$3.98~~$5.47 billion for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 from ~~$3.33~~$5.21 billion for the same period in ~~2016. Average securities decreased $68.3~~2019. The average balance of loans receivable increased $87.1 million, or ~~10.6~~1.90 percent, to ~~$574.8 million for the nine months ended September 30, 2017 from $643.1 million for the same period in 2016. Average interest-earning assets increased $563.4 million, or 13.9 percent, to $4.61~~$4.60 billion for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 from ~~$4.05~~$4.51 billion for the same period in ~~2016.~~2019. The ~~increase in~~ average ~~loans and leases was due mainly to new loan production and the commencement~~balance of ~~the Commercial Equipment Leasing Division in the fourth quarter of 2016. Average~~ interest-bearing liabilities increased ~~$483.2~~$15.1 million, or ~~18.6~~0.42 percent, to ~~$3.08~~$3.62 billion for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, compared with ~~$2.60~~$3.60 billion for the same period in 2016. The increase in average interest-bearing liabilities resulted primarily from an increase in money market and savings deposits and the $100 million of subordinated debt issued in the first quarter of 2017. In addition, average noninterest-bearing demand deposits increased $58.5 million, or 5.0 percent, to $1.22 billion for the first nine months of 2017 from $1.17 billion in the same period in 2016.

The average yield on loans and leases decreased to 4.83 percent for the nine months ended September 30, 2017 from 4.84 percent for the same period in 2016, primarily due to a decrease in discount accretion on purchased loans. The average yield on securities, on a taxable equivalent basis, increased to 2.36 percent for the nine months ended September 30, 2017 from

~~2.10 percent for the same period in 2016, attributable primarily to purchasing higher yielding U.S. government agency mortgage-backed securities.~~ 2019.

The average yield on interest-earning assets, on a taxable equivalent basis, ~~increased 12~~decreased 58 basis points to ~~4.50~~4.22 percent for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 from ~~4.38~~4.80 percent for the same period in ~~2016,~~2019, primarily due ~~mainly~~ to the ~~higher percentage of loans~~decrease in the ~~mix~~general level of interest rates of interest-earning ~~assets.~~assets partially offset by an increase in the average balance of interest-bearing deposits at other banks. The average cost of interest-bearing liabilities ~~increased~~decreased by 3356 basis points to ~~1.00~~1.46 percent for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 from ~~0.67~~2.02 percent for the same period in ~~2016.~~

2019, mainly due to lower market interest rates and a smaller percentage of higher-costing time deposits in theportfolio.

~~Provision for Loan and Lease Losses~~

~~In anticipation~~

Credit Loss Expense

For the three months ended June 30, 2020, credit loss expense was $24.6 million, comprised of ~~credit risks inherent in our lending business, we set aside an allowance~~a $21.1 million provision for loan losses and ~~lease losses through charges to earnings. These charges are made not only for our outstanding loan and lease portfolio, but also~~a $3.5 million provision for off-balance sheet items such as commitments to extend credit, or letters of credit. The provisions, whether a charge or a credit, made for our outstanding loan and lease portfolio are recorded to the allowance for loan and lease losses, whereas charges or credits to other noninterest expense for off-balance sheet items are recorded to the allowance for off-balance sheet items, and are presented as a component of other liabilities.

The provision for loan and lease losses was $0.3 million for the third quarter of 2017. For the same period in 2016, the provision for loan and lease losses was a negative $1.5 million. The charge to other noninterest expense for losses on off-balance sheet items was a negative $0.2 million for the three months ended September 30, 2017 compared ~~to none for the same period in 2016.~~

The provision for loan and lease losses was $0.6 million for the first nine months of 2017, which included a negative loan loss provision of $0.2 million related to Purchased Credit Impaired loans from the 2014 acquisition. For the same period in 2016, the provision for loan and lease losses was a negative $4.5 million, which includedwith a loan loss provision ~~of $0.2 million related to Purchased Credit Impaired loans. The charge to other noninterest expense~~ for ~~losses on off-balance sheet items was a negative $0.3 million for the nine months ended September 30, 2017 compared to $0.5~~$16.7 million for the same period in ~~2016.~~

2019 and a provision for off-balance sheet items of $0.2 million. The credit loss expense for the three months ended June 30, 2020 reflects principally deteriorating assumptions about unemployment and economic activity as well as higher levels of unused loan commitments.

The credit loss expense for the six months ended June 30, 2020 and 2019 was $40.3 million and $17.8 million. Included in credit loss expense was the provision for loan losses of $36.0 million and provision for off-balance sheet items of $4.3 million for the six months ended June 30, 2020. The loan loss provision for the six months ended June 30, 2019 was $17.8 million, and the provision for off-balance sheet items was a credit to expense of $0.1 million.

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

Noninterest Income

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

	Three Months Ended June 30,				Increase (Decrease)
	2020		2019		Amount
	(in thousands)
Service charges on deposit accounts	$	2,032	$	2,486	$	(454	)
Trade finance and other service charges and fees		961		1,204		(243	)
Servicing income		855		600		255
Bank-owned life insurance income		276		281		(5	)
All other operating income		1,095		293		802
Service charges, fees & other		5,219		4,864		355
Gain on sale of SBA loans		—		1,060		(1,060	)
Net gain (loss) on sales of securities		15,712		570		15,142
Gain on sale of bank premises		—		1,235		(1,235	)
Total noninterest income	$	20,931	$	7,729	$	13,202

Three Months Ended September 30, Increase (Decrease)
2017 2016 Amount Percentage
(dollars in thousands)
Service charges on deposit accounts $ 2,678
$ 2,883
$ (205 ) (7.1 )%
Trade finance and other service charges and fees 1,133
992
141
14.2 %
Other operating income 1,213
2,348
(1,135 ) (48.3 )%
Subtotal service charges, fees and other income 5,024
6,223
(1,199 ) (19.3 )%
Gain on sale of SBA loans 2,546
1,616
930
57.5 %
Disposition gains on PCI loans 979
789
190
24.1 %
Net gain on sales of securities 267
46
221
480.4 %
Total noninterest income $ 8,816
$ 8,674
$ 142
1.6 %

For the three months ended ~~September~~June 30, ~~2017,~~2020, noninterest income was ~~$8.8~~$20.9 million, an increase of ~~$0.1~~$13.2 million, or ~~1.6~~170.8 percent, compared with ~~$8.7~~$7.7 million for the same period in ~~2016. The~~2019. Most of the increase was ~~primarily~~ attributable to ~~increased~~$15.7 million in gains on sale of $479.9 million of securities reflecting the repositioning of the securities portfolio to capture the high level of unrealized gains arising from the very low rate environment. Securities transactions for the year ago period resulted in gains of $0.5 million as we sold the remaining tax-exempt municipal bonds during the three months ended June 30, 2019. There were no gains on sale of SBA loans ~~and securities transactions offset by lower other operating income. Gains on SBA loan sales were $2.5 million for~~during the third quarter of 2017, an increase of $0.9 million from the third quarter of 2016 as the volume of loan sales increased to $32.5 million from $24.1 million in the same quarter last year. Sales of securities resulted in a net gain of $267,000 for the third quarter of 2017three months ended June 30, 2020 compared with ~~$46,000~~$1.1 million for the same period ~~in 2016. Other operating income was $1.2 million for the third quarter of 2017,~~ a decrease of $1.1 million, or 48.3%, compared with $2.3 million for the third quarter of 2016. The decrease in other operating income was due to the gain from the sale of a branch facility in the third quarter of 2016.

year ago.

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

	Six Months Ended June 30,				Increase (Decrease)
	2020		2019		Amount
	(in thousands)
Service charges on deposit accounts	$	4,432	$	4,844	$	(412	)
Trade finance and other service charges and fees		1,948		2,328		(380	)
Servicing income		1,416		1,083		333
Bank-owned life insurance income		553		533		20
All other operating income		1,939		679		1,260
Service charges, fees & other		10,288		9,467		821
Gain on sale of SBA loans		1,154		1,986		(832	)
Net gain (loss) on sales of securities		15,712		1,295		14,417
Gain on sale of bank premises		—		1,235		(1,235	)
Total noninterest income	$	27,154	$	13,983	$	13,171

Nine Months Ended September 30, Increase (Decrease)
2017 2016 Amount Percentage
(dollars in thousands)
Service charges on deposit accounts $ 7,667
$ 8,782
$ (1,115 ) (12.7 )%
Trade finance and other service charges and fees 3,449
3,099
350
11.3 %
Other operating income 4,764
5,423
(659 ) (12.2 )%
Subtotal service charges, fees and other income 15,880
17,304
(1,424 ) (8.2 )%
Gain on sale of SBA loans 6,678
4,247
2,431
57.2 %
Disposition gains on PCI loans 1,473
3,411
(1,938 ) (56.8 )%
Net gain on sales of securities 1,702
46
1,656
3,600.0 %
Total noninterest income $ 25,733
$ 25,008
$ 725
2.9 %

For the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, noninterest income was ~~$25.7~~$27.2 million, an increase of ~~$0.7~~$13.2 million, or ~~2.9~~94.2 percent, compared with ~~$25.0~~$14.0 million for the same period in ~~2016. The increase~~2019. Increase in noninterest income for the six months ended June 30, 2020 was ~~primarily attributable~~mostly attributed to $15.7 million in gains on sales of securities. Securities transactions for the same period a year ago resulted in gains of $1.3 million as we sold all of our tax-exempt municipal bonds during the six months ended June 30, 2019. In addition, other operating income increased from $512,000 of fees relating to back-to-back swap contracts with a notional amount of $29.5 million and higher levels of bank interchange fees of $699,000. These were partially offset by lower gains on sales of SBA loans which were $1.2 million for the six months ended June 30, 2020 compared with $2.0 million for the same period a year ago, and the absence of a gain on the sale of ~~SBA loans and securities transactions offset by lower gains from the resolution or disposition of PCI loans and service charges on deposit accounts. Gains on SBA loan sales were $6.7~~bank premises in 2020 compared to a $1.2 million gain for the first nine months of 2017, an increase of $2.4 million from the first nine months of 2016 as the volume of loan sales increased to $84.5 million from $55.9 million in the same quarter last year. Sales of securities resulted in a net gain of $1.7 million for the first nine months of 2017 compared with $46,000 for the same period in 2016. Disposition gains on PCI loans were $1.5 million for the ninesix months ended ~~September~~June 30, ~~2107 compared with $3.4 million the same period in 2016.~~

2019.

Noninterest Expense

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

	Three Months Ended June 30,					Increase (Decrease)
	2020			2019		Amount
	(in thousands)
Salaries and employee benefits	$	14,701		$	16,881	$	(2,180	)
Occupancy and equipment		4,508			3,468		1,040
Data processing		2,804			2,140		664
Professional fees		1,545			1,983		(438	)
Supplies and communications		858			649		209
Advertising and promotion		456			945		(489	)
All other operating expenses		2,457			3,687		(1,230	)
Subtotal		27,329			29,753		(2,424	)
Provision expense (income) for losses on off-balance sheet items ⁽¹⁾		—			233		(233	)
Other real estate owned expense		(191	)		158		(349	)
Total noninterest expense	$	27,138		$	30,144	$	(3,006	)

(1)	Provision expense (income) for losses on off-balance sheet items is now included in credit loss expense; the provision for losses on off-balance sheet items was $3.5 million for the six months ended June 30, 2020.

Three Months Ended September 30, Increase (Decrease)
2017 2016 Amount Percentage
(dollars in thousands)
Salaries and employee benefits $ 16,947
$ 15,950
$ 997
6.3 %
Occupancy and equipment 3,883
3,917
(34 ) -0.9 %
Data processing 1,779
1,330
449
33.8 %
Professional fees 1,210
1,090
120
11.0 %
Supplies and communications 755
821
(66 ) -8.0 %
Advertising and promotion 1,147
1,153
(6 ) -0.5 %
OREO expense (16 ) 73
(89 ) -121.9 %
Other operating expenses 2,955
4,003
(1,048 ) -26.2 %
Total noninterest expense $ 28,660
$ 28,337
$ 323
1.1 %

For the three months ended ~~September~~June 30, ~~2017,~~2020, noninterest expense was ~~$28.7~~$27.1 million, ~~an increase~~a decrease of ~~$0.3~~$3.0 million, or ~~1.1~~10.0 percent, compared with ~~$28.3~~$30.1 million for the same period in ~~2016.~~2019. The ~~increase~~decrease was primarily due ~~primarily~~ to ~~increases in~~lower salaries and employee benefits ~~OREO and data processing, offset by a decrease~~expense from $3.1 million in ~~other operating expenses. The increase in~~higher capitalized salaries and employee benefits is largely due to personnel added with the commencement of the Commercial Equipment Leasing Division and annual merit increases compared to the same period in 2016. The decrease in other operating expenses is mainly ~~due to a $1.4 million charge for the three months ended September 30, 2016~~ related to the ~~finalization~~origination of ~~prior year FDIC loss share claims.~~

PPP loans.

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

	Six Months Ended June 30,						Increase (Decrease)
	2020			2019			Amount
	(in thousands)
Salaries and employee benefits	$	32,450		$	32,619		$	(169	)
Occupancy and equipment		8,983			7,989			994
Data processing		5,473			4,223			1,250
Professional fees		3,460			3,632			(172	)
Supplies and communications		1,639			1,493			146
Advertising and promotion		1,190			1,705			(515	)
Merger and integration costs		—			641			(641	)
All other operating expenses		5,200			7,089			(1,889	)
Subtotal		58,395			59,391			(996	)
Provision expense (income) for losses on off-balance sheet items ⁽¹⁾		—			(106	)		106
Other real estate owned expense		(189	)		(75	)		(114	)
Total noninterest expense	$	58,206		$	59,210		$	(1,004	)

Nine Months Ended September 30, Increase (Decrease)
2017 2016 Amount Percentage
(dollars in thousands)
Salaries and employee benefits $ 50,674
$ 47,710
$ 2,964
6.2 %
Occupancy and equipment 11,743
11,351
392
3.5 %
Data processing 5,148
4,219
929
22.0 %
Professional fees 3,912
4,063
(151 ) -3.7 %
Supplies and communications 2,135
2,266
(131 ) -5.8 %
Advertising and promotion 2,964
2,769
195
7.0 %
OREO expense 402
721
(319 ) -44.2 %
Merger and integration costs (income) (40 ) —
(40 ) -100.0 %
Other operating expenses 7,905
9,170
(1,265 ) -13.8 %
Total noninterest expense $ 84,843
$ 82,269
$ 2,574
3.1 %

(1)	Provision expense (income) for losses on off-balance sheet items is now included in credit loss expense; the provision for losses on off-balance sheet items was $4.3 million for the six months ended June 30, 2020.

For the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, noninterest expense was ~~$84.8~~$58.2 million, ~~an increase~~a decrease of ~~$2.6~~$1.0 million, or ~~3.1~~1.7 percent, compared with ~~$82.3~~$59.2 million for the same period in ~~2016.~~2019. The decrease was primarily due to a reduction of other operating expenses from gains on sales and disposals of repossessed assets, offset by an increase ~~was due primarily to increases~~ in ~~salaries and employee benefits,~~ data processing and occupancy and equipment costs.

Income Tax Expense

Income tax expense ~~offset by a decrease in other operating expense.~~was $4.5 million and $1.2 million representing an effective income tax rate of 32.7 percent and 31.5 percent for the three months ended June 30, 2020 and 2019, respectively. The increase in ~~salaries and employee benefits is largely due to personnel added with~~ the ~~commencement of~~effective tax rate for the ~~Commercial Equipment Leasing Division and annual merit increases~~three months ended June 30, 2020, compared to the same period in ~~2016. The decrease in other operating expenses is mainly~~2019 was principally due to ~~a $1.4 million charge for~~higher pre-tax income during the ~~three months ended September 30, 2016 related to the finalization of prior year FDIC loss share claims.~~

~~Income Tax Expense~~

second quarter.

Income tax expense was ~~$9.9~~$5.5 million and $7.5 million representing an effective income tax rate of 32.3 percent and 30.2 percent for the ~~three~~six months ended ~~September~~June 30, ~~2017,~~2020 and 2019, respectively. The increase in the effective tax rate for the six months ended June 30, 2020, compared ~~with $8.2 million for~~to the same period in ~~2016. The effective income tax rate~~2019 was ~~39.9 percent for the three months ended September 30, 2017~~principally due to lower tax-exempt interest and ~~38.6 percent for the same period in 2016.~~

Income tax expense was $27.6 million for the nine months ended September 30, 2017, compared with $23.3 million for the same period in 2016. The effective income tax rate was 39.0 percent for the nine months ended September 30, 2017, compared with 35.6 percent for the same period in 2016. Income tax expense for the first nine months of 2016 included a $1.8 million benefit arising from the finalization of the 2014 amended income tax returns.

dividends.

Financial Condition

Securities

As of ~~September~~June 30, ~~2017,~~2020, our securities portfolio ~~was composed primarily~~consisted of U.S. government agency and sponsored agency mortgage-backed securities, ~~and~~ collateralized mortgage obligations ~~as well as tax exempt municipal bonds.~~and, to a lesser extent, U.S. Treasury securities. Most of ~~the~~these securities ~~carried~~carry fixed interest rates. Other than holdings of U.S. government agency ~~securities,~~and sponsored agency obligations, there were no securities of any one issuer exceeding 10 percent of stockholders’ equity as of ~~Sepember~~June 30, ~~2017~~2020 and December 31, ~~2016.~~

2019.

The following table summarizes the amortized cost, estimated fair value and unrealized gain (loss) on securities as of the dates indicated:

	June 30, 2020							December 31, 2019
			Estimated		Unrealized					Estimated		Unrealized
	Amortized		Fair		Gain			Amortized		Fair		Gain
	Cost		Value		(Loss)			Cost		Value		(Loss)
	(in thousands)
Securities available for sale:
U.S. Treasury securities	$	44,982	$	45,262	$	280		$	34,947	$	35,206	$	259
U.S. government agency and sponsored agency obligations:
Mortgage-backed securities		413,278		413,263		(15	)		406,813		410,800		3,987
Collateralized mortgage obligations		120,080		120,294		214			164,232		164,592		360
Debt securities		77,160		77,152		(8	)		23,733		23,879		146
Total U.S. government agency and sponsored agency obligations		610,518		610,709		191			594,778		599,271		4,493
Total securities available for sale	$	655,500	$	655,971	$	471		$	629,725	$	634,477	$	4,752

September 30, 2017 December 31, 2016

Amortized
Cost

Estimated
Fair
Value

Unrealized
Gain
(Loss)

Amortized
Cost

Estimated
Fair
Value

Unrealized
Gain
(Loss)
(in thousands)
Securities available for sale:
Mortgage-backed securities ^{(1) (2)}
$ 310,111
$ 309,750
$ (361 ) $ 230,489
$ 229,630
$ (859 )
Collateralized mortgage obligations ⁽¹⁾
107,052
106,124
(928 ) 77,447
76,451
(996 )
U.S. government agency securities 7,499
7,457
(42 ) 7,499
7,441
(58 )
SBA loan pool securities 4,036
3,896
(140 ) 4,356
4,146
(210 )
Municipal bonds-tax exempt 146,177
148,524
2,347
159,789
158,030
(1,759 )
Municipal bonds-taxable —
—
—
13,391
13,701
310
Corporate bonds —
—
—
5,010
5,015
5
U.S. treasury securities 153
153
—
156
156
—
Mutual funds 22,916
22,536
(380 ) 22,916
22,394
(522 )
Total securities available for sale $ 597,944
$ 598,440
$ 496
$ 521,053
$ 516,964
$ (4,089 )


⁽¹⁾	~~Collateralized by residential mortgages and guaranteed by U.S. government sponsored entities.~~


⁽²⁾	~~Includes securities collateralized by home equity conversion mortgages with an estimated fair value of $8.1 million and $52.9 million as of September 30, 2017 and December 31, 2016, respectively.~~

As of ~~September~~June 30, ~~2017,~~2020, securities available for sale increased ~~15.8~~$21.5 million, or 3.4 percent, to ~~$598.4~~$656.0 million, compared with ~~$517.0~~$634.5 million as of December 31, ~~2016, due mainly to security purchases. As~~2019. The increase reflects partial utilization of September 30, 2017, securities available for sale had a net unrealized gain of $496,000, comprised of $3.2 million of unrealized gains and $2.7 million of unrealized losses. As of December 31, 2016, securities available for sale had a net unrealized loss of $4.1 million, comprised of $1.2 million of unrealized gains and $5.3 million of unrealized losses.

excess liquidity.

The following table summarizes the contractual maturity schedule for securities, at amortized cost, and their ~~weighted-average yields~~weighted- average yield as of ~~September~~June 30, ~~2017:~~2020:

						After One Year But					After Five Years But
	Within One Year					Within Five Years					Within Ten Years					After Ten Years					Total
	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
	(in thousands)
Securities available for sale:
U.S. Treasury securities	$	34,988		0.51	%	$	9,996		2.67	%	$	—		0.00	%	$	—		0.00	%	$	44,984		0.99	%
U.S. government agency and sponsored agency obligations:
Mortgage-backed securities		7,083		1.95	%		4,685		2.10	%		—		0.00	%		401,510		1.54	%		413,278		1.56	%
Collateralized mortgage obligations		11		1.68	%		1,411		1.48	%		1,813		1.42	%		116,843		1.02	%		120,078		1.03	%
Debt securities		—		0.00	%		67,160		0.54	%		10,000		0.85	%		—		0.00	%		77,160		0.58	%
Total U.S. government agency and sponsored agency obligations		7,094		1.95	%		73,256		0.66	%		11,813		0.94	%		518,353		1.43	%		610,516		1.33	%
Total securities available for sale	$	42,082		0.75	%	$	83,252		0.90	%	$	11,813		0.94	%	$	518,353		1.43	%	$	655,500		1.31	%

After One Year But After Five Years But
Within One Year Within Five Years Within Ten Years After Ten Years Total
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
(dollars in thousands)
Securities available for sale:
Mortgage-backed securities $ 23,222
1.76 % $ 37,312
2.01 % $ 92,049
2.21 % $ 157,528
2.28 % $ 310,111
2.19 %
Collateralized mortgage obligations 21
— % 1,935
1.55 % 17,941
1.71 % 87,155
1.86 % 107,052
1.83 %
U.S. government agency securities —
— % 6,000
1.35 % 1,499
2.20 % —
— % 7,499
1.52 %
SBA loan pool securities —
— % —
— % —
— % 4,036
1.72 % 4,036
1.72 %
Municipal bonds-tax exempt ⁽¹⁾
—
— % 5,296
2.64 % 85,104
3.20 % 55,777
4.18 % 146,177
3.55 %
Municipal bonds-taxable —
— % —
— % —
— % —
— % —
— %
Corporate bonds —
— % —
— % —
— % —
— % —
— %
U.S. treasury securities 153
1.20 % —
— % —
— % —
— % 153
1.20 %
Mutual funds ⁽²⁾
—
— % —
— % —
— % 22,916
2.46 % 22,916
2.46 %
Total securities available for sale $ 23,396
1.75 % $ 50,543
1.98 % $ 196,593
2.59 % $ 327,412
2.50 % $ 597,944
2.46 %


⁽¹⁾	~~The yield on municipal bonds has been computed on a federal tax-equivalent basis of 35 percent.~~


⁽²⁾	~~Mutual funds do not have contractual maturities. However, they are included in the table shown above as over ten years, since the Company intends to hold these securities for at least this duration.~~

Loans ~~and Leases~~ Receivable ~~Net~~

The following table shows the ~~loan and lease~~loans portfolio composition by type as of the dates ~~indicated:~~indicated, excluding loans held for sale:

	June 30, 2020			December 31, 2019
	(in thousands)
Real estate loans:
Commercial property
Retail	$	808,157		$	869,302
Hospitality		882,812			922,288
Other⁽¹⁾		1,504,916			1,358,432
Total commercial property loans		3,195,885			3,150,022
Construction		70,357			76,455
Residential property		354,064			402,028
Total real estate loans		3,620,306			3,628,505
Commercial and industrial loans		730,399			484,093
Leases receivable		462,811			483,879
Consumer loans ⁽²⁾		12,126			13,670
Loans receivable		4,825,642			4,610,147
Allowance for credit losses		(86,330	)		(61,408	)
Loans receivable, net	$	4,739,312		$	4,548,739

September 30, 2017 December 31, 2016
(in thousands)
Real estate loans:
Commercial property
Retail $ 917,823
$ 859,953
Hospitality 733,226
651,158
Gas station 247,430
262,879
Other ⁽¹⁾
1,146,189
1,109,656
Total commercial real estate loans 3,044,668
2,883,646
Construction 64,263
55,962
Residential property 430,627
338,767
Total real estate loans 3,539,558
3,278,375
Commercial and industrial loans:
Commercial term 170,942
138,168
Commercial lines of credit 149,937
136,231
International loans 43,577
25,821
Total commercial and industrial loans 364,456
300,220
Leases receivable 272,271
243,294
Consumer loans⁽²⁾
19,070
22,880
Loans and leases receivable 4,195,355
3,844,769
Allowance for loan and lease losses (32,492 ) (32,429 )
Loans and leases receivable, net $ 4,162,863
$ 3,812,340

(1)
⁽¹⁾	Includes, among other types, mixed-use, apartment, office, industrial, gas stations, faith-based facilities and warehouse; all other property types ~~which individually~~ represent less than one percent of total loans ~~and leases receivable; other property types include mixed-use, apartment, office, industrial, faith-based facilities and warehouse.~~receivable.

(2)
⁽²⁾	Consumer loans include home equity lines of credit of ~~$14.7~~$7.6 million and ~~$17.7~~$8.2 million as of ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016,~~2019, respectively.

As of ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016,~~2019, net loans ~~and leases~~ receivable ~~were $4.16~~was $4.74 billion and ~~$3.81~~$4.55 billion, respectively, representing an increase of ~~$350.5~~$190.6 million, or ~~9.2~~4.2 percent. The increase in net loans ~~and leases~~receivable as of ~~September~~

June 30, ~~2017~~2020 compared with December 31, ~~2016~~2019 was ~~primarily~~ attributable to an increase of new loan production by $534.1 million, of which $308.8 million related to the loans issued under the Paycheck Protection Program. These increases were partially offset by an increase in the allowance for credit losses by $24.9 million from an adjustment of $17.4 million related to adoption CECL (ASU 2016-13) on January 1, 2020 and ~~lease production~~additional provisions for the forecasted impact to the loan portfolio as of ~~$702.1 million and loan purchases of $161.3 million.~~

June 30, 2020 due to the ongoing pandemic.

Industry

Our ~~loan and lease~~loans receivable portfolio included the following concentrations of loans to one type of industry that were greater than 1010.0 percent of loans ~~and leases~~receivable outstanding:

			Percentage of
	Balance as of		Loans Receivable
	June 30, 2020		Outstanding
	(in thousands)
Lessor of nonresidential buildings	$	1,384,992		28.7	%
Hospitality		944,923		19.6	%

Balance at September 30, 2017
Percentage of Loans and Leases
Outstanding

Industry (in thousands)
Lessor of nonresidential buildings $ 1,262,200
30.1 %
Hospitality $ 739,401
17.6 %

There was no other concentration of loans ~~and leases~~receivable to any one type of industry exceeding 10.0 percent of loans ~~and leases~~receivable outstanding.

Loan Quality Indicators

As of June 30, 2020 and December 31, 2019, pass/pass-watch, special mention and classified loans, disaggregated by loan class, were as follows:

	Pass/Pass- Watch		Special Mention		Classified		Total
	(in thousands)
June 30, 2020
Real estate loans:
Commercial property
Retail	$	800,437	$	1,182	$	6,538	$	808,157
Hospitality		879,131		—		3,681		882,812
Other		1,469,272		6,059		29,585		1,504,916
Total commercial property loans		3,148,840		7,241		39,804		3,195,885
Construction		44,503		—		25,854		70,357
Residential property		350,520		784		2,760		354,064
Total real estate loans		3,543,863		8,025		68,418		3,620,306
Commercial and industrial loans		702,443		12,423		15,533		730,399
Leases receivable		453,528		—		9,283		462,811
Consumer loans		10,752		686		688		12,126
Total loans receivable	$	4,710,586	$	21,134	$	93,922	$	4,825,642

December 31, 2019
Real estate loans:
Commercial property
Retail	$	859,739	$	2,835	$	6,728	$	869,302
Hospitality		915,834		939		5,515		922,288
Other		1,329,817		7,807		20,809		1,358,432
Total commercial property loans		3,105,390		11,580		33,052		3,150,022
Construction		36,956		1,613		37,886		76,455
Residential property		398,737		2,512		779		402,028
Total real estate loans		3,541,082		15,705		71,718		3,628,505
Commercial and industrial loans		458,184		10,222		15,687		484,093
Leases receivable		477,977		—		5,902		483,879
Consumer loans		12,247		705		718		13,670
Total loans receivable	$	4,489,491	$	26,632	$	94,025	$	4,610,147

Classified loans were $93.9 million at June 30, 2020 compared with $94.0 million at the end of 2019, while special mention loans were $21.1 million at the end of the second quarter compared with $26.6 million at December 31, 2019. The decrease in classified loans primarily reflects the $25.2 million charge-off of the previously identified troubled loan relationship, offset by the addition of two film-tax credit loans totaling $12.6 million and one construction loan totaling $12.8 million.

Nonperforming Loans and ~~Leases and~~ Nonperforming Assets

Nonperforming loans ~~and leases (excluding PCI loans)~~ consist of loans ~~and leases~~receivable on nonaccrual status and loans ~~and leases~~ 90 days or more past due and still accruing interest. Nonperforming assets consist of nonperforming loans and ~~leases and~~ OREO. ~~Non-purchased credit impaired (“Non-PCI”) loans and leases~~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 ~~receivable~~loan on nonaccrual status earlier, depending upon the individual circumstances surrounding the ~~receivable's~~loan's delinquency. When ~~an asset~~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 ~~assets~~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 ~~and leases~~ not meeting the criteria for nonaccrual. OREO consists of properties acquired by foreclosure or similar means that management intends to offer for sale.

Except for nonperforming loans ~~and leases~~ set forth in the table belowand ~~PCI loans,~~ the matters described in the following paragraph, we are not aware of any other loans ~~or leases~~ as of ~~September~~June 30, ~~2017 and December 31, 2016~~2020 for which known credit problems of the borrower would cause serious doubts as to the ability of such borrowers to comply with their present repayment terms, or any known events that would result in the ~~receivable~~loan being designated as nonperforming at some future date. We cannot, however, predict the extent to which a deterioration ingeneral economic conditions, real estate values, increases in general rates of interest, or changes in the financial condition or business of borrower may adversely affect a borrower’s ability to pay.

On March 22, 2020, banking regulators issued a statement titled the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19. Additionally, Section 4013 of the CARES Act further provides that a qualified loan modification is exempt by law from classification as a TDR as defined by GAAP, from the period beginning March 1, 2020 and until the earlier of December 31, 2020 or the date that is 60 days after the date on which the national emergency concerning the COVID-19 outbreak declared by the President of the United States under the National Emergencies Act (50 U.S.C. 1601 et seq.) terminates. Accordingly, we are offering short-term modifications made in response to COVID-19 to borrowers who are current and otherwise not past due. These include short-term, 90 days or less, modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. As of June 30, 2020, the Bank approved 2,443modification requests representing $1.4 billion of loans and leases, or 29.0 percent of the loan portfolio, of which 698 or $1.3 billion represented loan modifications and 1,745 or $1.0 million represented lease modifications.

The following table provides information with respect to the components of nonperforming assets ~~(excluding PCI loans)~~ as of the dates indicated:

							Increase (Decrease)
	June 30, 2020			December 31, 2019			Amount			Percentage
	(in thousands)
Nonperforming loans:
Real estate loans:
Commercial property
Retail	$	1,355		$	277		$	1,078			388.9	%
Hospitality		—			225			(225	)		-100.0	%
Other		4,503			14,864			(10,361	)		-69.7	%
Total commercial property loans		5,858			15,366			(9,508	)		-61.9	%
Construction		25,854			27,201			(1,347	)		-5.0	%
Residential property		2,794			1,124			1,670			148.5	%
Total real estate loans		34,506			43,691			(9,185	)		-21.0	%
Commercial and industrial loans		13,785			13,479			306			2.3	%
Leases receivable		9,285			5,902			3,383			57.3	%
Consumer loans		688			689			(1	)		-0.1	%
Total nonaccrual loans		58,264			63,761			(5,497	)		-8.6	%
Loans 90 days or more past due and still accruing		—			—			—			100.0	%
Total nonperforming loans ⁽¹⁾		58,264			63,761			(5,497	)		-8.6	%
Other real estate owned		148			63			85			134.9	%
Total nonperforming assets	$	58,412		$	63,824		$	(5,412	)		-8.5	%

Nonperforming loans as a percentage of loans		1.21	%		1.38	%
Nonperforming assets as a percentage of assets		0.94	%		1.15	%
Performing troubled debt restructured loans	$	14,524		$	830

September 30, 2017 December 31, 2016 Increase (Decrease)
Amount Percentage
(dollars in thousands)
Nonperforming Non-PCI loans and leases:
Real estate loans:
Commercial property
Retail $ 253
$ 404
$ (151 ) -37.4 %
Hospitality 5,368
5,266
102
1.9 %
Gas station 742
1,025
(283 ) -27.6 %
Other 2,097
2,033
64
3.1 %
Total commercial real estate loans 8,460
8,728
(268 ) -3.1 %
Residential property 621
564
57
10.1 %
Commercial and industrial loans 1,165
824
341
41.4 %
Leases receivable 3,378
901
2,477
274.9 %
Consumer loans 934
389
545
140.1 %
Total nonperforming Non-PCI loans 14,558
11,406
3,152
27.6 %
Loans 90 days or more past due and still accruing —
—
—
—
Total nonperforming Non-PCI loans and leases⁽¹⁾
14,558
11,406
3,152
27.6 %
OREO 1,946
7,484
(5,538 ) -74.0 %
Total nonperforming assets $ 16,504
$ 18,890
$ (2,386 ) -12.6 %

Nonperforming Non-PCI loans and leases as a percentage of Non-PCI loans and leases 0.35 % 0.30 %
Nonperforming assets as a percentage of assets 0.32 % 0.40 %
Troubled debt restructured performing Non-PCI loans and leases $ 8,490
$ 11,146


⁽¹⁾	Includes nonperforming TDRs of ~~$7.2~~$17.0 million and ~~$6.9~~$55.5 million as of ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016,~~ 2019,respectively.

~~Nonaccrual Non-PCI~~

Nonperforming loans were $58.3 million and ~~leases were $14.6~~$63.8 million as of ~~September~~June 30, 2017, compared with $11.4 million as of December 31, 2016, representing an increase of $3.2 million, or 27.6 percent, primarily due to lease receivables. There were no Non-PCI loans or leases past due 90 days or more and still accruing as of September 30, 20172020 and December 31, ~~2016. During~~2019, respectively. The decrease reflects principally the ~~nine months ended September 30, 2017, $8.8~~$25.2 million charge-off of the troubled loan relationship, the pay-off of a $5.5 million past due film-tax credit loan, as well as two other loans totaling $14.1 million returning to accruing status offset by the addition of three loans totaling $22.9 million and leases were placed on nonaccrual status. These additions to nonaccrual loans and leases were partially offset by $1.1 million of nonaccrual loans and leases restored to accrual status and $2.1 million in principal payoffs and pay downs and $0.2 million in OREO transfers.

totaling $1.6 million.

Delinquent ~~Non-PCI~~ loans ~~and leases~~ (defined as 30 to 89 days past due and still accruing) were ~~$7.6~~$10.0 million as of ~~September~~June 30, ~~2017,~~2020 compared with ~~$7.4~~$10.3 million as of December 31, ~~2016.~~

The ratio of nonperforming Non-PCI loans and leases to Non-PCI loans and leases increased to 0.35 percent at September 30, 2017 from 0.30 percent at December 31, 2016. Of the $14.6 million nonperforming Non-PCI loans and leases, approximately $14.3 million were impaired based on the definition contained in ASC 310, Receivables, which resulted in an aggregate impairment reserve of $6.4 million as of September 30, 2017. The allowance for collateral-dependent loans is calculated as the difference between the outstanding loan balance and the value of the collateral as determined by recent appraisals less estimated costs to sell. The allowance for collateral-dependent loans varies from loan to loan based on the collateral coverage of the loan at the time of designation as nonperforming. We continue to monitor the collateral coverage, based on recent appraisals, on these loans on a quarterly basis and adjust the allowance accordingly.

2019.

As of ~~September~~June 30, ~~2017,~~2020, OREO consisted of 6three properties with a combined carrying value of ~~$1.9~~$0.1 million as compared ~~with 12~~to two properties with a combined carrying value of ~~$7.5~~$0.01 million as of December 31, ~~2016.~~

~~Impaired Loans and Leases~~

~~We evaluate loan and lease impairment in accordance~~2019.

The following table provides information with ~~GAAP. With the exception of PCI loans, loans and leases are considered impaired when it is probable that we will be unable to collect all amounts due according~~respect to the ~~contractual terms~~amortized cost basis of nonperforming loans:

	June 30, 2020
	Nonaccrual Loans With No Allowance for Credit Losses		Nonaccrual Loans With Allowance for Credit Losses		Loans Past Due 90 Days Still Accruing		Total Nonperforming Loans
	(in thousands)
Real estate loans:
Commercial property loans	$	5,238	$	620	$	—	$	5,858
Construction loans		13,046		12,808		—		25,854
Residential property loans		2,761		33		—		2,794
Total real estate loans		21,045		13,461		—		34,506
Commercial and industrial loans		12,878		907		—		13,785
Leases receivable		1,797		7,488		—		9,285
Consumer loans		688		—		—		688
Total nonperforming loans	$	36,408	$	21,856	$	—	$	58,264

Individually Evaluated Loans

Prior to the ~~loan and lease agreement, including scheduled interest payments. Impaired~~adoption of ASU 2016-13, impaired loans ~~and leases are~~were measured based on the present value of expected future cash flows discounted at the ~~receivable's~~loan's effective interest rate or, as ana practical expedient, at the ~~receivable's~~loan's observable market price or the fair value of the collateral if the loan iswas collateral dependent, less estimated costs to sell. If the ~~measure~~estimated value of the impaired ~~receivable is~~loan was less than the recorded investment in the ~~receivable,~~loan, we charged-off the deficiency ~~will be charged off~~ against the allowance for ~~loan and lease~~credit losses or ~~alternatively,~~we established a specific ~~allocation will be established.~~allowance in the allowance for credit losses. Additionally, ~~impaired loans and leases are specifically~~we excluded from the quarterly migration analysis impaired loans when determining the amount of the allowance for ~~loan and lease~~credit losses required for theperiod.

We review, under ASU 2016-13, all loans on an individual basis when they do not share similar risk characteristics with loan pools.

The following table provides information on individually evaluated loans as of June 30, 2020 and impaired loans ~~and lease (excluding PCI loans)~~ as of ~~the dates indicated:~~December 31, 2019:

	June 30, 2020					December 31, 2019
	Recorded Investment		Percentage			Recorded Investment		Percentage
	(dollars in thousands)
Real estate loans:
Commercial property
Retail	$	1,355		1.9	%	$	434		0.7	%
Hospitality		—		0.0	%		244		0.4	%
Other		18,299		25.5	%		14,864		22.9	%
Total commercial property loans		19,654		27.4	%		15,542		24.0	%
Construction		25,854		36.0	%		27,201		42.0	%
Residential property		2,794		3.9	%		1,124		1.7	%
Total real estate loans		48,302		67.3	%		43,867		67.7	%
Commercial and industrial loans		13,771		19.1	%		13,700		21.2	%
Leases receivable		8,456		11.8	%		5,902		9.1	%
Consumer loans		1,280		1.8	%		1,297		2.0	%
Total	$	71,809		100.0	%	$	64,766		100.0	%

September 30, 2017 December 31, 2016

Recorded
Investment
Percentage
Recorded
Investment
Percentage
(dollars in thousands)
Real estate loans:
Commercial property
Retail $ 1,475
5.4 % $ 1,678
6.4 %
Hospitality 6,288
22.9 % 6,227
23.6 %
Gas station 4,260
15.5 % 4,984
18.9 %
Other 4,777
17.3 % 6,070
23.0 %
Total commercial real estate loans 16,800
61.1 % 18,959
71.9 %
Residential property 2,666
9.7 % 2,798
10.6 %
Commercial and industrial loans 3,610
13.1 % 4,174
15.9 %
Leases Receivable 3,378
12.3 % —
— %
Consumer loans 1,045
3.8 % 419
1.6 %
Total Non-PCI loans and leases $ 27,499
100.0 % $ 26,350
100.0 %

~~Total impaired~~

Individually evaluated loans ~~and leases~~ increased ~~$1.1~~$7.0 million, or ~~4.4~~10.9 percent, to ~~$27.5~~$71.8 million as of ~~September~~June 30, ~~2017,~~2020, from ~~$26.4~~$64.8 million at December 31, ~~2016.~~2019, principally due to the addition of two film-tax credits totaling $12.6 million, one construction loan totaling $12.8 million, and one commercial real estate loan totaling $1.4 million, offset by a charge-off of $25.2 million of a $40.0 million troubled loan relationship (comprised of $13.5 million construction/land loan charge off and an $11.7 million commercial business loan charge-off). Specific allowances associated with ~~impaired~~individually evaluated loans ~~and leases~~ were ~~$6.4 million and $4.3~~$5.2 million as of ~~September~~June 30, ~~2017 and~~2020 compared with $25.8 million as of December 31, ~~2016, respectively.~~

2019. The decrease was primarily due to the charge-off of $25.2 million troubled loan relationship, offset by a specific provision for the $12.8 million construction loan.

During the three months ended ~~September~~June 30, ~~2017 and 2016,~~2020, we would have recognized $1.4 million of interest income ~~that would have been recognized~~ had ~~impaired~~ loans ~~and leases~~individually evaluated performed in accordance with their original ~~terms totaled $0.2~~terms. During the three months ended June 30, 2019, we would have recognized $1.1 million ~~and $0.2 million, respectively.~~of interest income had impaired loans receivable performed in accordance with their original terms. Of these amounts, ~~actual~~we actually recognized interest ~~recognized on impaired loans and leases was~~income of $0.5 million and ~~$0.5~~$0.7 million for the three months ended ~~September~~June 30, ~~2017~~2020 and ~~2016,~~2019, respectively.

During the ~~nine~~six months ended ~~September~~June 30, ~~2017 and 2016,~~2020, we would have recognized $3.0 million of interest income ~~that would have been recognized~~ had ~~impaired~~ loans ~~and leases~~individually evaluated performed in accordance with their original ~~terms totaled $0.6~~terms. During the six months ended June 30, 2019, we would have recognized $2.0 million ~~and $0.5 million, respectively.~~of interest income had impaired loans receivable performed in accordance with their original terms. Of these amounts, ~~actual~~we actually recognized interest ~~recognized on impaired loans and leases was $1.3~~income of $1.1 million and ~~$1.8~~$1.4 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016,~~2019, respectively.

Troubled Debt Restructurings (TDRs)

The following table provides information on TDRs ~~(excluding PCI loans)~~ as of the dates indicated:

	June 30, 2020						December 31, 2019
	Nonaccrual TDRs		Accrual TDRs		Total		Nonaccrual TDRs		Accrual TDRs		Total
	(in thousands)
Real estate loans	$	15,649	$	13,796	$	29,445	$	41,798	$	—	$	41,798
Commercial and industrial loans		724		136		860		12,991		222		13,213
Consumer loans		661		592		1,253		689		608		1,297
Total	$	17,034	$	14,524	$	31,558	$	55,478	$	830	$	56,308

September 30, 2017 December 31, 2016
Nonaccrual TDRs Accrual TDRs Total Nonaccrual TDRs Accrual TDRs Total
(in thousands)
Real estate loans

Commercial property $ 5,862
$ 5,114
$ 10,976
$ 6,195
$ 6,870
$ 13,065
Residential property —
919
919
—
1,072
1,072
Commercial and industrial loans 475
2,346
2,821
708
3,085
3,793
Consumer loans 820
111
931
—
119
119
Total Non-PCI loans and leases $ 7,157
$ 8,490
$ 15,647
$ 6,903
$ 11,146
$ 18,049

For the three months and six months ended ~~September~~June 30, ~~2017, four~~2020, we restructured two loans ~~were restructured and subsequently~~for $2.0 million classified as TDRs. Temporary payment structure modifications included, but were not limited to, reducing the amount of principal and/or interest due monthly and/or allowing for interest only monthly payments for nine months or less.

As of ~~September~~June 30, ~~2017,~~2020, TDRs on an accrual status were ~~$8.5~~$14.5 million, all of which were temporary interest rate and payment reductions orand extensions of maturity ~~and~~of which a ~~$0.2~~$0.01 million allowance relating to these loans was included in the allowance for ~~loan and lease~~credit losses. For the TDRs on an accrual status, we determined that, based on the financial capabilities of the borrowers at the time of the loan restructuring and the borrowers’ past performance in the payment of debt service under the previous loan terms, performance and collection under the revised terms is probable. As of ~~September~~June 30, ~~2017,~~2020, TDRs on a nonaccrual status were ~~$7.2~~$17.0 million, and a ~~$2.0~~$0.1 million allowance relating to these loans was included in the allowance for ~~loan and lease~~credit losses.

As of December 31, ~~2016,~~2019, TDRs on an accrual status were ~~$11.1~~$0.8 million, all of which were temporary interest rate and payment reductions, or extensions of maturity, ~~and~~or principal deferrals of which a ~~$0.7~~$0.03 million allowance relating to these loans was included in the allowance for ~~loan and lease~~credit losses. As of December 31, ~~2016,~~2019, TDRs on a nonaccrual status were ~~$6.9~~$55.5 million, and a ~~$2.6~~$22.7 million allowance relating to these loans was included in the allowance for ~~loan and lease~~credit losses.

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

The ~~Bank charges or credits operating expenses for provisions to~~Company’s estimate of the allowance for credit losses at June 30, 2020 reflects losses expected over the remaining contractual life of the assets. The contractual term does not consider extensions, renewals or modifications unless the Company has identified an expected troubled debt restructuring.

At June 30, 2020, the Company used the discounted cash flow (DCF) method to estimate allowances for credit losses for the commercial and industrial loan ~~and lease losses~~portfolio and the ~~allowance~~consumer loan portfolio. For all loan pools utilizing the DCF method, the Company utilizes and forecasts the national unemployment rate as the primary loss driver. In addition, 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. As of and for ~~off-balance sheet items at least quarterly based upon~~ the ~~allowance need.~~quarter ended June 30, 2020, the Company leveraged the economic projections from Moody’s Analytics Economic Scenarios and Forecasts to inform its loss driver forecasts over the four-quarter forecast period. For each of these loan segments, the Company applied an annualized historical PD/LGD using all available historical periods. The ~~allowance~~

reason for the change from relying on the FRED economic data to Moody’s data was because Moody’s data is ~~determined through an analysis involving quantitative calculations~~updated more frequently and timely than FOMC or FRED, and thus provides a better forecast for PD/LGD models. Since reasonable and supportable forecasts of economic conditions are imbedded directly to DCF model, qualitative adjustments are reduced but considered. Qualitative adjustments were based on ~~historic loss rates and qualitative adjustments for general reserves and individual impairment calculations for~~the Company's judgment of company, market, industry or business specific ~~allocations. The Bank charges the allowance for actual losses and credits the allowance for recoveries on loans and leases previously charged-off.~~

~~The Bank evaluates the allowance methodology at least annually. Beginning~~data, changes in the ~~fourth quarter~~underlying loan composition of ~~2016 through~~specific portfolios.

Management determined that, due to model limitations, the ~~first nine months~~regression model that supports the DCF calculation for the SBA and commercial property, construction, and residential real estate portfolios does not take into account the volatile nature of ~~2017, the Bank utilized a 24-quarter look-back period with equal weighting to all quarters. For the first nine months of 2016, the Bank utilized a 20-quarter look-back period.~~

To determine general reserve requirements, existing loans and leases are divided into general pools of risk-rated loans, as well as homogeneous pools. During the first nine months of 2016, existing loans were divided into fourteen general loan pools of risk-rated loans as well as three homogeneous loan pools. For the fourth quarter of 2016 through the first nine months of 2017, loans were divided into eleven general pools of risk-rated loans,COVID-19 on these portfolios, as well as the government assistance programs based on the maturities. As a result, at June 30, 2020, the Company utilized the Probability of Default/Loss Given Default (PD/LGD) method for the SBA and commercial property, construction, and residential real estate portfolios. The Company previously applied the DCF method to the real estate secured portfolios in the implementation of CECL at January 1, 2020 and through March 31, 2020 and determined that the change from DCF to PD/LGD was not material. See Note 1 – Organization and Basis of Presentation for a further description of the methodologies applied at the inception of CECL and during the three ~~homogeneous pools. For risk-rated loans, migration analysis allocates~~months ended March 31, 2020. The Company used historical periods that included an economic downturn to derive historical losses ~~by pool and risk grade to determine risk factors~~ for ~~potential loss inherent~~better alignment in the ~~current outstanding portfolio. As three homogeneous pools are bulk graded, the risk grade is not factored into the~~estimation of expected losses. The Company leveraged Frye-Jacobs modeled LGD rates for loan segments with no historical ~~loss analysis.~~losses. In addition, for those loans granted a loan modification due to COVID-19, the Company used historical periods under PD/LGD as of March 31, 2020 to reflect the moratorium on TDRs under Section 4013 of the CARES Act. The PD/LGD method incorporates a forecast into loss estimates using a qualitative adjustment. Qualitative loss factors were based on the Company's judgment of company, market, industry or business specific ~~reserves are allocated~~data, changes in the underlying loan composition of specific portfolios, trends relating to credit quality, delinquency, nonperforming and adversely rated loans, and reasonable and supportable forecasts of economic conditions.

The Company used a Weighted Average Remaining Maturity (WARM) method to estimate expected credit losses for ~~loans deemed “impaired.”~~

~~When determining~~equipment financing agreements or the equipment lease receivables portfolio. The Company applied an expected loss ratio based on internal historical losses adjusted as appropriate ~~level~~ for qualitative factors. The Company's evaluation of market, industry or business specific data, changes in the underlying portfolio composition, trends relating to credit quality, delinquency, nonperforming and adversely rated leases, and reasonable and supportable forecasts of economic conditions inform the estimate of qualitative factors.

The allowance for credit losses was $86.3 million at June 30, 2020 compared with $61.4 million at December 31, 2019. The allowance attributed to loans individually evaluated for impairment was $5.2 million at June 30, 2020 compared with $25.8 million at December 31, 2019, the decline primarily reflecting the $25.2 million charge-off of the previously identified troubled loan relationship during the first quarter of 2020. The allowance attributed to loans collectively evaluated for impairment was $81.1 million at June 30, 2020 compared with $35.6 million at December 31, 2019. The increase principally reflects the adoption of ASU 2016-13 as well as the change from January 1, 2020 to June 30, 2020 in the macroeconomic assumptions including a higher projected average unemployment rate for the subsequent four quarters and ~~lease~~a lower projected GDP growth rate. The Company recognizes the inherent uncertainties in the estimate of the allowance for credit losses ~~management considers qualitative adjustments for any factors that are likely to cause estimated loan~~ and ~~lease losses associated with~~ the Bank’s current portfolio to differ from historical loss experience, including, but not limited to, national and local economic and business conditions, volume and geographic concentrations, and problem loan trends.

~~To systematically quantify~~effect the ~~credit risk impact of trends and changes within the loan and lease portfolio, a credit risk matrix is utilized. The qualitative factors are considered~~COVID-19 pandemic may have on ~~a loan pool by loan pool basis subsequent to, and in conjunction~~

~~with, a loss migration analysis. The credit risk matrix provides various scenarios with positive or negative impact on the portfolio along with corresponding basis points for qualitative adjustments.~~

borrowers.

The following tables reflect our allocation of the allowance for ~~loan and lease~~credit losses by ~~category as well as the receivable for each~~ loan ~~type:~~category:

	June 30, 2020										December 31, 2019
	Allowance					Total					Allowance					Total
	Amount		Percentage			Loans		Percentage			Amount		Percentage			Loans		Percentage
	(in thousands)
Real estate loans:
Commercial property
Retail	$	7,341		8.5	%	$	808,157		16.7	%	$	4,911		8.0	%	$	869,302		18.9	%
Hospitality		11,984		13.9	%		882,812		18.3	%		6,686		10.9	%		922,288		20.0	%
Other		24,920		28.9	%		1,504,916		31.2	%		8,060		13.1	%		1,358,432		29.4	%
Total commercial property loans		44,245		51.3	%		3,195,885		66.2	%		19,657		32.0	%		3,150,022		68.3	%
Construction		9,331		10.8	%		70,357		1.5	%		15,003		24.4	%		76,455		1.7	%
Residential property		2,640		3.1	%		354,064		7.3	%		1,695		2.8	%		402,028		8.7	%
Total real estate loans		56,216		65.2	%		3,620,306		75.0	%		36,355		59.2	%		3,628,505		78.7	%
Commercial and industrial loans		13,387		15.5	%		730,399		15.1	%		16,206		26.4	%		484,093		10.5	%
Leases receivable		16,525		19.1	%		462,811		9.6	%		8,767		14.3	%		483,879		10.5	%
Consumer loans		202		0.2	%		12,126		0.3	%		80		0.1	%		13,670		0.3	%
Total	$	86,330		100.0	%	$	4,825,642		100.0	%	$	61,408		100.0	%	$	4,610,147		100.0	%

September 30, 2017 December 31, 2016

Allowance
Amount
Percentage Non- PCI Loans and Leases
Allowance
Amount
Percentage Non- PCI Loans and Leases
(dollars in thousands)
Real estate loans:
Commercial property
Retail $ 3,442
10.9 % $ 916,236
$ 4,172
13.3 % $ 857,629
Hospitality 7,760
24.5 % 731,562
9,171
29.2 % 649,540
Gas station 1,136
3.6 % 245,042
1,438
4.6 % 260,187
Other 5,606
17.6 % 1,144,176
7,448
23.7 % 1,107,589
Total commercial real estate loans 17,944
56.6 % 3,037,016
22,229
70.8 % 2,874,945
Construction 659
2.1 % 64,263
1,916
6.1 % 55,962
Residential property 982
3.1 % 429,669
1,067
3.4 % 337,791
Total real estate loans 19,585
61.8 % 3,530,948
25,212
80.3 % 3,268,698
Commercial and industrial loans:

Commercial term 5,338
16.8 % 170,891
3,961
12.6 % 138,032
Commercial lines of credit 894
2.8 % 149,937
1,297
4.1 % 136,231
International loans 262
0.8 % 43,577
324
1.0 % 25,821
Total commercial and industrial loans 6,494
20.4 % 364,405
5,582
17.7 % 300,084
Leases receivable 64
0.2 % 272,271
307
1.0 % 243,294
Consumer loans 4,837
15.3 % 19,027
191
0.6 % 22,830
Unallocated 718
2.3 % —
166
0.4 % —
Total $ 31,698
100.0 % $ 4,186,651
$ 31,458
100.0 % $ 3,834,906

September 30, 2017 December 31, 2016

Allowance
Amount
Percentage PCI Loans
Allowance
Amount
Percentage PCI Loans
(dollars in thousands)
Real estate loans:
Commercial property
Retail $ 97
12.2 % $ 1,587
$ 122
12.6 % $ 2,324
Hospitality 132
16.6 % 1,664
138
14.2 % 1,618
Gas station 369
46.5 % 2,388
589
60.7 % 2,692
Other 8
1.0 % 2,013
1
0.1 % 2,067
Total commercial real estate loans 606
76.3 % 7,652
850
87.6 % 8,701
Residential property 146
18.4 % 958
72
7.4 % 976
Total real estate loans 752
94.7 % 8,610
922
95.0 % 9,677
Commercial and industrial loans:

Commercial term 41
5.2 % 51
41
4.2 % 136
Consumer loans 1
0.1 % 43
8
0.8 % 50
Total $ 794
100.0 % $ 8,704
$ 971
100.0 % $ 9,863

The following ~~tables~~table set forth certain information regarding the allowance for ~~loan and lease~~credit losses and the allowance for credit losses related to off-balance sheet items for the periods presented. ~~Allowance~~

	As of and For the Three Months Ended						As of and For the Six Months Ended
	June 30, 2020			June 30, 2019			June 30, 2020			June 30, 2019
	(in thousands)
Allowance for credit losses:
Balance at beginning of period	$	66,500		$	32,896		$	61,408		$	31,974
Adjustment related to adoption of ASU 2016-13		—			—			17,433			—
Adjusted balance as of January 1, 2020		66,500			32,896			78,841			31,974
Less loans receivable charged off		1,573			1,536			29,046			2,634
Recoveries on loans receivable previously charged-off		(272	)		(1,327	)		(488	)		(2,230	)
Provision for credit losses		21,131			16,699			36,047			17,816
Ending balance	$	86,330		$	49,386		$	86,330		$	49,386

Allowance for credit losses related to off-balance sheet items:
Balance at beginning of period	$	2,885		$	1,100		$	2,397		$	1,439
Adjustment related to adoption of ASU 2016-13		—			—			(335	)		—
Adjusted balance as of January 1, 2020		2,885			1,100			2,062			1,439
Provision (income) for off-balance sheet items		3,462			233			4,285			(106	)
Ending balance	$	6,347		$	1,333		$	6,347		$	1,333

Ratios:
Net loan charge-offs (recoveries) to average loans, annualized		0.11	%		0.02	%		1.24	%		0.02	%
Allowance for credit losses to loans receivable		1.79	%		1.08	%		1.79	%		1.08	%
Net loan charge-offs (recoveries) to allowance for credit losses, annualized		6.03	%		1.69	%		66.16	%		1.64	%
Allowance for credit losses to nonperforming loans		148.17	%		78.35	%		148.17	%		78.35	%

Balance:
Average loans receivable during period	$	4,680,048		$	4,491,377		$	4,599,222		$	4,512,134
Loans receivable at end of period		4,825,642			4,555,802			4,825,642			4,555,802
Nonperforming loans at end of period		58,264			63,031			58,264			63,031

The allowance for credit losses was $86.3 million as of June 30, 2020 generating an allowance for credit losses to loans receivable of 1.79 percent compared with 1.08 percent at June 30, 2019. The increase principally reflects the change in the accounting for the allowance for credit losses previously described and the effect of the COVID-19 pandemic.

The allowance for credit losses at June 30, 2020 included a $25.7 million specific qualitative amount for the uncertainties arising from the COVID-19 crisis. The Company analyzed the segments of the portfolio believed to be the most vulnerable to the crisis at this time – hospitality, food service, and retail – representing approximately $1.69 billion, or 35.0 percent of the portfolio. For these segments, the Company used varying revenue shocks to identify post-stressed real estate secured loans with debt-service-coverage ratios of one or less and compared those to estimated post-stressed real estate valuations as well as peak historical loss rates for unsecured loans in developing this estimate. The Company recognizes the inherent uncertainties in this estimate and the effects this crisis may have on our borrowers. The Company expects the estimate of the allowance for credit losses will change in future periods because of changes in economic conditions, economic forecasts, and other factors.

The allowance for credit losses related to off-balance sheet items, ~~is determined by applying reserve factors according to pool and grade as well as actual current commitment usage figures by type to existing contingent liabilities.~~

As of and for the Three Months Ended
September 30, 2017 December 31, 2016 September 30, 2016
Non-PCI Loans and Leases PCI Loans Total Non-PCI Loans and Leases PCI Loans Total Non-PCI Loans and Leases PCI Loans Total
(dollars in thousands)
Allowance for loan and Lease losses:
Balance at beginning of period $ 33,038
$ 720
$ 33,758
$ 33,439
$ 5,533
$ 38,972
$ 34,259
$ 5,448
$ 39,707
Charge-offs (2,405 ) —
(2,405 ) (2,326 ) (4,991 ) (7,317 ) (111 ) (5 ) (116 )
Recoveries on loans previously charged off 871
—
871
623
—
623
831
—
831
Net loan (charge-offs)
recoveries
(1,534 ) —
(1,534 ) (1,703 ) (4,991 ) (6,694 ) 720
(5 ) 715
Loan and lease loss provision (income) 194
74
268
(278 ) 429
151
(1,540 ) 90
(1,450 )
Balance at end of period $ 31,698
$ 794
$ 32,492
$ 31,458
$ 971
$ 32,429
$ 33,439
$ 5,533
$ 38,972

Allowance for off-balance sheet items:
Balance at beginning of period $ 1,135
$ —
$ 1,135
$ 1,491
$ —
$ 1,491
$ 1,475
$ —
$ 1,475
Provision (income) (220 ) —
(220 ) (307 ) —
(307 ) 16
—
16
Balance at end of period $ 915
$ —
$ 915
$ 1,184
$ —
$ 1,184
$ 1,491
$ —
$ 1,491

Ratios:
Net loan and lease charge-offs (recoveries) to average loans and leases⁽¹⁾
0.15 % — % 0.15 % 0.18 % 157.18 % 0.73 % (0.08 )% 0.13 % (0.08 )%
Net loan and lease charge-offs (recoveries) to loans and leases⁽¹⁾
0.15 % — % 0.15 % 0.18 % 202.41 % 0.70 % (0.08 )% 0.13 % (0.08 )%
Allowance for loan and lease losses to average loans and leases 0.78 % 9.08 % 0.79 % 0.85 % 7.64 % 0.88 % 0.96 % 36.21 % 1.12 %
Allowance for loan and lease losses to loans and leases 0.76 % 9.12 % 0.77 % 0.82 % 9.84 % 0.84 % 0.95 % 35.60 % 1.10 %
Net loan and lease charge-offs (recoveries) to allowance for loan and lease losses⁽¹⁾
19.36 % — % 18.88 % 21.65 % 2056.02 % 82.57 % (8.61 )% 0.36 % (7.34 )%
Allowance for loan and lease losses to nonperforming loans and leases 217.74 % — % 223.19 % 275.80 % — % 284.32 % 305.43 % — % 355.97 %
Balance:
Average loans and leases during period $ 4,125,465
$ 8,744
$ 4,092,131
$ 3,686,013
$ 12,702
$ 3,690,955
$ 3,485,705
$ 15,280
$ 3,477,428
Loans and leases at end of period $ 4,186,651
$ 8,704
$ 4,195,355
$ 3,834,906
$ 9,863
$ 3,844,769
$ 3,537,119
$ 15,540
$ 3,552,659
Nonperforming loans and leases at end of period $ 14,558
$ —
$ 14,558
$ 11,406
$ —
$ 11,406
$ 10,948
$ —
$ 10,948


⁽¹⁾	~~Net loan charge-offs (recoveries) are annualized to calculate the ratios.~~

As of and for the Nine Months Ended
September 30, 2017 September 30, 2016
Non-PCI Loans PCI Loans Total Non-PCI Loans PCI Loans Total

Allowance for loan losses:
Balance at beginning of period $ 31,458
$ 971
$ 32,429
$ 37,494
$ 5,441
$ 42,935
Charge-offs (3,256 ) —
(3,256 ) (1,410 ) (142 ) (1,552 )
Recoveries on loans previously charged off 2,709
—
2,709
2,079
—
2,079
Net loan (charge-offs) recoveries (547 ) —
(547 ) 669
(142 ) 527
Loan and lease loss provision (income) 787
(177 ) 610
(4,724 ) 234
(4,490 )
Balance at end of period $ 31,698
$ 794
$ 32,492
$ 33,439
$ 5,533
$ 38,972

Allowance for off-balance sheet items:
Balance at beginning of period $ 1,184
$ —
$ 1,184
$ 986
$ —
$ 986
Provision (income) (269 ) —
(269 ) 505
—
505
Balance at end of period $ 915
$ —
$ 915
$ 1,491
$ —
$ 1,491

Ratios:
Net loan charge-offs (recoveries) to average loans⁽¹⁾
0.02 % — % 0.02 % (0.03 )% 1.07 % (0.02 )%
Net loan charge-offs (recoveries) to loans ⁽¹⁾
0.02 % — % 0.02 % (0.03 )% 1.22 % (0.02 )%
Allowance for loan losses to average loans 0.79 % 8.55 % 0.82 % 1.00 % 31.12 % 1.17 %
Allowance for loan losses to loans 0.76 % 9.12 % 0.77 % 0.95 % 35.60 % 1.10 %
Net loan charge-offs (recoveries) to allowance for loan losses⁽¹⁾
2.30 % — % 2.24 % (2.67 )% 3.42 % (1.80 )%
Allowance for loan losses to nonperforming loans 217.75 % — % 223.2 % 305.43 % — % 355.97 %
Balance:
Average loans during period $ 4,010,779
$ 9,283
$ 3,976,021
$ 3,350,211
$ 17,777
$ 3,333,419
Loans at end of period $ 4,186,651
$ 8,704
$ 4,195,355
$ 3,537,119
$ 15,540
$ 3,552,659
Nonperforming loans at end of period $ 14,558
$ —
$ 14,558
$ 10,948
$ —
$ 10,948


⁽¹⁾	~~Net loan charge-offs (recoveries) are annualized to calculate the ratios.~~

Allowance for loan and lease losses was $32.5 million, $32.4 million and $39.0 million, as of September 30, 2017, December 31, 2016, and September 30, 2016, respectively. The increase of $63,000, or 0.2 percent, in the allowance for loan and lease losses as of September 30, 2017, compared with December 31, 2016 was due primarily to the in loan and lease receivables. Accordingly, the non-PCI loan and lease loss allowance increased $240,000 to $31.7 million as of September 30, 2017, compared with $31.5 million at December 31, 2016. The PCI loan loss allowance decreased $0.2 million to $0.8 million as of September 30, 2017, compared with $1.0 million at December 31, 2016.

~~The allowance for off-balance sheet exposure,~~ primarily unfunded loan commitments, was ~~$0.9 million, $1.2~~$6.3 million and ~~$1.5~~$1.3 million as of ~~September~~June 30, ~~2017, December 31, 2016~~2020 and ~~September 30, 2016,~~2019, 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 are adequate for losses inherent in the loan and lease portfolio and for off-balance sheet exposures as of September 30, 2017.

The following table presents a summary of net charge-offs ~~(recoveries):~~and recoveries:

	Three Months Ended								Six Months Ended
	Charge- offs		Recoveries			Net Charge- Offs (Recoveries)			Charge- offs		Recoveries			Net Charge- Offs (Recoveries)
	(in thousands)
June 30, 2020
Real estate loans	$	91	$	(98	)	$	(7	)	$	14,233	$	(156	)	$	14,077
Commercial and industrial loans		438		(60	)		378			12,589		(144	)		12,445
Leases receivable		1,044		(114	)		930			2,224		(188	)		2,036
Total	$	1,573	$	(272	)	$	1,301		$	29,046	$	(488	)	$	28,558

June 30, 2019
Real estate loans	$	—	$	(1,133	)	$	(1,133	)	$	113	$	(1,563	)	$	(1,450	)
Commercial and industrial loans		562		(89	)		473			695		(471	)		224
Leases receivable		974		(105	)		869			1,826		(196	)		1,630
Total	$	1,536	$	(1,327	)	$	209		$	2,634	$	(2,230	)	$	404

As of and for the Three Months Ended As of and for the Nine Months Ended
Charge-offs Recoveries
Net
Charge-offs (Recoveries)
Charge-offs Recoveries
Net
Charge-offs (Recoveries)
(in thousands)
September 30, 2017
Real estate loans $ 146
$ 343
$ (197 ) $ 289
$ 1,434
$ (1,145 )
Commercial and industrial loans 1,976
308
1,668
2,015
1,021
994
Leases receivable 283
220
63
952
239
713
Consumer loans —
—
—
15
(15 )
Total Non-PCI loans $ 2,405
$ 871
$ 1,534
$ 3,256
$ 2,709
$ 547

September 30, 2016
Real estate loans $ 18
$ 337
(319 ) $ 709
$ 527
182
Commercial and industrial loans 93
494
(401 ) 701
1,499
(798 )
Consumer loans —
—
—
—
53
(53 )
Total Non-PCI loans $ 111
$ 831
$ (720 ) $ 1,410
$ 2,079
$ (669 )

For the three months ended ~~September~~June 30, ~~2017 and 2016,~~2020, total charge-offs were $2.4 million and $0.1 million, respectively. For the three months ended September 30, 2017, total recoveries were $871,000, an increase of $40,000, or 4.8 percent, from $831,000 for the same period in 2016. For the nine months ended September 30, 2017, total charge-offs were $3.3$1.6 million, an increase of ~~$1.8~~$0.1 million, ~~or 131.0 percent~~ from ~~$1.4~~$1.5 million for the same period in ~~2016, and total~~2019. Charge-offs were offset by recoveries ~~were $2.7~~during the three months ended June 30, 2020 of $0.3 million, ~~an increase~~a decrease of ~~$0.6~~$1.0 million, ~~or 30.3 percent~~ from ~~$2.1~~$1.3 million for the same period in ~~2016.~~

2019. For the six months ended June 30, 2020, total charge-offs were $29.0 million, an increase of $26.4 million, or 1,002.7 percent, from $2.6 million for the same period in 2019. The first quarter of 2020 included a $25.2 million charge off of a $40.0 million troubled loan relationship (comprised of $13.5 million real estate construction loan charge off and an $11.7 million commercial and industrial loan charge off). Charge-offs were offset by recoveries during the six months ended June 30, 2020 of $0.5 million, a decrease of $1.7 million, or 78.1 percent, from $2.2 million for the same period in 2019.

Deposits

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

	June 30, 2020					December 31, 2019
	Balance		Percent			Balance		Percent
	(dollars in thousands)
Demand – noninterest-bearing	$	1,865,213		35.8	%	$	1,391,624		29.6	%
Interest-bearing:
Demand		96,941		1.9	%		84,323		1.8	%
Money market and savings		1,812,612		34.8	%		1,667,096		35.5	%
Time deposits of $100,000 or more ⁽¹⁾		1,307,496		25.1	%		1,402,063		29.8	%
Other time deposits		127,519		2.5	%		153,856		3.3	%
Total deposits	$	5,209,781		100.0	%	$	4,698,962		100.0	%

September 30, 2017 December 31, 2016
Balance Percent Balance Percent
(dollars in thousands)
Demand – noninterest-bearing $ 1,293,538
30.1 % $ 1,203,240
31.6 %
Interest-bearing: —

Demand 90,734
2.1 % 96,856
2.5 %
Money market and savings 1,534,457
35.7 % 1,329,324
34.9 %
Time deposits of $100,000 or more ⁽¹⁾
1,074,870
25.0 % 844,386
22.2 %
Other time deposits 305,411
7.1 % 335,931
8.8 %
Total deposits $ 4,299,010
100.0 % $ 3,809,737
100.0 %


⁽¹⁾	Includes ~~$430.5~~$308.5 million and ~~$445.4~~$299.9 million of time deposits of $250,000 or more as of ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016,~~2019, respectively.

Deposits increased ~~$489.3~~$510.8 million, or ~~12.8~~10.9 percent, to ~~$4.30~~$5.21 billion as of ~~September~~June 30, ~~2017~~2020 from ~~$3.81~~$4.70 billion as of December 31, ~~2016.~~2019. The increase in deposits was mainly attributable to the ~~$205.1~~$473.6 million increase in demand – noninterest-bearing deposits and ~~$200.0~~increase of $145.5 million ~~increase~~ in money market and savings ~~deposits and time deposits, respectively.~~

accounts.

Borrowings

At ~~September~~June 30, ~~2017 and December 31, 2016, there were $110.0 million and $315.0~~2020, the Bank had $150.0 million in ~~overnight~~term advances from the FHLB ~~respectively. The reduction in FHLB~~compared with $75.0 million at December 31, 2019. There were no overnight advances ~~was supported by the increase in deposits for the first nine months of 2017.~~at June 30, 2020, compared to $15.0 million at December 31, 2019. In addition, ~~subordinated debentures were $117.1~~the Bank had $101.8 million ~~and $19.0 million at September 30, 2017 and December 31, 2016, respectively.~~in PPPLF advances during the second quarter. The ~~change represents~~Bank repaid the ~~proceeds from~~PPPLF advance subsequent to the ~~subordinated note offering that closed on March 21, 2017.~~

end of the 2020 second quarter.

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 rather than maximizing yield.~~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). ~~This sensitivity analysis is compared~~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~~24- month horizon, given the basis point adjustment in interest rates reflected below.

	Net Interest Income Simulation
Change in	1- to 12-Month Horizon						13- to 24-Month Horizon
Interest	Dollar			Percentage			Dollar			Percentage
Rate	Change			Change			Change			Change
	(dollars in thousands)
300%	$	21,993			11.42	%	$	37,241			19.43	%
200%	$	14,389			7.47	%	$	24,798			12.94	%
100%	$	7,261			3.77	%	$	13,206			6.89	%
(100%)	$	(713	)		(0.37	%)	$	(675	)		(0.35	%)

Change in	Economic Value of Equity (EVE)
Interest	Dollar			Percentage
Rate	Change			Change
	(dollars in thousands)
300%	$	155,509			40.17	%
200%	$	117,882			30.45	%
100%	$	71,973			18.59	%
(100%)	$	(94,600	)		(24.43	%)

Net Interest Income Simulation
1- to 12-Month Horizon 13- to 24-Month Horizon
Change in
Interest
Rate

Dollar
Change

Percentage
Change

Dollar
Change

Percentage
Change
(dollars in thousands)
300% $ (2,297 ) (1.25)% $ 5,326
2.89%
200% $ (1,547 ) (0.84)% $ 3,582
1.94%
100% $ (395 ) (0.21)% $ 2,728
1.48%
(100)% $ (12,406 ) (6.74)% $ (21,438 ) (11.63)%

Economic Value of Equity (EVE)
Change in
Interest
Rate

Dollar
Change

Percentage
Change
(dollars in thousands)
300% $ (20,246 ) (3.53)%
200% $ (12,411 ) (2.16)%
100% $ 788
0.14%
(100)% $ (45,610 ) (7.94)%

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

Capital Resources and Liquidity

Capital Resources

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

In response to the uncertainty surrounding the COVID-19 pandemic, the Board reduced the quarterly cash dividend paid on common stock for the second and third quarter of 2020 to $0.12 and $0.08 per share, respectively, from $0.24 per share paid in the first quarter of 2020. The Board believes these actions were the most prudent course of action as it continues to monitor the results of operations and financial condition of the Company and expects to continue to re-evaluate quarterly the level of any subsequent regular quarterly dividend. We cannot assure you that future dividends will not be reduced or eliminated based on such re-evaluation.

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 DBO, in an amount not exceeding the greatest of: (1) retained earnings of the bank; (2) net income of the bank for its last fiscal year; or (3) the net income of the bank for its current fiscal year. As of July 1, 2020, after giving effect to the 2020 third quarter dividend declared by the Company, the Bank has the ability to pay $6.8 million of dividends without the prior approval of the Commissioner of Business Oversight.

At ~~September~~June 30, ~~2017,~~2020, the Bank’s total risk-based capital ratio of ~~15.32~~13.62 percent, Tier 1 risk-based capital ratio of ~~14.55~~12.36 percent, common equity Tier 1 capital ratio of ~~14.55~~12.36 percent and Tier 1 leverage capital ratio of ~~12.66~~11.03 percent, placed the

Bank in the “well capitalized” category pursuant to capital rules, which is defined as institutions with total risk-based capital ratio equal to or greater than 10.00 percent, Tier 1 risk-based capital ratio equal to or greater than 8.00 percent, common equity Tier 1 capital ratios equal to or greater than 6.50 percent, and Tier 1 leverage capital ratio equal to or greater than 5.00 percent.

At ~~September~~June 30, ~~2017,~~2020, the Company's total risk-based capital ratio was ~~15.58~~14.04 percent, Tier 1 risk-based capital ratio was ~~12.56~~10.86 percent, common equity Tier 1 capital ratio was ~~12.20~~10.46 percent and Tier 1 leverage capital ratio was ~~10.92~~9.69 percent.

For a discussion of implemented changes to the capital adequacy framework prompted by Basel III and the ~~Dodd-Frank~~Dodd- Frank Wall Street Reform and Consumer Protection Act, see our ~~2016~~2019 Annual Report on Form 10-K.

Liquidity

Hanmi Financial

At June 30, 2020, Hanmi Financial had $20.3 million in cash on deposit with its bank subsidiary. Management believes that Hanmi Financial, on a stand-alone basis, has adequate liquid assets to meet its current obligations.

Hanmi Bank

The principal objective of our liquidity management program is to maintain the Bank’s ability to meet the day-to-day cash flow requirements of our customers who wish either ~~wish~~ to withdraw funds or to draw upon credit facilities to meet their cash needs. Management believes that the Bank, on a stand-alone basis, has adequate liquid assets to meet its current obligations. The Bank’s primary funding source will continue to be deposits originating from its branch platform. The Bank’s wholesale funds historically consisted of FHLB advances and brokered deposits. As of ~~September~~June 30, ~~2017,~~2020, the Bank had ~~$145.2~~$150.0 million in advances from the FHLB, and $235.2 million of brokered deposits.

The Bank had $101.8 million of 0.35 percent advances with the FRB under the Paycheck Protection Program Lending Facility. The advances were repaid subsequent to the end of the second quarter. There were no outstanding borrowings with the FRB as of December 31, 2019.

We monitor the sources and ~~used~~uses of funds on a regular basis to maintain an acceptable liquidity position. The Bank’s primary source of borrowings is the FHLB, from which the Bank is eligible to borrow up to ~~30%~~30 percent of its assets. As of ~~September~~June 30, ~~2017,~~2020, the total ~~borrowing capacity available based on pledged collateral and~~ remaining available borrowing capacity ~~were $808.9 million and $698.9 million, respectively, compared to $736.6 million and $421.6 million, respectively as of December 31, 2016.~~

was $1.5 billion.

As a means of augmenting its liquidity, the Bank had an available borrowing source of ~~$8.9~~$47.9 million from the Federal Reserve Discount Window, to which the Bank pledged securities with a carrying value of ~~$9.5~~$50.0 million, and had no borrowings under this source as of ~~September~~June 30, ~~2017.~~

2020.

Off-Balance Sheet Arrangements

For a discussion of off-balance sheet arrangements, see Note 12 - Off-Balance Sheet Commitments included in the ~~Notes~~notes to ~~Consolidated Financial Statements (Unaudited)~~unaudited consolidated financial statements in this Report and “Item 1. Business - Off-Balance Sheet Commitments” in our ~~2016~~2019 Annual Report on Form 10-K.

Contractual Obligations

There have been no material changes to the contractual obligations described in our ~~2016~~2019 Annual Report on Form 10-K.

Recently Issued Accounting Standards

~~FASB ASU 2014-09,~~ ~~Revenue from Contracts with Customers (Topic 606)~~, replaces existing revenue recognition guidance for contracts to provide goods or services to customers and amends existing guidance related to recognition of gains and losses on the sale of certain nonfinancial assets such as real estate. ASU 2014-09 established a principles-based approach to recognizing revenue that applies to all contracts other than those covered by other authoritative U.S. GAAP guidance. Quantitative and qualitative disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows are also required. ASU 2014-09 was to be effective for interim and annual periods beginning after December 15, 2016 and was to be applied on either a modified retrospective or full retrospective basis. In August 2015, the FASB

No newly issued ~~ASU 2015-14 which defers the original effective date for all entities by one year. Public business entities should apply the guidance in ASU 2015-14~~

standards were noted.

to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.

While the guidance will replace most existing revenue recognition guidance in GAAP, the ASU is not applicable to financial instruments and, therefore, will not impact a majority of the Company’s revenue, including net interest income. While in scope of the new guidance, the Company does not expect a material change in the timing or measurement of revenues related to deposit account fees. The Company will continue to evaluate the effect that this guidance will have on other revenue streams within its scope, as well as changes in disclosures required by the new guidance. However, we do not expect adoption of this ASU to have a material impact on the Company’s consolidated financial statements.

~~FASB ASU 2016-01,~~ ~~Financial Instruments-Overall Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10)~~, Recognition and Measurement of Financial Assets and Financial Liabilities, amends the guidance in U.S. GAAP on the accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements of financial instruments. The FASB additionally clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted for the accounting guidance on financial liabilities under the fair value option. While we are currently evaluating the impact of this ASU, we do not expect its adoption to have a material impact on our consolidated financial statements.

~~FASB ASU 2016-02,~~ ~~Leases (Topic 842)~~, introduces the most significant change for lessees including the requirement under the new guidance to recognize right-of-use assets and lease liabilities for all leases not considered short-term leases. By definition, a short-term lease is one in which: (a) the lease term is 12 months or less; and (b) there is not an option to purchase the underlying asset that the lessee is reasonably certain to exercise. For short-term leases, lessees may elect an accounting policy by class of underlying asset under which right-of-use assets and lease liabilities are not recognized and lease payments are generally recognized as expense over the lease term on a straight-line basis. This change will result in lessees recognizing right-of-use assets and lease liabilities for most leases currently accounted for as operating leases under the legacy lease accounting guidance. Examples of changes in the new guidance affecting both lessees and lessors include: (a) defining initial direct costs to only include those incremental costs that would not have been incurred if the lease had not been entered into, (b) requiring related party leases to be accounted for based on their legally enforceable terms and conditions, (c) eliminating the additional requirements that must be applied today to leases involving real estate and (d) revising the circumstances under which the transfer contract in a sale-leaseback transaction should be accounted for as the sale of an asset by the seller-lessee and the purchase of an asset by the buyer-lessor. In addition, both lessees and lessors are subject to new disclosure requirements. ASU 2016-02 is effective for public entities for interim and annual periods beginning after December 15, 2018.

As a lessee in several operating lease arrangements that are not considered short-tem, effective January 1, 2019, the Company expects to recognize a lease liability for the present value of future such lease commitments and a right of use asset for the same leases. While the Company is currently evaluating the impact of this new guidance, the adoption will result in an increase in the Company’s assets and liabilities on our consolidated balance sheets and it will likely not have a significant impact on our consolidated net income, stockholders’ equity or cash flows.

~~FASB ASU 2016-13,~~ ~~Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments~~, introduces new guidance for the accounting for credit losses on instruments within its scope. The new guidance introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale (AFS) debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. Current expected credit losses (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost; and (2) certain off-balance sheet credit exposures. This includes loans, held-to-maturity debt securities, loan commitments, financial guarantees, and net investments in leases, as well as reinsurance and trade receivables. Upon initial recognition of the exposure, the CECL model requires an entity to estimate the credit losses expected over the life of an exposure (or pool of exposures). The estimate of expected credit losses (ECL) should consider historical information, current information, and reasonable and supportable forecasts, including estimates of prepayments. Financial instruments with similar risk characteristics should be grouped together when estimating ECL. ASU 2016-13 is effective for public entities for interim and annual periods beginning after December 15, 2019. Early application of the guidance will be permitted for all entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are currently evaluating the impact of this ASU on our consolidated financial statements.

~~FASB ASU 2016-15,~~ ~~Statement of Cash flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the FASB Emerging Issues Task Force)~~, addresses eight classification issues related to the statement of cash flows: (1) Debt prepayment of debt extinguishment costs; (2) Settlement of zero-coupon bonds: (3) Contingent consideration payments made after a business combination; (4) Proceeds from the settlement of insurance claims; (5) Proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (6) Distributions received from equity method investees; (7) Beneficial interests in securitization transactions; and (8) Separately identifiable cash flows and application of the predominance principle. ASU 2016-15 is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact of this ASU on its consolidated financial statements.

~~FASB ASU 2016-18,~~ ~~Statement of Cash flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force)~~, requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Entities will also be required to reconcile such total to amounts on the balance sheet and disclose the nature of the restrictions. ASU 2016-18 is effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact of this ASU on its consolidated financial statements.

~~FASB ASU 2017-01,~~ ~~Business Combinations (Topic 805): Clarifying the Definition of Business~~, provides guidance on evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The new standard clarifies that when substantially all of the fair value of gross assets acquired is concentrated in a single asset, or a group of similar assets, the asset acquired would not represent a business. The new ASU introduces this initial required screen and, if met, eliminates the need for further assessment. For public business entities with a calendar year end, the standard is effective in 2018. Early adoption is permitted, including adoption in an interim period. The amendments can be applied to transactions occurring before the guidance was issued, as long as the applicable financial statements have not been issued. The Company does not expect the adoption of this ASU to have a material effect on its consolidated financial statements.

~~FASB ASU 2017-04,~~ ~~Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment~~, simplifies the subsequent measurement of goodwill impairment by eliminating the requirement to calculate the implied fair value of goodwill (i.e., the current Step 2 of the goodwill impairment test) to measure a goodwill impairment charge. Under this ASU, the impairment test is simply the comparison of the fair value of a reporting unit with its carrying amount (the current Step 1), with the impairment charge being the deficit in fair value but not exceeding the total amount of goodwill allocated to that reporting unit. The simplified one-step impairment test applies to all reporting units (including those with zero or negative carrying amounts). An entity should apply the amendments in this ASU on a prospective basis. An entity is required to disclose the nature of and reason for the change in accounting principle upon transition. That disclosure should be provided in the first annual period and in the interim period within the first annual period when the entity initially adopts the amendments in this standard. Public business entities should adopt the amendments in this ASU for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact of this ASU on its consolidated financial statements.

~~FASB ASU 2017-08,~~ ~~Receivables-Nonrefundable Fees and Other Costs (Topic 310): Premium Amortization on Purchased Callable Debt Securities~~, shortens the period of amortization of the premium on certain callable debt securities to the earliest call date. ASU 2017-08 applies to securities that have explicit, non-contingent call features that are callable at fixed prices and on preset dates. Securities purchased at a discount and mortgage-backed securities in which early repayment is based on prepayment of the underlying assets of the security are outside the scope of ASU 2017-08. For public business entities, the standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period, and applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company is currently evaluating the impact of this ASU on its consolidated financial statements.

~~FASB ASU 2017-09,~~ ~~Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting~~, provides clarity and reduces both diversity in practice, and costs and complexity when applying the guidance in Topic 718 to a change in the terms or conditions of a share-based payment award. Under ASU 2017-09, an entity should account for the effects of a modification unless all the following are met: (1) the fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified, (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified and (3) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the

original award immediately before the original award is modified. The amendments in this ASU are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. The amendments in this ASU should be applied prospectively to an award modified on or after the adoption date. The Company does not expect the adoption of this ASU to have a material effect on its consolidated financial statements.

~~FASB ASU 2017-12, Derivatives and Hedging (Topic 815):~~ ~~Targeted Improvements to~~ ~~Accounting for Hedging Activities~~, was issued in August 2017 with the objective of improving the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. In addition to that main objective, the amendments in this Update make certain targeted improvements to simplify the application of the hedge accounting guidance in current GAAP. The ASU requires certain hedging instrument to be presented in the same line item as the hedged item and also requires expanded disclosures. This ASU’s mandatory effective date for calendar year-end public companies is January 1, 2019, but the amendments may be early adopted in any interim or annual period after issuance. The Company does not currently have hedging transactions that would be impacted by this ASU and does not expect the adoption of this ASU to have a material effect on its consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

During the three months ended June 30, 2020, pursuant to Rule 13a-15 of ~~September 30, 2017, Hanmi Financial carried out~~the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), our management, including our principal executive officer and principal financial officer, conducted an evaluation of the effectiveness and design of our disclosure controls and procedures as(as that term is defined in Rules 13a-15(e) and 15d-15(e) ~~under~~of the Exchange ~~Act, under~~Act) and have concluded that the supervision and with the participation of our senior management, including our Chief Executive Officer (principal executive officer) and our Chief Financial Officer (principal financial and accounting officer). The purpose of theCompany’s disclosure controls and procedures ~~is to ensure~~are effective as of the end of the period covered by this Quarterly Report on Form 10-Q.

Remediation of Material Weakness

During the fourth quarter of 2019 and the first quarter of 2020, the Company identified a material weakness in internal controls over financial reporting resulting in a conclusion that ~~information required to be disclosed in~~ the reports that are filed or submitted under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

~~Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that Hanmi Financial’s~~Company’s disclosure controls and procedures were ~~effective~~not effective. The material weakness in internal control over financial reporting resulted from ineffective information technology general controls in the area of user access and segregation of duties over certain information technology (“IT”) systems that support the recording of transactions and financial reporting processes. We believe that this control deficiency was a result of insufficient training of personnel around changes in our IT environment. The material weakness did not result in any identified misstatements to the financial statements, and there were no changes to previously released financial results.

Management with the oversight of the Audit Committee, was actively engaged in addressing this material weakness beginning in the fourth quarter of 2019 and continuing through the first half of 2020. Management reviewed this material weakness with the Audit Committee and continued to update the Audit Committee as to the status of the remediation efforts. Management implemented enhanced IT controls, including but not limited to, strengthening user access controls, training personnel around changes in our IT environment, and augmenting systemic controls related to the segregation of duties within the financial systems. During the second quarter of 2020, Management completed its testing of the operating effectiveness of the implemented controls, and concluded they were effective. As a result, we have concluded that the material weakness previously identified had been remediated as of ~~September~~June 30, ~~2017.~~

2020.

Changes in Internal Control Over Financial Reporting

~~During~~

Other than described above, during the most recent fiscal quarter, there has been no change in our internal ~~control~~controls over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, that ~~has~~have materially affected or isare reasonably likely to materially affect Hanmi ~~Financial's~~Financial’s internal ~~control~~controls over financial reporting.

Part II — Other Information

Item 1. Legal Proceedings

From time to time, Hanmi Financial and its subsidiaries are parties to litigation that arises in the ordinary course of business, such as claims to enforce liens, claims involving the origination and servicing of loans, and other issues related to the business of Hanmi Financial and its subsidiaries. In the opinion of management, the resolution of any such issues would not have a material adverse impact on the financial condition, results of operations, or liquidity of Hanmi Financial or its subsidiaries.

Item 1A. Risk Factors

~~There have been no~~

In addition to the other information contained in this Quarterly Report on Form 10-Q, the following risk factor represents material ~~changes in~~updates and additions to the risk factors previously disclosed ~~under Part I, Item 1A, "Risk Factors" of~~in our ~~2016~~ Annual Report on Form ~~10-K.~~10-K for the fiscal year ended December 31, 2019 as filed with the SEC. Additional risks not presently known to us, or that we currently deem immaterial, may also adversely affect our business, financial condition or results of operations. Further, to the extent that any of the information contained in this Quarterly Report on Form 10-Q constitutes forward-looking statements, the risk factor set forth below also is a cautionary statement identifying important factors that could cause our actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of us.

The economic impact of the COVID-19 outbreak could adversely affect our financial condition and results of operations.

Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 outbreak on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and when and how the economy may be reopened. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations:

•

demand for our products and services may decline, making it difficult to grow assets and income;

•

if the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income;

•

collateral for loans, especially real estate, may decline in value, which could cause credit loss expense to increase;

•

our allowance for credit losses may have to be increased if borrowers experience financial difficulties beyond forbearance periods, which will adversely affect our net income;

•

the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us;

•

as the result of the decline in the Federal Reserve Board’s target federal funds rate, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income;

•

a material decrease in net income or a net loss over several quarters could result in a decrease in the rate of our quarterly cash dividend;

•

our cyber security risks are increased as the result of an increase in the number of employees working remotely;

•

we rely on third party vendors for certain services and the unavailability of a critical service due to the COVID-19 outbreak could have an adverse effect on us;

•

Federal Deposit Insurance Corporation premiums may increase if the agency experiences additional resolution costs;

•

potential goodwill impairment charges could result if acquired assets and operations are adversely affected and remain at reduced levels;

•

due to recent legislation and government action limiting foreclosure of real property and reduced governmental capacity to effect business transactions and property transfers, we may have more difficulty taking possession of collateral supporting our loans, which may negatively impact our ability to minimize our losses, which could adversely impact our financial results; and

•

we face litigation, regulatory enforcement and reputation risk as a result of our participation in the Paycheck Participation Program (“PPP”) and the risk that the Small Business Administration may not fund some or all PPP loan guaranties.

Moreover, our future success and profitability substantially depends on the management skills of our executive officers and directors, many of whom have held officer and director positions with us for many years. The unanticipated loss or unavailability of key employees due to the outbreak could harm our ability to operate our business or execute our business strategy. We may not be successful in finding and integrating suitable successors in the event of key employee loss or unavailability.

Any one or a combination of the factors identified above could negatively impact our business, financial condition and results of operations and prospects.

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

~~None.~~

On January 24, 2019, the Company announced a stock repurchase program that authorized the repurchase of up to 5 percent of its outstanding shares or approximately 1.5 million shares of common stock. As of June 30, 2020, approximately 1.0 million shares remained available for future purchases under that stock repurchase program. Shortly following the federal proclamation declaring a national emergency concerning the COVID-19 outbreak, Hanmi suspended its share repurchase program and does not anticipate it will consider resumption of share repurchases until the rescission of the national emergency. During the three months ended June 30, 2020, the Company acquired 12,811 shares from employees in connection with the satisfaction of employee tax withholding obligations incurred through vesting of Company stock awards.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

~~None.~~

Item 6. Exhibits

Exhibit Number		Document

~~Exhibit~~ ~~Number~~ 31.1	~~Document~~
~~3.1~~	First Amendment to the Second Amended and Restated Bylaws and Hanmi Financial Corporation, effective September 27, 2017 (incorporated by reference herein from Exhibit 3.1 to Hanmi Financial's Current Report on Form 8-K, filed with the SEC on October 2, 2017).
~~31.1~~	Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities ExchangeAct, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of2002.
~~31.2~~
31.2		CertificationofPrincipalFinancialOfficerpursuanttoRule13a-14(a)/15d-14(a)oftheSecuritiesExchangeAct, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of2002.
~~32.1~~
32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section906 of the Sarbanes-Oxley Act of2002.
~~32.2~~
32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906of the Sarbanes-Oxley Act of2002.
~~101.INS~~
101.INS		Inline XBRL Instance Document*
~~101.SCH~~
101.SCH		Inline XBRL Taxonomy Extension Schema Document*
~~101.CAL~~
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document *
~~101.LAB~~
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document *
~~101.PRE~~	XBRL Taxonomy Extension Presentation Linkbase Document *
~~101.DEF~~ 101.PRE		InlineXBRLTaxonomyExtensionPresentationLinkbaseDocument*

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document*

104		The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, formatted in InlineXBRL

*	Attached as Exhibit 101 to this report are documents formatted in Inline XBRL (Extensible BusinessReporting Language).

†	Constitutes a management contract or compensatory plan or arrangement.

* Attached as Exhibit 101 to this report are documents formatted in XBRL (Extensible Business Reporting Language).

Signatures

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



				Hanmi Financial Corporation

Date:	~~November 9, 2017~~	August 10, 2020	~~By:~~	By:	/s/ ~~C. G. Kum~~Bonita I.Lee
				~~C. G. Kum~~	Bonita I. Lee
					President and Chief Executive Officer ~~(Principal~~ (Principal Executive Officer)

Delaware		95-4788120

~~Delaware~~		~~95-4788120~~
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		~~(I.R.S. Employer~~ Identification No.)


3660 Wilshire Boulevard, PenthouseSuiteA
Los Angeles, California		90010
(Address of PrincipalExecutiveOffices)		(Zip Code)


☒
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934


☐
¨	TRANSITION REPORTPURSUANTTOSECTION13OR15(d)OFTHESECURITIES EXCHANGE ACT OF1934



	(Unaudited) September 30, 2017			December 31, 2016
Assets
Cash and due from banks	$	138,139		$	147,235
Securities available for sale, at fair value (amortized cost of $597,944 as of September 30, 2017 and $521,053 as of December 31, 2016)	598,440			516,964
Loans held for sale, at the lower of cost or fair value	6,469			9,316
Loans and leases receivable, net of allowance for loan and lease losses of $32,492 as of September 30, 2017 and $32,429 as of December 31, 2016	4,162,863			3,812,340
Accrued interest receivable	12,098			10,987
Premises and equipment, net	26,648			28,698
Other real estate owned ("OREO"), net	1,946			7,484
Customers’ liability on acceptances	647			978
Servicing assets	10,428			10,564
Goodwill and other intangible assets, net	12,628			12,889
Federal Home Loan Bank ("FHLB") stock, at cost	16,385			16,385
Income tax asset, net	46,210			48,047
Bank-owned life insurance	50,268			49,440
Prepaid expenses and other assets	28,227			30,019
Total assets	$	5,111,396		$	4,701,346
Liabilities and stockholders’ equity
Liabilities:
Deposits:
Noninterest-bearing	$	1,293,538		$	1,203,240
Interest-bearing	3,005,472			2,606,497
Total deposits	4,299,010			3,809,737
Accrued interest payable	4,071			2,567
Bank’s liability on acceptances	657			978
FHLB advances	110,000			315,000
Subordinated debentures	117,140			18,978
Accrued expenses and other liabilities	21,271			23,061
Total liabilities	4,552,149			4,170,321
Stockholders’ equity:
Common stock, $0.001 par value; authorized 62,500,000 shares; issued 33,059,166 shares (32,413,082 shares outstanding) as of September 30, 2017 and issued 32,946,197 shares (32,330,747 shares outstanding) as of December 31, 2016	33			33
Additional paid-in capital	564,787			562,446
Accumulated other comprehensive income (loss), net of tax expense of $207 as of September 30, 2017 and tax benefit of $1,696 as of December 31, 2016	290			(2,394		)
Retained earnings	65,858			41,726
Less: treasury stock, at cost; 646,084 shares as of September 30, 2017 and 615,450 shares as of December 31, 2016	(71,721		)	(70,786		)
Total stockholders’ equity	559,247			531,025
Total liabilities and stockholders’ equity	$	5,111,396		$	4,701,346



	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Interest and dividend income:
Interest and fees on loans and leases	$	50,265		$	41,150		$	143,614		$	120,862
Interest on securities	3,188			2,701			8,657			8,604
Dividends on Federal Reserve Bank ("FRB") and FHLB stock	286			419			943			1,540
Interest on deposits in other banks	123			55			323			152
Total interest and dividend income	53,862			44,325			153,537			131,158
Interest expense:
Interest on deposits	7,071			4,358			18,687			11,769
Interest on FHLB advances	198			179			714			673
Interest on subordinated debentures	1,667			206			3,677			584
Total interest expense	8,936			4,743			23,078			13,026
Net interest income before provision for loan and lease losses	44,926			39,582			130,459			118,132
Loan and lease loss provision (income)	269			(1,450		)	611			(4,490		)
Net interest income after provision for loan and lease losses	44,657			41,032			129,848			122,622
Noninterest income:
Service charges on deposit accounts	2,678			2,883			7,667			8,782
Trade finance and other service charges and fees	1,133			992			3,449			3,099
Gain on sales of Small Business Administration ("SBA") loans	2,546			1,616			6,678			4,247
Disposition gains on Purchased Credit Impaired ("PCI") loans	979			789			1,702			3,411
Net gain on sales of securities	267			46			1,473			46
Other operating income	1,213			2,348			4,764			5,423
Total noninterest income	8,816			8,674			25,733			25,008
Noninterest expense:
Salaries and employee benefits	16,947			15,950			50,674			47,710
Occupancy and equipment	3,883			3,917			11,743			11,351
Data processing	1,779			1,330			5,148			4,219
Professional fees	1,210			1,090			3,912			4,063
Supplies and communications	755			821			2,135			2,266
Advertising and promotion	1,147			1,153			2,964			2,769
OREO expense (income)	(16		)	73			402			721
Merger and integration costs (income)	—			—			(40		)	—
Other operating expenses	2,955			4,003			7,905			9,170
Total noninterest expense	28,660			28,337			84,843			82,269
Income before income tax expense	24,813			21,369			70,738			65,361
Income tax expense	9,890			8,248			27,576			23,288
Net income	$	14,923		$	13,121		$	43,162		$	42,073
Basic earnings per share	$	0.46		$	0.41		$	1.34		$	1.31
Diluted earnings per share	$	0.46		$	0.41		$	1.33		$	1.31
Weighted-average shares outstanding:
Basic	32,095,286			31,912,470			32,058,705			31,880,466
Diluted	32,255,814			32,088,233			32,230,319			32,031,295



	Common Stock - Number of Shares					Stockholders’ Equity
	Shares Issued	Treasury Shares		Shares Outstanding		Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Treasury Stock, at Cost			Total Stockholders’ Equity
Balance at January 1, 2016	32,566,522	(592,163	)	31,974,359		$	257		$	557,761	$	(315	)	$	6,422		$	(70,207	)	$	493,918
Correction of accounting for the 2011 1-for-8 stock split	—	—		—		(224		)	224		—			—			—			—
Stock options exercised	42,584	—		42,584		—			592		—			—			—			592
Restricted stock awards, net of forfeitures	256,287	—		256,287		—			—		—			—			—			—
Share-based compensation expense	—	—		—		—			2,329		—			—			—			2,329
Restricted stock surrendered due to employee tax liability	—	(20,456	)	(20,456	)	—			—		—			—			(502		)	(502		)
Cash dividends declared	—	—		—		—			—		—			(15,082		)	—			(15,082		)
Net income	—	—		—		—			—		—			42,073			—			42,073
Change in unrealized gain (loss) on securities available for sale, net of income taxes	—	—		—		—			—		7,870			—			—			7,870
Balance at September 30, 2016	32,865,393	(612,619	)	32,252,774		$	33		$	560,906	$	7,555		$	33,413		$	(70,709	)	$	531,198

Balance at January 1, 2017	32,946,197	(615,450	)	32,330,747		$	33		$	562,446	$	(2,394	)	$	41,726		$	(70,786	)	$	531,025
Stock options exercised	22,125	—		22,125		—			270		—			—			—			270
Restricted stock awards, net of forfeitures	90,844	—		90,844		—			—		—			—			—			—
Share-based compensation expense	—	—		—		—			2,071		—			—			—			2,071
Restricted stock surrendered due to employee tax liability	—	(30,634	)	(30,634	)	—			—		—			—			(935		)	(935		)
Cash dividends declared	—	—		—		—			—		—			(19,030		)	—			(19,030		)
Net income	—	—		—		—			—		—			43,162			—			43,162
Change in unrealized gain (loss) on securities available for sale, net of income taxes	—	—		—		—			—		2,684			—			—			2,684
Balance at September 30, 2017	33,059,166	(646,084	)	32,413,082		$	33		$	564,787	$	290		$	65,858		$	(71,721	)	$	559,247



	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss		Estimated Fair Value
	(in thousands)
September 30, 2017
Mortgage-backed securities ^{(1) (2)}	$	310,111	$	793	$	1,154	$	309,750
Collateralized mortgage obligations ⁽¹⁾	107,052		16		944		106,124
U.S. government agency securities	7,499		—		42		7,457
SBA loan pool securities	4,036		—		140		3,896
Municipal bonds-tax exempt	146,177		2,424		77		148,524
U.S. treasury securities	153		—		—		153
Mutual funds	22,916		—		380		22,536
Total securities available for sale	$	597,944	$	3,233	$	2,737	$	598,440

December 31, 2016
Mortgage-backed securities ^{(1) (2)}	$	230,489	$	598	$	1,457	$	229,630
Collateralized mortgage obligations ⁽¹⁾	77,447		6		1,002		76,451
U.S. government agency securities	7,499		—		58		7,441
SBA loan pool securities	4,356		—		210		4,146
Municipal bonds-tax exempt	159,789		236		1,995		158,030
Municipal bonds-taxable	13,391		319		9		13,701
Corporate bonds	5,010		5		—		5,015
U.S. treasury securities	156		—		—		156
Mutual funds	22,916		—		522		22,394
Total securities available for sale	$	521,053	$	1,164	$	5,253	$	516,964



	Three Months Ended September 30,					Nine Months Ended September 30,
	2017		2016			2017		2016
	(in thousands)
Gross realized gains on sales of securities	$	267	$	396		$	1,473	$	396
Gross realized losses on sales of securities	—		(350		)	—		(350		)
Net realized gains on sales of securities	$	267	$	46		$	1,473	$	46
Proceeds from sales of securities	$	17,644	$	78,282		$	70,333	$	78,282



	September 30, 2017									December 31, 2016
	Non-PCI Loans and Leases			PCI Loans			Total			Non-PCI Loans and Leases			PCI Loans			Total
	(in thousands)
Real estate loans:
Commercial property
Retail	$	916,236		$	1,587		$	917,823		$	857,629		$	2,324		$	859,953
Hospitality	731,562			1,664			733,226			649,540			1,618			651,158
Gas station	245,042			2,388			247,430			260,187			2,692			262,879
Other ⁽¹⁾	1,144,176			2,013			1,146,189			1,107,589			2,067			1,109,656
Construction	64,263			—			64,263			55,962			—			55,962
Residential property	429,669			958			430,627			337,791			976			338,767
Total real estate loans	3,530,948			8,610			3,539,558			3,268,698			9,677			3,278,375
Commercial and industrial loans:
Commercial term	170,891			51			170,942			138,032			136			138,168
Commercial lines of credit	149,937			—			149,937			136,231			—			136,231
International loans	43,577			—			43,577			25,821			—			25,821
Total commercial and industrial loans	364,405			51			364,456			300,084			136			300,220
Leases receivable	272,271			—			272,271			243,294			—			243,294
Consumer loans ⁽²⁾	19,027			43			19,070			22,830			50			22,880
Loans and leases receivable	4,186,651			8,704			4,195,355			3,834,906			9,863			3,844,769
Allowance for loan and lease losses	(31,698		)	(794		)	(32,492		)	(31,458		)	(971		)	(32,429		)
Loans and leases receivable, net	$	4,154,953		$	7,910		$	4,162,863		$	3,803,448		$	8,892		$	3,812,340



	SBA Loans Held for Sale
	Real Estate			Commercial and Industrial			Total
	(in thousands)
September 30, 2017
Balance at beginning of period	$	8,817		$	2,132		$	10,949
Originations	16,326			11,723			28,049
Sales	(20,593		)	(11,926		)	(32,519		)
Principal payoffs and amortization	(4		)	(6		)	(10		)
Balance at end of period	$	4,546		$	1,923		$	6,469

September 30, 2016
Balance at beginning of period	$	9,293		$	3,540		$	12,833
Originations	11,272			6,417			17,689
Sales	(15,968		)	(8,122		)	(24,090		)
Principal payoffs and amortization	(2		)	(5		)	(7		)
Balance at end of period	$	4,595		$	1,830		$	6,425



	As of and for the Nine Months Ended
	September 30, 2017									September 30, 2016
	Non-PCI Loans and Leases			PCI Loans			Total			Non-PCI Loans and Leases			PCI Loans			Total
	(in thousands)
Allowance for loan and lease losses:
Balance at beginning of period	$	31,458		$	971		$	32,429		$	37,494		$	5,441		$	42,935
Charge-offs	(3,256		)	—			(3,256		)	(1,410		)	(142		)	(1,552		)
Recoveries on loans and leases previously charged off	2,709			—			2,709			2,079			—			2,079
Net loan and lease (charge-offs) recoveries	(547		)	—			(547		)	669			(142		)	527
Loan and lease loss provision (income)	787			(177		)	610			(4,724		)	234			(4,490		)
Balance at end of period	$	31,698		$	794		$	32,492		$	33,439		$	5,533		$	38,972



	Real Estate			Commercial and Industrial			Leases Receivable			Consumer			Unallocated			Total
	(In thousands)
As of and for the Three Months Ended September 30, 2017
Allowance for loan and lease losses on non-PCI loans and leases:
Beginning balance	$	22,762		$	6,979		2,033			$	87		$	1,177		$	33,038
Charge-offs	(146		)	(1,976		)	(283		)	—			—			(2,405		)
Recoveries on loans and leases previously charged off	343			308			220			—			—			871
Loan and lease loss provision (income)	(3,374		)	1,183			2,867			(23		)	(459		)	194
Ending balance	$	19,585		$	6,494		$	4,837		$	64		$	718		$	31,698
Ending balance: individually evaluated for impairment	$	3,882		$	531		$	2,008		$	—		$	—		$	6,421
Ending balance: collectively evaluated for impairment	$	15,703		$	5,963		$	2,829		$	64		$	718		$	25,277

Non-PCI loans and leases receivable:
Ending balance	$	3,530,948		$	364,405		$	272,271		$	19,027		$	—		$	4,186,651
Ending balance: individually evaluated for impairment	$	19,466		$	3,610		$	3,378		$	1,045		$	—		$	27,499
Ending balance: collectively evaluated for impairment	$	3,511,482		$	360,795		$	268,893		$	17,982		$	—		$	4,159,152

Allowance for loan losses on PCI loans:
Beginning balance	$	671		$	41		$	—		$	8		$	—		$	720
Charge-offs	—			—			—			—			—			—
Loan loss provision (income)	81			—			—			(7		)	—			74
Ending balance	$	752		$	41		$	—		$	1		$	—		$	794

PCI loans receivable:
Ending balance: acquired with deteriorated credit quality	$	8,610		$	51		$	—		$	43		$	—		$	8,704



	Pass/Pass-Watch		Special Mention		Classified		Total
	(in thousands)
September 30, 2017
Real estate loans:
Commercial property
Retail	$	910,890	$	1,577	$	3,769	$	916,236
Hospitality	718,244		4,979		8,339		731,562
Gas station	240,952		2,274		1,816		245,042
Other	1,131,423		8,840		3,913		1,144,176
Construction	64,263		—		—		64,263
Residential property	429,048		326		295		429,669
Total real estate loans	3,494,820		17,996		18,132		3,530,948
Commercial and industrial loans:
Commercial term	167,492		1,623		1,776		170,891
Commercial lines of credit	149,646		110		181		149,937
International loans	43,577		—		—		43,577
Total commercial and industrial loans	360,715		1,733		1,957		364,405
Leases receivable	268,893		—		3,378		272,271
Consumer loans	17,930		—		1,097		19,027
Total Non-PCI loans and leases	$	4,142,358	$	19,729	$	24,564	$	4,186,651

December 31, 2016
Real estate loans:
Commercial property
Retail	$	851,147	$	2,275	$	4,207	$	857,629
Hospitality	634,397		5,497		9,646		649,540
Gas station	252,123		1,911		6,153		260,187
Other	1,100,070		1,645		5,874		1,107,589
Construction	55,962		—		—		55,962
Residential property	337,227		—		564		337,791
Total real estate loans	3,230,926		11,328		26,444		3,268,698
Commercial and industrial loans:
Commercial term	133,811		2,060		2,161		138,032
Commercial lines of credit	135,699		464		68		136,231
International loans	23,406		2,415		—		25,821
Total commercial and industrial loans	292,916		4,939		2,229		300,084
Leases receivable	242,393		—		901		243,294
Consumer loans	22,139		—		691		22,830
Total Non-PCI loans and leases	$	3,788,374	$	16,267	$	30,265	$	3,834,906



	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current			Total
	(in thousands)
September 30, 2017
Real estate loans:
Commercial property
Retail	$	7	$	1	$	223	$	231	$	916,005		$	916,236
Hospitality	1,869		—		975		2,844		728,718			731,562
Gas station	43		63		128		234		244,808			245,042
Other	1,043		280		739		2,062		1,142,114			1,144,176
Construction	—		—		—		—		64,263			64,263
Residential property	500		—		326		826		428,843		��	429,669
Total real estate loans	3,462		344		2,391		6,197		3,524,751			3,530,948
Commercial and industrial loans:
Commercial term	236		53		510		799		170,092			170,891
Commercial lines of credit	—		—		181		181		149,756			149,937
International loans	—		—		—		—		43,577			43,577
Total commercial and industrial loans	236		53		691		980		363,425			364,405
Leases receivable	3,042		476		2,033		5,551		266,720			272,271
Consumer loans	—		—		—		—		19,027			19,027
Total Non-PCI loans and leases	$	6,740	$	873	$	5,115	$	12,728	$	4,173,923		$	4,186,651

December 31, 2016
Real estate loans:
Commercial property
Retail	$	9	$	137	$	234	$	380	$	857,249		$	857,629
Hospitality	1,037		46		600		1,683		647,857			649,540
Gas station	245		643		137		1,025		259,162			260,187
Other	432		79		1,100		1,611		1,105,978			1,107,589
Construction	—		—		—		—		55,962			55,962
Residential property	730		89		423		1,242		336,549			337,791
Total real estate loans	2,453		994		2,494		5,941		3,262,757			3,268,698
Commercial and industrial loans:
Commercial term	484		42		111		637		137,395			138,032
Commercial lines of credit	—		—		—		—		136,231			136,231
International loans	80		—		—		80		25,741			25,821
Total commercial and industrial loans	564		42		111		717		299,367			300,084
Leases receivable	2,090		1,043		385		3,518		239,776			243,294
Consumer loans	170		—		—		170		22,660			22,830
Total Non-PCI loans and leases	$	5,277	$	2,079	$	2,990	$	10,346	$	3,824,560		$	3,834,906



	Recorded Investment		Unpaid Principal Balance		With No Related Allowance Recorded		With an Allowance Recorded		Related Allowance
	(in thousands)
September 30, 2017
Real estate loans:
Commercial property
Retail	$	1,475	$	1,495	$	124	$	1,351	$	61
Hospitality	6,288		7,233		2,165		4,123		3,057
Gas station	4,260		4,732		4,155		105		—
Other	4,777		5,170		1,881		2,897		764
Residential property	2,666		2,812		2,666		—		—
Total real estate loans	19,466		21,442		10,991		8,476		3,882
Commercial and industrial loans:
Commercial term	3,429		3,482		361		3,068		531
Commercial lines of credit	181		181		181		—		—
Total commercial and industrial loans	3,610		3,663		542		3,068		531
Leases receivable	3,378		3,482		658		2,720		2,008
Consumer loans	1,045		1,221		1,045		—		—
Total Non-PCI loans and leases	$	27,499	$	29,808	$	13,236	$	14,264	$	6,421

December 31, 2016
Real estate loans:
Commercial property
Retail	$	1,678	$	1,684	$	151	$	1,527	$	120
Hospitality	6,227		6,823		2,243		3,984		3,078
Gas station	4,984		5,092		4,984		—		—
Other	6,070		6,808		3,127		2,943		782
Residential property	2,798		2,851		2,798		—		—
Total real estate loans	21,757		23,258		13,303		8,454		3,980
Commercial and industrial loans:
Commercial term	4,106		4,171		1,229		2,877		347
Commercial lines of credit	68		68		68		—		—
Total commercial and industrial loans	4,174		4,239		1,297		2,877		347
Consumer loans	419		489		419		—		—
Total Non-PCI loans and leases	$	26,350	$	27,986	$	15,019	$	11,331	$	4,327



	Three Months Ended				Nine Months Ended
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(in thousands)
September 30, 2017
Real estate loans:
Commercial property
Retail	$	1,487	$	24	$	1,551	$	85
Hospitality	6,476		143		6,268		309
Gas station	4,603		85		4,764		297
Other	4,886		117		4,917		304
Residential property	2,794		26		2,797		87
Total real estate loans	20,246		395		20,297		1,082
Commercial and industrial loans:
Commercial term	3,495		54		3,739		165
Commercial lines of credit	1,060		—		853		16
Total commercial and industrial loans	4,555		54		4,592		181
Leases receivable	3,560		12		4,044		36
Consumer loans	1,201		15		917		21
Total Non-PCI loans and leases	$	29,562	$	476	$	29,850	$	1,320

September 30, 2016
Real estate loans:
Commercial property
Retail	$	1,985	$	31	$	2,430	$	117
Hospitality	3,222		66		4,429		367
Gas station	4,557		134		4,772		395
Other	6,541		138		7,438		533
Residential property	2,512		28		2,606		85
Total real estate loans	18,817		397		21,675		1,497
Commercial and industrial loans:
Commercial term	4,792		71		5,032		235
Commercial lines of credit	15		3		29		12
International loans	—		—		420		—
Total commercial and industrial loans	4,807		74		5,481		247
Consumer loans	682		7		688		22
Total Non-PCI loans and leases	$	24,306	$	478	$	27,844	$	1,766



	Nonaccrual TDRs										Accrual TDRs
	Deferral of Principal		Deferral of Principal and Interest		Reduction of Principal and Interest		Extension of Maturity		Total		Deferral of Principal		Deferral of Principal and Interest		Reduction of Principal and Interest		Extension of Maturity		Total
	(in thousands)
September 30, 2017
Real estate loans	$	1,959	$	3,836	$	67	$	—	$	5,862	$	3,389	$	—	$	1,399	$	1,245	$	6,033
Commercial and industrial loans	132		186		48		109		475		10		184		1,667		485		2,346
Consumer loans	820		—		—		—		820		—		—		111		—		111
Total Non-PCI TDR loans	$	2,911	$	4,022	$	115	$	109	$	7,157	$	3,399	$	184	$	3,177	$	1,730	$	8,490

December 31, 2016
Real estate loans	$	1,679	$	4,373	$	143	$	—	$	6,195	$	4,795	$	—	$	1,514	$	1,633	$	7,942
Commercial and industrial loans	149		71		69		419		708		22		198		2,135		730		3,085
Consumer loans	—		—		—		—		—		—		—		119		—		119
Total Non-PCI TDR loans	$	1,828	$	4,444	$	212	$	419	$	6,903	$	4,817	$	198	$	3,768	$	2,363	$	11,146



	Carrying Amount			Accretable Yield
	(in thousands)
Balance at January 1, 2017	$	8,892		$	(5,677	)
Accretion	501			501
Payments received	(1,770		)	—
Disposal/transfer to OREO	110			—
Change in expected cash flows, net	—			(306		)
Loan loss (provision) income	177			—
Balance at September 30, 2017	$	7,910		$	(5,482	)

Balance at January 1, 2016	$	14,573		$	(5,944	)
Accretion	933			933
Payments received	(6,408		)	—
Disposal/transfer to OREO	1,143			—
Change in expected cash flows, net	—			(900		)
Loan loss (provision) income	(234		)	—
Balance at September 30, 2016	$	10,007		$	(5,911	)



	Pooled PCI Loans							Non-pooled PCI Loans
	Number of Loans	Number of Pools	Carrying Amount (in thousands)			Percentage of Total		Number of Loans	Carrying Amount (in thousands)			Percentage of Total		Total PCI Loans (in thousands)
September 30, 2017
Real estate loans:
Commercial property	41	6	$	6,788		88.7	%	1	$	864		11.3	%	$	7,652
Residential property	—	—	—			—	%	1	958			100.0	%	$	958
Total real estate loans	41	6	6,788			78.8	%	2	1,822			21.2	%	8,610
Commercial and industrial loans	3	3	51			100.0	%	—	—			—	%	51
Consumer loans	1	1	4			9.3	%	1	39			90.4	%	43
Total acquired loans	45	10	6,843			78.6	%	3	1,861			21.4	%	8,704
Allowance for loan losses			(378		)				(416		)			(794		)
Total carrying amount			$	6,465					$	1,445				$	7,910



	Unrealized Gains and Losses on Available for Sale Securities			Tax Benefit (Expense)			Total
	(in thousands)
September 30, 2017
Balance at beginning of period	$	235		$	(98	)	$	137
Other comprehensive income before reclassification	529			(109		)	420
Reclassification from accumulated other comprehensive income	(267		)	—			(267		)
Period change	262			(109		)	153
Balance at end of period	$	497		$	(207	)	$	290

September 30, 2016
Balance at beginning of period	$	13,816		$	(4,695	)	$	9,121
Other comprehensive income before reclassification	(2,629		)	1,109			(1,520		)
Reclassification from accumulated other comprehensive income	(46		)	—			(46		)
Period change	(2,675		)	1,109			(1,566		)
Balance at end of period	$	11,141		$	(3,586	)	$	7,555



	Unrealized Gains and Losses on Available for Sale Securities			Unrealized Gains and Losses on Interest-Only Strip			Tax Benefit (Expense)			Total
	(in thousands)
September 30, 2017
Balance at beginning of period	$	(4,089	)	$	—		$	1,695		$	(2,394	)
Other comprehensive income before reclassification	6,059			—			(1,902		)	4,157
Reclassification from accumulated other comprehensive income	(1,473		)	—			—			(1,473		)
Period change	4,586			—			(1,902		)	2,684
Balance at end of period	$	497		$	—		$	(207	)	$	290

September 30, 2016
Balance at beginning of period	$	(2,331	)	$	9		$	2,007		$	(315	)
Other comprehensive income before reclassification	13,518			(9		)	(5,593		)	7,916
Reclassification from accumulated other comprehensive income	(46		)	—			—			(46		)
Period change	13,472			(9		)	(5,593		)	7,870
Balance at end of period	$	11,141		$	—		$	(3,586	)	$	7,555



	Actual				Minimum Regulatory Requirement				Minimum to Be Categorized as “Well Capitalized”
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(dollars in thousands)
September 30, 2017
Total capital (to risk-weighted assets):
Hanmi Financial	$	677,024	15.58	%	$	347,757	8.00	%	N/A		N/A
Hanmi Bank	$	666,298	15.32	%	$	347,949	8.00	%	$	434,936	10.00	%
Tier 1 capital (to risk-weighted assets):
Hanmi Financial	$	545,698	12.56	%	$	260,818	6.00	%	N/A		N/A
Hanmi Bank	$	632,891	14.55	%	$	260,962	6.00	%	$	347,949	8.00	%
Common equity Tier 1 capital (to risk-weighted assets):
Hanmi Financial	$	530,347	12.20	%	$	195,613	4.50	%	N/A		N/A
Hanmi Bank	$	632,891	14.55	%	$	195,721	4.50	%	$	282,709	6.50	%
Tier 1 capital (to average assets):
Hanmi Financial	$	545,698	10.92	%	$	199,818	4.00	%	N/A		N/A
Hanmi Bank	$	632,891	12.66	%	$	199,897	4.00	%	$	249,871	5.00	%

December 31, 2016
Total capital (to risk-weighted assets):
Hanmi Financial	$	554,089	13.86	%	$	319,901	8.00	%	N/A		N/A
Hanmi Bank	$	544,759	13.64	%	$	319,520	8.00	%	$	399,399	10.00	%
Tier 1 capital (to risk-weighted assets):
Hanmi Financial	$	520,477	13.02	%	$	239,926	6.00	%	N/A		N/A
Hanmi Bank	$	511,146	12.80	%	$	239,640	6.00	%	$	319,520	8.00	%
Common equity Tier 1 capital (to risk-weighted assets):
Hanmi Financial	$	509,239	12.73	%	$	179,944	4.50	%	N/A		N/A
Hanmi Bank	$	511,146	12.80	%	$	179,730	4.50	%	$	259,610	6.50	%
Tier 1 capital (to average assets):
Hanmi Financial	$	520,477	11.53	%	$	180,581	4.00	%	N/A		N/A
Hanmi Bank	$	511,146	11.33	%	$	180,411	4.00	%	$	225,514	5.00	%



	Unrecognized Expense		Average Expected Recognition Period
	(in thousands)
Stock option awards	$	19	0.9 years
Restricted stock awards	4,751		2.3 years
Total unrecognized share-based compensation expense	$	4,770	2.3 years



	Number of Shares		Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Life	Aggregate Intrinsic Value of In-the- Money Options
						(in thousands)
Options outstanding at beginning of period	376,401		$	17.68	6.3 years	$	4,168	⁽¹⁾
Options exercised	(10,625	)	$	12.21	4.5 years	—
Options outstanding at end of period	365,776		$	17.84	6.1 years	$	4,797	⁽²⁾

Options exercisable at end of period	348,105		$	17.62	6.1 years	$	4,641	⁽²⁾



	Three Months Ended September 30, 2017				Nine Months Ended September 30, 2017
	Number of Shares		Weighted- Average Grant Date Fair Value Per Share		Number of Shares		Weighted- Average Grant Date Fair Value Per Share
Restricted stock at beginning of period	305,951		$	20.21	343,958		$	16.60
Restricted stock granted	13,173		28.79		104,179		31.04
Restricted stock vested	(2,666	)	20.52		(122,010	)	18.12
Restricted stock forfeited	(3,667	)	28.60		(13,336	)	24.73
Restricted stock at end of period	312,791		20.47		312,791		20.47



	As of or for the
	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
	(dollars in thousands, except per share data)
Summary balance sheets:
Cash and due from banks	$	138,139		$	130,197		$	138,139		$	130,197
Securities	598,440			548,961			598,440			548,961
Loans and leases receivable, net ⁽¹⁾	4,162,863			3,513,687			4,162,863			3,513,687
Assets	5,111,396			4,402,180			5,111,396			4,402,180
Deposits	4,299,010			3,771,207			4,299,010			3,771,207
Liabilities	4,552,149			3,870,982			4,552,149			3,870,982
Stockholders’ equity	559,247			531,198			559,247			531,198
Tangible equity	546,619			529,742			546,619			529,742
Average loans and leases receivable ⁽¹⁾	4,092,131			3,447,428			3,976,021			3,333,419
Average securities	611,538			589,832			574,801			643,125
Average interest-earning assets	4,759,035			4,130,145			4,608,870			4,045,480
Average assets	5,027,704			4,397,703			4,881,527			4,315,062
Average deposits	4,260,349			3,669,419			4,101,640			3,544,389
Average borrowings	185,000			171,779			207,340			222,889
Average interest-bearing liabilities	3,187,395			2,651,505			3,084,094			2,600,851
Average stockholders’ equity	551,763			528,581			543,503			515,403
Average tangible equity	539,087			527,072			530,740			513,813
Per share data:
Earnings per share – basic ⁽²⁾	$	0.46		$	0.41		$	1.34		$	1.31
Earnings per share – diluted ⁽²⁾	$	0.46		$	0.41		$	1.33		$	1.31
Book value per share ⁽³⁾	$	17.25		$	16.47		$	17.25		$	16.47
Tangible book value per share ⁽⁴⁾	$	16.86		$	16.42		$	16.86		$	16.42
Cash dividends per share	$	0.21		$	0.19		$	0.59		$	0.47
Common shares outstanding	32,413,082			32,252,774			32,413,082			32,252,774
Performance ratios:
Return on average assets ^{(5) (6)}	1.18		%	1.19		%	1.18		%	1.30		%
Return on average stockholders’ equity ^{(5) (7)}	10.73		%	9.88		%	10.62		%	10.90		%
Return on average tangible equity ^{(5) (8)}	10.98		%	9.90		%	10.87		%	10.94		%
Net interest margin ⁽⁹⁾	3.79		%	3.86		%	3.83		%	3.95		%
Net interest margin excluding acquisition accounting ⁽⁹⁾	3.76		%	3.75		%	3.79		%	3.76		%
Efficiency ratio ⁽¹⁰⁾	53.33		%	58.72		%	54.32		%	57.47		%
Dividend payout ratio ⁽¹¹⁾	45.45		%	46.50		%	53.66		%	35.83		%
Average stockholders’ equity to average assets	10.97		%	12.02		%	11.13		%	11.94		%



Capital ratios⁽¹⁵⁾:
Total risk-based capital:
Hanmi Financial	15.58		%	14.99		%	15.58		%	14.99		%
Hanmi Bank	15.32		%	14.61		%	15.32		%	14.61		%
Tier 1 risk-based capital:
Hanmi Financial	12.56		%	13.89		%	12.56		%	13.89		%
Hanmi Bank	14.55		%	13.50		%	14.55		%	13.50		%
Common equity Tier 1 capital:
Hanmi Financial	12.20		%	13.73		%	12.20		%	13.73		%
Hanmi Bank	14.55		%	13.50		%	14.55		%	13.50		%
Tier 1 leverage:
Hanmi Financial	10.92		%	11.68		%	10.92		%	11.68		%
Hanmi Bank	12.66		%	11.36		%	12.66		%	11.36		%
Asset quality ratios:
Nonperforming Non-PCI loans and leases to loans and leases ⁽¹²⁾	0.35		%	0.31		%	0.35		%	0.31		%
Nonperforming assets to assets ⁽¹³⁾	0.32		%	0.50		%	0.32		%	0.50		%
Net loan and lease charge-offs (recoveries) to average loans and leases	0.15		%	(0.08		)%	—		%	(0.02		)%
Allowance for loan lease losses to loans and leases	0.77		%	1.10		%	0.77		%	1.10		%
Allowance for loan and lease losses to non-performing loans and leases ⁽¹²⁾ ⁽¹⁴⁾	217.74		%	305.43		%	217.74		%	305.43		%
Acquired loans:
PCI loans, net of discounts	$	8,704		$	15,540		$	8,704		$	15,540
Allowance for loan losses on PCI loans	794			5,533			794			5,533
Non-PCI loans, net of discounts	91,013			108,434			91,013			108,434
Unamortized acquisition discounts on Non-PCI loans	4,999			7,087			4,999			7,087



	September 30,
	2017			2016
	(in thousands, except per share data)
Total assets	$	5,111,396		$	4,402,180
Less goodwill	(11,031		)	—
Less other intangible assets, net	(1,597		)	(1,456		)
Tangible assets	$	5,098,768		$	4,400,724

Total stockholders’ equity	$	559,247		$	531,198
Less goodwill	(11,031		)	—
Less other intangible assets, net	(1,597		)	(1,456		)
Tangible stockholders' equity	$	546,619		$	529,742

Book value per share	$	17.25		$	16.47
Effect of goodwill	(0.34		)	—
Effect of other intangible assets	(0.05		)	(0.05		)
Tangible book value per share	$	16.86		$	16.42



	Three Months Ended
	September 30, 2017 vs. September 30, 2016
	Increases (Decreases) Due to Change In
	Volume			Rate			Total
	(in thousands)
Interest and dividend income:
Loans and leases receivable	$	7,646		$	1,469		$	9,115
Securities	122			351			473
FRB and FHLB stock	(55		)	(78		)	(133		)
Interest-bearing deposits in other banks	(7		)	75			68
Total interest and dividend income	$	7,706		$	1,817		$	9,523
Interest expense:
Demand: interest-bearing	$	(1	)	$	—		$	(1	)
Money market and savings	732			745			1,477
Time deposits	310			927			1,237
FHLB advances	(140		)	159			19
Subordinated debentures	1,380			81			1,461
Total interest expense	$	2,281		$	1,912		$	4,193
Change in net interest income (taxable equivalent)	$	5,425		$	(95	)	$	5,330



	September 30, 2017							December 31, 2016
	Amortized Cost		Estimated Fair Value		Unrealized Gain (Loss)			Amortized Cost		Estimated Fair Value		Unrealized Gain (Loss)
	(in thousands)
Securities available for sale:
Mortgage-backed securities ^{(1) (2)}	$	310,111	$	309,750	$	(361	)	$	230,489	$	229,630	$	(859	)
Collateralized mortgage obligations ⁽¹⁾	107,052		106,124		(928		)	77,447		76,451		(996		)
U.S. government agency securities	7,499		7,457		(42		)	7,499		7,441		(58		)
SBA loan pool securities	4,036		3,896		(140		)	4,356		4,146		(210		)
Municipal bonds-tax exempt	146,177		148,524		2,347			159,789		158,030		(1,759		)
Municipal bonds-taxable	—		—		—			13,391		13,701		310
Corporate bonds	—		—		—			5,010		5,015		5
U.S. treasury securities	153		153		—			156		156		—
Mutual funds	22,916		22,536		(380		)	22,916		22,394		(522		)
Total securities available for sale	$	597,944	$	598,440	$	496		$	521,053	$	516,964	$	(4,089	)



					After One Year But				After Five Years But
	Within One Year				Within Five Years				Within Ten Years				After Ten Years				Total
	Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield
									(dollars in thousands)
Securities available for sale:
Mortgage-backed securities	$	23,222	1.76	%	$	37,312	2.01	%	$	92,049	2.21	%	$	157,528	2.28	%	$	310,111	2.19	%
Collateralized mortgage obligations	21		—	%	1,935		1.55	%	17,941		1.71	%	87,155		1.86	%	107,052		1.83	%
U.S. government agency securities	—		—	%	6,000		1.35	%	1,499		2.20	%	—		—	%	7,499		1.52	%
SBA loan pool securities	—		—	%	—		—	%	—		—	%	4,036		1.72	%	4,036		1.72	%
Municipal bonds-tax exempt ⁽¹⁾	—		—	%	5,296		2.64	%	85,104		3.20	%	55,777		4.18	%	146,177		3.55	%
Municipal bonds-taxable	—		—	%	—		—	%	—		—	%	—		—	%	—		—	%
Corporate bonds	—		—	%	—		—	%	—		—	%	—		—	%	—		—	%
U.S. treasury securities	153		1.20	%	—		—	%	—		—	%	—		—	%	153		1.20	%
Mutual funds ⁽²⁾	—		—	%	—		—	%	—		—	%	22,916		2.46	%	22,916		2.46	%
Total securities available for sale	$	23,396	1.75	%	$	50,543	1.98	%	$	196,593	2.59	%	$	327,412	2.50	%	$	597,944	2.46	%

August 10, 2020

/s/Romolo C. Santarosa

Romolo C. Santarosa

Senior Executive Vice President and Chief Financial Officer
~~(Principal~~ (Principal Financial and Accounting Officer)