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CATHAY GENERAL BANCORP - Quarter Report: 2022 September (Form 10-Q)

caty20220930_10q.htm
 

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)         

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period endedSeptember 30, 2022

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from

 

to

 

Commission file number

001-31830

CATHAY GENERAL BANCORP

(Exact name of registrant as specified in its charter)

 

Delaware

 

95-4274680

(State of other jurisdiction of incorporation

 

(I.R.S. Employer

or organization)

 

Identification No.)

777 North Broadway, Los Angeles, California

90012

(Address of principal executive offices)

(Zip Code)

Registrant's telephone number, including area code:

(213) 625-4700

(Former name, former address, and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock

CATY

Nasdaq Global Select Market

 

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

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑          No ☐

 

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

 

Large accelerated filer ☑

  

Accelerated filer ☐  

Non-accelerated filer ☐

Smaller reporting company ☐    

Emerging growth company ☐

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐           No ☑

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Common stock, $.01 par value, 74,413,792 shares outstanding as of October 31, 2022.

 

  

 

CATHAY GENERAL BANCORP AND SUBSIDIARIES

3RD QUARTER 2022 REPORT ON FORM 10-Q

TABLE OF CONTENTS

 

 

PART I  FINANCIAL INFORMATION

3

Item 1.  FINANCIAL STATEMENTS (Unaudited)

3

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

8

Item 2.  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

44

Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

70

Item 4.  CONTROLS AND PROCEDURES.

71

PART II  OTHER INFORMATION

71

Item 1.  LEGAL PROCEEDINGS.

71

Item 1A.  RISK FACTORS.

72

Item 3.  DEFAULTS UPON SENIOR SECURITIES.

73

Item 4.  MINE SAFETY DISCLOSURES.

73

Item 5.  OTHER INFORMATION.

73

Item 6.  EXHIBITS.

73

SIGNATURES

75

  

 

    

Forward-Looking Statements

 

In this Quarterly Report on Form 10-Q, the term “Bancorp” refers to Cathay General Bancorp and the term “Bank” refers to Cathay Bank. The terms “Company,” “we,” “us,” and “our” refer to Bancorp and the Bank collectively.

 

The statements in this report include forward-looking statements within the meaning of the applicable provisions of the Private Securities Litigation Reform Act of 1995 regarding management’s beliefs, projections, and assumptions concerning future results and events. We intend such forward-looking statements to be covered by the safe harbor provision for forward-looking statements in these provisions. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including statements about anticipated future operating and financial performance, financial position and liquidity, growth opportunities and growth rates, growth plans, acquisition and divestiture opportunities, business prospects, strategic alternatives, business strategies, financial expectations, regulatory and competitive outlook, loan and deposit growth, investment and expenditure plans, financing needs and availability, level of nonperforming assets, and other similar forecasts and statements of expectation and statements of assumptions underlying any of the foregoing. Words such as “aims,” “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “hopes,” “intends,” “may,” “optimistic,” “plans,” “potential,” “possible,” “predicts,” “projects,” “seeks,” “shall,” “should,” “will,” and variations of these words and similar expressions are intended to identify these forward-looking statements. Forward-looking statements by us are based on estimates, beliefs, projections, and assumptions of management and are not guarantees of future performance. These forward-looking statements are subject to certain risks, uncertainties and other factors that could cause actual results to differ materially from our historical experience and our present expectations or projections. Such risks, uncertainties and other factors include, but are not limited to:

 

 

local, regional, national, and international economic and market conditions and events and the impact they may have on us, our customers and our operations, assets and liabilities;

 

the impact on our business, operations, financial condition, liquidity, results of operations, prospects and trading prices of our shares arising out of the COVID-19 pandemic and its related economic impacts;

 

possible additional provisions for loan losses and charge-offs;

 

credit risks of lending activities and deterioration in asset or credit quality;

 

extensive laws and regulations and supervision that we are subject to, including potential supervisory action by bank supervisory authorities;

 

increased costs of compliance and other risks associated with changes in regulation;

 

higher capital requirements from the implementation of the Basel III capital standards;

 

compliance with the Bank Secrecy Act and other money laundering statutes and regulations;

 

potential goodwill impairment;

 

liquidity risk;

 

fluctuations in interest rates;

 

risks associated with acquisitions and the expansion of our business into new markets;

 

inflation and deflation;

 

real estate market conditions and the value of real estate collateral;

 

environmental liabilities;

 

our ability to generate anticipated returns from our investments and/or financings in certain tax advantaged-projects;

 

our ability to compete with larger competitors;

 

 

 

our ability to retain key personnel;

 

successful management of reputational risk;

 

natural disasters, public health crises (including the occurrence of a contagious disease or illness, such as COVID-19) and geopolitical events;

 

failures, interruptions, or security breaches of our information systems;

 

our ability to adapt our systems to the expanding use of technology in banking;

 

risk management processes and strategies;

 

adverse results in legal proceedings;

 

the impact of regulatory enforcement actions, if any;

 

certain provisions in our charter and bylaws that may affect acquisition of the Company;

 

changes in accounting standards or tax laws and regulations;

 

market disruption and volatility;

 

fluctuations in the Bancorp’s stock price;

 

restrictions on dividends and other distributions by laws and regulations and by our regulators and our capital structure;

 

issuances of preferred stock;

 

capital level requirements and successfully raising additional capital, if needed, and the resulting dilution of interests of holders of Bancorp common stock; and

 

the soundness of other financial institutions.

 

These and other factors are further described in Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2021 (Item 1A in particular), other reports and registration statements filed with the Securities and Exchange Commission (“SEC”), and other filings Bancorp makes with the SEC from time to time. Actual results in any future period may also vary from the past results discussed in this report. Given these risks and uncertainties, readers are cautioned not to place undue reliance on any forward-looking statements. We have no intention and undertake no obligation to update any forward-looking statement or to announce publicly any revision of any forward-looking statement to reflect developments, events, occurrences, or circumstances after the date of such statement, except as required by law.

 

Bancorp’s filings with the SEC are available at the website maintained by the SEC at http://www.sec.gov, or by request directed to Cathay General Bancorp, 9650 Flair Drive, El Monte, California 91731, Attention: Investor Relations (626) 279-3296.

 

 

PART I FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS (Unaudited)

 

CATHAY GENERAL BANCORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

  

September 30, 2022

  

December 31, 2021

 
  

(In thousands, except share and per share data)

 

Assets

        

Cash and due from banks

 $200,051  $134,141 

Short-term investments and interest-bearing deposits

  1,063,294   2,315,563 

Securities available-for-sale (amortized cost of $1,577,311 at September 30, 2022, and $1,126,867 at December 31, 2021)

  1,414,411   1,127,309 

Loans

  18,106,803   16,342,479 

Less:  Allowance for loan losses

  (148,817)  (136,157)

Unamortized deferred loan fees, net

  (6,936)  (4,321)

Loans, net

  17,951,050   16,202,001 

Equity securities

  23,123   22,319 

Federal Home Loan Bank stock

  17,250   17,250 

Other real estate owned, net

  4,067   4,368 

Affordable housing investments and alternative energy partnerships, net

  325,439   299,211 

Premises and equipment, net

  96,419   99,402 

Customers’ liability on acceptances

  6,899   8,112 

Accrued interest receivable

  71,177   56,994 

Goodwill

  375,696   372,189 

Other intangible assets, net

  6,948   4,627 

Right-of-use assets - operating leases

  30,679   27,834 

Other assets

  303,628   195,403 

Total assets

 $21,890,131  $20,886,723 
         

Liabilities and Stockholders Equity

        

Deposits:

        

Non-interest-bearing demand deposits

 $4,398,152  $4,492,054 

Interest-bearing deposits:

        

NOW deposits

  2,570,036   2,522,442 

Money market deposits

  4,935,266   4,611,579 

Savings deposits

  1,128,823   915,515 

Time deposits

  5,543,474   5,517,252 

Total deposits

  18,575,751   18,058,842 

Advances from the Federal Home Loan Bank

  360,000   20,000 

Other borrowings of affordable housing investments

  22,651   23,145 

Long-term debt

  119,136   119,136 

Acceptances outstanding

  6,899   8,112 

Lease liabilities - operating leases

  33,931   30,694 

Other liabilities

  352,204   180,543 

Total liabilities

  19,470,572   18,440,472 

Commitments and contingencies

      

Stockholders Equity

        

Common stock, $0.01 par value, 100,000,000 shares authorized; 91,067,423 issued and 73,411,960 outstanding at September 30, 2022, and 90,871,860 issued and 75,750,862 outstanding at December 31, 2021

  911   909 

Additional paid-in-capital

  978,433   972,474 

Accumulated other comprehensive loss, net

  (112,874)  (3,065)

Retained earnings

  2,172,098   1,985,168 

Treasury stock, at cost (17,655,463 shares at September 30, 2022, and 15,120,998 shares at December 31, 2021)

  (619,009)  (509,235)

Total equity

  2,419,559   2,446,251 

Total liabilities and equity

 $21,890,131  $20,886,723 

 

See accompanying Notes to Consolidated Financial Statements.

 

 

CATHAY GENERAL BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE INCOME

(Unaudited)

 

  

Three months ended September 30,

  

Nine months ended September 30,

 
  

2022

  

2021

  

2022

  

2021

 
  

(In thousands, except share and per share data)

 

Interest and Dividend Income

                

Loans receivable

 $211,541  $163,948  $558,657  $485,162 

Investment securities

  7,483   3,707   18,059   9,963 

Federal Home Loan Bank stock

  258   258   774   730 

Deposits with banks

  6,732   714   10,003   1,467 

Total interest and dividend income

  226,014   168,627   587,493   497,322 
                 

Interest Expense

                

Time deposits

  10,218   9,299   22,002   33,363 

Other deposits

  13,871   5,243   25,894   16,302 

Advances from Federal Home Loan Bank

  2,941   146   3,396   1,036 

Long-term debt

  1,455   1,455   4,318   4,318 

Total interest expense

  28,485   16,143   55,610   55,019 
                 

Net interest income before provision/(reversal) for credit losses

  197,529   152,484   531,883   442,303 

Provision/(reversal) for credit losses

  2,000   3,050   13,143   (19,508)

Net interest income after provision/(reversal) for credit losses

  195,529   149,434   518,740   461,811 
                 

Non-Interest Income

                

Net (losses)/gains from equity securities

  (3,661)  3   1,358   (3,628)

Securities losses, net

           853 

Letters of credit commissions

  1,609   1,764   4,767   5,236 

Depository service fees

  1,690   1,401   4,993   4,107 

Wealth management fees

  4,184   3,578   12,494   11,074 

Other operating income

  6,054   5,470   21,114   17,157 

Total non-interest income

  9,876   12,216   44,726   34,799 
                 

Non-Interest Expense

                

Salaries and employee benefits

  34,677   33,437   107,453   98,917 

Occupancy expense

  5,975   5,136   17,150   15,142 

Computer and equipment expense

  3,509   3,175   9,762   10,093 

Professional services expense

  6,337   6,232   20,738   16,698 

Data processing service expense

  3,484   3,524   9,813   10,422 

FDIC and regulatory assessments

  2,003   1,830   5,999   5,195 

Marketing expense

  2,005   945   4,692   5,270 

Other real estate owned expense/(income)

  55   (88)  93   197 

Amortization of investments in low income housing and alternative energy partnerships

  11,949   12,411   27,471   34,663 

Amortization of core deposit intangibles

  250   172   724   515 

Cost associated with debt redemption

           732 

Acquisition, integration and restructuring costs

  59   476   4,086   476 

Other operating expense

  5,085   4,965   14,227   15,005 

Total non-interest expense

  75,388   72,215   222,208   213,325 
                 

Income before income tax expense

  130,017   89,435   341,258   283,285 

Income tax expense

  30,982   17,038   78,217   60,305 

Net income

 $99,035  $72,397  $263,041  $222,980 
                 

Other Comprehensive Income, net of tax

                

Net holding losses on securities available-for-sale

  (43,191)  (3,232)  (115,612)  (7,872)

Net holding gains on cash flow hedge derivatives

  1,645   492   5,803   2,194 

Total other comprehensive loss, net of tax

  (41,546)  (2,740)  (109,809)  (5,678)

Total other comprehensive income

 $57,489  $69,657  $153,232  $217,302 
                 

Net Income Per Common Share:

                

Basic

 $1.35  $0.93  $3.53  $2.83 

Diluted

 $1.35  $0.93  $3.52  $2.82 

Cash dividends paid per common share

 $0.34  $0.31  $1.02  $0.93 

Average Common Shares Outstanding:

                

Basic

  73,158,096   77,846,424   74,475,032   78,841,899 

Diluted

  73,444,096   78,153,408   74,799,324   79,128,644 

 

See accompanying Notes to Consolidated Financial Statements.

 

 

CATHAY GENERAL BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY

(Unaudited)

 

              

Accumulated

             
  

Common Stock

  

Additional

  

Other

          

Total

 
  

Number of

      

Paid-in

  

Comprehensive

  

Retained

  

Treasury

  

Stockholders'

 

Three months ended

 

Shares

  

Amount

  

Capital

  

loss

  

Earnings

  

Stock

  

Equity

 
  

(In thousands, except share data)

 

Balance at June 30, 2022

  74,421,884  $910  $976,547  $(71,328) $2,098,122  $(572,719) $2,431,532 

Dividend Reinvestment Plan

  21,880   1   919            920 

Restricted stock units vested

  47,736                   

Shares withheld related to net share settlement of RSUs

        (849)           (849)

Purchases of treasury stock

  (1,079,540)              (46,290)  (46,290)

Stock-based compensation

        1,816            1,816 

Cash dividends of $0.34 per share

              (25,059)     (25,059)

Other comprehensive loss

           (41,546)        (41,546)

Net income

              99,035      99,035 

Balance at September 30, 2022

  73,411,960  $911  $978,433  $(112,874) $2,172,098  $(619,009) $2,419,559 

 

              

Accumulated

             
  

Common Stock

  

Additional

  

Other

          

Total

 
  

Number of

      

Paid-in

  

Comprehensive

  

Retained

  

Treasury

  

Stockholders'

 
  

Shares

  

Amount

  

Capital

  

Income

  

Earnings

  

Stock

  

Equity

 
  

(In thousands, except share data)

 

Balance at June 30, 2021

  78,158,590  $908  $967,166  $2,372  $1,887,571  $(405,660) $2,452,357 

Dividend Reinvestment Plan

  22,267      894            894 

Restricted stock units vested

  1,971                   

Shares withheld related to net share settlement of RSUs

        (38)           (38)

Purchases of treasury stock

  (942,613)              (37,139)  (37,139)

Stock-based compensation

        1,697            1,697 

Cash dividends of $0.31 per share

              (24,137)     (24,137)

Other comprehensive income

           (2,740)        (2,740)

Net income

              72,397      72,397 

Balance at September 30, 2021

  77,240,215  $908  $969,719  $(368) $1,935,831  $(442,799) $2,463,291 

 

See accompanying Notes to Consolidated Financial Statements.

 

 

CATHAY GENERAL BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY

(Unaudited)

 

              

Accumulated

             
  

Common Stock

  

Additional

  

Other

          

Total

 
  

Number of

      

Paid-in

  

Comprehensive

  

Retained

  

Treasury

  

Stockholders'

 

Nine months ended

 

Shares

  

Amount

  

Capital

  

loss

  

Earnings

  

Stock

  

Equity

 
  

(In thousands, except share data)

 

Balance at December 31, 2021

  75,750,862  $909  $972,474  $(3,065) $1,985,168  $(509,235) $2,446,251 

Dividend Reinvestment Plan

  65,142   1   2,791            2,792 

Restricted stock units vested

  110,641   1               1 

Stock issued to directors

  19,780      849            849 

Shares withheld related to net share settlement of RSUs

        (2,864)           (2,864)

Purchases of treasury stock

  (2,534,465)              (109,774)  (109,774)

Stock-based compensation

        5,183            5,183 

Cash dividends of $1.02 per share

              (76,111)     (76,111)

Other comprehensive loss

           (109,809)        (109,809)

Net income

              263,041      263,041 

Balance at September 30, 2022

  73,411,960  $911  $978,433  $(112,874) $2,172,098  $(619,009) $2,419,559 

 

              

Accumulated

             
  

Common Stock

  

Additional

  

Other

          

Total

 
  

Number of

      

Paid-in

  

Comprehensive

  

Retained

  

Treasury

  

Stockholders'

 
  

Shares

  

Amount

  

Capital

  

Income or (loss)

  

Earnings

  

Stock

  

Equity

 
  

(In thousands, except share data)

 

Balance at December 31, 2020

  79,508,265  $906  $964,734  $5,310  $1,789,325  $(342,131) $2,418,144 

Cumulative effect of change in accounting principle related to ASC 326, net of tax

              (3,139)     (3,139)

Dividend Reinvestment Plan

  62,326   1   2,618            2,619 

Restricted stock units vested

  123,893   1               1 

Stock issued to directors

  20,750      850            850 

Shares withheld related to net share settlement of RSUs

        (2,632)           (2,632)

Purchases of treasury stock

  (2,475,019)              (100,668)  (100,668)

Stock-based compensation

        4,149            4,149 

Cash dividends of $0.93 per share

              (73,335)     (73,335)

Other comprehensive loss

           (5,678)        (5,678)

Net income

              222,980      222,980 

Balance at September 30, 2021

  77,240,215  $908  $969,719  $(368) $1,935,831  $(442,799) $2,463,291 

 

See accompanying Notes to Consolidated Financial Statements.

 

 

 

CATHAY GENERAL BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   

Nine months ended September 30,

 
   

2022

   

2021

 
   

(In thousands)

 

Cash Flows from Operating Activities

               

Net income

  $ 263,041     $ 222,980  

Adjustments to reconcile net income to net cash provided by operating activities:

               

Provision/(reversal) for credit losses

    13,143       (19,508 )

Provision for losses on other real estate owned

          (8 )

Deferred tax (benefit)/provision

    (713 )     8,867  

Depreciation and amortization

    6,847       5,942  

Amortization of right-of-use asset

    7,446       5,972  

Change in operating lease liabilities

    (3,216 )     (1,456 )

Net gains on sale and transfer of other real estate owned

    (6 )     (120 )

Net gains on sale of loans

    (1 )     (357 )

Proceeds from sales of loans

    33       5,351  

Originations of loans held for sale

          (4,994 )

Loss on sales or disposal of fixed assets

    46       55  

Amortization on alternative energy partnerships, venture capital and other investments

    27,471       31,610  

Net gain on sales and calls of securities

    (101 )     (853 )

Amortization/accretion of security premiums/discounts, net

    2,875       6,128  

Unrealized (gain)/loss on equity securities

    (1,257 )     3,628  

Stock-based compensation and stock issued to officers as compensation

    6,032       4,999  

Net change in accrued interest receivable and other assets

    (77,012 )     (21,607 )

Net change in other liabilities

    125,345       (9,082 )

Net cash provided by operating activities

    369,973       237,547  
                 

Cash Flows from Investing Activities

               

Purchase of investment securities available-for-sale

    (583,992 )     (406,750 )

Proceeds from repayments, maturities and calls of investment securities available-for-sale

    130,673       326,527  

Proceeds from sale of investment securities available-for-sale

    553       21,102  

Net increase in loans

    (1,122,519 )     (349,924 )

Purchase of premises and equipment

    (3,093 )     (2,828 )

Benefits received from bank owned life insurance policies

          2,752  

Proceeds from sales of other real estate owned

    307        

Net increase in investment in affordable housing and alternative energy partnerships

    (107 )     (19,039 )

Acquisition, net of cash acquired

    (73,882 )      

Net cash used for investing activities

    (1,652,060 )     (428,160 )
                 

Cash Flows from Financing Activities

               

Net (decrease)/increase in deposits

    (58,316 )     897,713  

Advances from Federal Home Loan Bank

    340,000       50,000  

Repayment of Federal Home Loan Bank borrowings

          (180,000 )

Cash dividends paid

    (76,111 )     (73,335 )

Purchases of treasury stock

    (109,774 )     (100,668 )

Proceeds from shares issued under Dividend Reinvestment Plan

    2,793       2,619  

Taxes paid related to net share settlement of RSUs

    (2,864 )     (2,632 )

Net cash provided by financing activities

    95,728       593,697  
                 

(Decrease)/Increase in cash, cash equivalents, and restricted cash

    (1,186,359 )     403,084  

Cash, cash equivalents, and restricted cash, beginning of the period

    2,449,704       1,421,078  

Cash, cash equivalents, and restricted cash, end of the period

  $ 1,263,345     $ 1,824,162  
                 

Supplemental disclosure of cash flow information

               

Cash paid during the period:

               

Interest

  $ 52,147     $ 61,574  

Income taxes paid

  $ 59,981     $ 65,291  

Non-cash investing and financing activities:

               

Net change in unrealized holding loss on securities available-for-sale, net of tax

  $ (115,612 )   $ (7,872 )

Net change in unrealized holding gain on cash flow hedge derivatives

  $ 5,803     $ 2,194  

Loans transferred from held-for-investment to held-for-sale

  $ 32     $  

Transfers to other real estate owned from loans held for investment

  $     $ 205  

 

See accompanying Notes to Consolidated Financial Statements.

 

 

CATHAY GENERAL BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

 

1. Business

 

Cathay General Bancorp (“Bancorp”) is the holding company for Cathay Bank (the “Bank” and, together, with Bancorp, the “Company”), ten limited partnerships investing in affordable housing investments in which the Bank is the sole limited partner, and GBC Venture Capital, Inc. Bancorp also owns 100% of the common stock of five statutory business trusts created for the purpose of issuing capital securities. The Bank was founded in 1962 and offers a wide range of financial services. As of September 30, 2022, the Bank operates 25 branches in Southern California, 19 branches in Northern California, 9 branches in New York State, four in Washington State, two in Illinois, two in Texas, one in Maryland, Massachusetts, Nevada, and New Jersey, one in Hong Kong, and a representative office in Taipei, Beijing, and Shanghai. Deposit accounts at the Hong Kong branch are not insured by the Federal Deposit Insurance Corporation (the “FDIC”).

  

 

2. Business Combinations

 

The Company’s subsidiary bank, Cathay Bank completed the purchase of HSBC Bank USA, National Association’s West Coast mass retail market consumer banking business and retail business banking business on February 7, 2022. As a result of the acquisition, Cathay Bank added 10 retail branches in California and additional loans with principal balance of $646.1 million and deposits with a balance of $575.2 million.

 

The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of the February 7, 2022 acquisition date. The assets acquired and liabilities assumed have been accounted for under the acquisition method of accounting. We have included the financial results of the business combinations in the Consolidated Statements of Operations and Comprehensive Income beginning on the acquisition date. The purchase accounting adjustments are preliminary and subject to finalization during the one-year measurement period from the date of the acquisition.

 

The fair value of the assets and the liabilities acquired as of February 7, 2022 are shown below:

 

  

Balance Sheet

 
  

(In thousands)

 

Assets:

    

Cash and cash equivalents

 $473 

Loans

  641,839 

Right-of-use assets - operating leases

  6,453 

Core deposit intangible

  3,138 

Other

  561 

Total assets

 $652,464 
     

Liabilities assumed:

    

Deposits

 $575,163 

Lease liabilities

  6,453 

Total liabilities assumed

 $581,616 

Net assets acquired

 $70,848 
     
     

Total cash paid at closing

 $74,355 

Goodwill

 $3,507 

 

8

  
 

3. Basis of Presentation and Summary of Significant Accounting Policies

 

The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. For further information, refer to the audited Consolidated Financial Statements and Notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on February 28, 2022 (the “2021 Form 10-K”).

 

The preparation of the Consolidated Financial Statements in accordance with GAAP requires management of the Company to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of the Consolidated Financial Statements. Actual results could differ from those estimates. The Company expects that the most significant estimate subject to change is the allowance for loan losses.

 

For comparability, the Company has adjusted consolidated prior period amounts to conform to the current periods presentation.

  

 

4. Recent Accounting Pronouncements

 

In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” ASU No. 2020-04 is effective for all entities as of March 12, 2020, through December 31, 2022. This ASU provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The ASU is intended to help stakeholders during the global market-wide reference rate transition period. Therefore, it will be in effect for a limited time through December 31, 2022. In January 2021, the FASB issued ASU 2021-01 as subsequent amendments, which expanded the scope of Topic 848 to include all affected derivatives and clarified certain optional expedients and exceptions regarding the hedge accounting for derivative contracts affected by the discounting transition. Based on our current assessment, we will plan to offer SOFR as the primary alternative reference rate but may consider alternate rates based on customer demands and/or the type of loan or financial instrument. The Company will also continue to assess impacts to our operations, financial models, data and technology as part of our transition plan. The Company adopted ASU 2020-04 and ASU 2021-01 on a prospective basis on January 1, 2021. At the time of adoption, the guidance did not have a material impact on the Company’s Consolidated Financial Statements. The Company will continue to track the exposure as of each reporting period and to assess the impact as the reference rate transition occurs through the cessation of LIBOR.

 

In March 2022, the FASB issued ASU 2022-01, “Derivatives and Hedging (Topic 815): Fair Value Hedging - Portfolio Layer Method.” Under prior guidance, entities can apply the last-of-layer hedging method to hedge the exposure of a closed portfolio of prepayable financial assets to fair value changes due to changes in interest rates for a portion of the portfolio that is not expected to be affected by prepayments, defaults, and other events affecting the timing and amount of cash flows. ASU 2022-01 expands the last-of-layer method, which permits only one hedge layer, to allow multiple hedged layers of a single closed portfolio. To reflect that expansion, the last-of-layer method is renamed the portfolio layer method. ASU 2022-01 also (i) expands the scope of the portfolio layer method to include non-prepayable financial assets, (ii) specifies eligible hedging instruments in a single-layer hedge, (iii) provides additional guidance on the accounting for and disclosure of hedge basis adjustments under the portfolio layer method and (iv) specifies how hedge basis adjustments should be considered when determining credit losses for the assets included in the closed portfolio. ASU 2022-01 will be effective for us on January 1, 2023 though early adoption is permitted. The adoption of ASU 2022-01 is not expected to have a significant impact on our financial statements.

 

9

 

In March 2022, ASU 2022-02, “Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures.” ASU 2022-02 eliminates the accounting guidance for troubled debt restructurings in Accounting Standards Codification (“ASC”) Subtopic 310-40, Receivables - Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Additionally, ASU 2022-02 requires entities to disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of ASC Subtopic 326-20, Financial Instruments - Credit Losses - Measured at Amortized Cost. ASU 2022-02 will be effective for us on January 1, 2023 though early adoption is permitted. The adoption of ASU 2022-02 is not expected to have a significant impact on our financial statements.

 

In June 2022, ASU 2022-03, “Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions.” ASU 2022-03 clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. ASU 2022-03 also clarifies that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction and requires certain new disclosures for equity securities subject to contractual sale restrictions. ASU 2022-03 will be effective for us on January 1, 2024 though early adoption is permitted. The adoption of ASU 2022-03 is not expected to have a significant impact on our financial statements.

   

 

5. Cash, Cash Equivalents and Restricted Cash

 

The Company manages its cash and cash equivalents based upon the Company’s operating, investment, and financing activities. Cash and cash equivalents, including for purposes of reporting cash flows, consist of cash on hand, amounts due from banks, and short-term investments with original maturity of three months or less.

 

The Company had average excess balance with Federal Reserve Bank of $1.3 billion for the nine months ended September 30, 2022 and $1.6 billion for the year ended December 31, 2021. As of September 30, 2022 and December 31, 2021, the Company had zero and $24.3 million, respectively, on deposit in a cash margin account that serves as collateral for interest rate swaps. These amounts included zero and $5.9 million as of September 30, 2022 and December 31, 2021, respectively, on deposit in a cash margin account that serves as collateral for the Bancorp’s interest rate swaps. As of September 30, 2022 and December 31, 2021, the Company held $32.7 million and $690 thousand, respectively, in a restricted escrow account with a major bank for its alternative energy investments.

 

10

  
 

6. Earnings per Share

 

Basic earnings per share excludes dilution and is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock and resulted in the issuance of common stock that then shared in earnings. Restricted stock units (“RSUs”) with anti-dilutive effect were not included in the computation of diluted earnings per share. The following table sets forth earnings per common share calculations:

 

  

Three months ended September 30,

  

Nine months ended September 30,

 
  

2022

  

2021

  

2022

  

2021

 
  

(In thousands, except share and per share data)

 
                 

Net income 

 $99,035  $72,397  $263,041  $222,980 
                 

Weighted-average shares:

                

Basic weighted-average number of common shares outstanding

  73,158,096   77,846,424   74,475,032   78,841,899 

Dilutive effect of weighted-average outstanding common share equivalents:

                

RSUs

  286,000   306,984   324,292   286,745 

Diluted weighted-average number of common shares outstanding

  73,444,096   78,153,408   74,799,324   79,128,644 
                 

Average restricted stock units with anti-dilutive effect

     884      30,130 

Earnings per common share:

                

Basic

 $1.35  $0.93  $3.53  $2.83 

Diluted

 $1.35  $0.93  $3.52  $2.82 

 

  

 

7. Stock-Based Compensation

 

Pursuant to the Company’s 2005 Incentive Plan, as amended and restated, the Company may grant incentive stock options (employees only), non-statutory stock options, common stock awards, restricted stock, RSUs, stock appreciation rights and cash awards to non-employee directors and eligible employees.

 

RSUs are generally granted at no cost to the recipient. RSUs generally vest ratably over three years or cliff vest after one or three years of continued employment from the date of the grant. While a portion of RSUs may be time-vesting awards, others may vest subject to the attainment of specified performance goals and are referred to as “performance-based RSUs.” All RSUs are subject to forfeiture until vested.

 

Performance-based RSUs are granted at the target amount of awards. Based on the Company’s attainment of specified performance goals and consideration of market conditions, the number of shares that vest can be adjusted to a minimum of zero and to a maximum of 150% of the target. The amount of performance-based RSUs that are eligible to vest is determined at the end of each performance period and is then added together to determine the total number of performance shares that are eligible to vest. Performance-based RSUs generally cliff vest three years from the date of grant.

 

Compensation costs for the time-based awards are based on the quoted market price of the Company’s stock at the grant date. Compensation costs associated with performance-based RSUs are based on grant date fair value, which considers both market and performance conditions. Compensation costs of both time-based and performance-based awards are recognized on a straight-line basis from the grant date until the vesting date of each grant.

 

11

 

The following table presents RSU activity during the nine months ended September 30, 2022:

 

  

Time-Based RSUs

  

Performance-Based RSUs

 
      

Weighted-Average

      

Weighted-Average

 
      

Grant Date

      

Grant Date

 
  

Shares

  

Fair Value

  

Shares

  

Fair Value

 

Balance at December 31, 2021

  235,944  $32.38   332,506  $31.82 

Granted

  65,389   46.85   112,393   40.24 

Vested

  (87,554)  40.89   (81,934)  44.52 

Forfeited

  (11,182)  33.31       

Balance at September 30, 2022

  202,597  $33.32   362,965  $31.56 

 

 

The compensation expense recorded for RSUs was $1.8 million and $1.7 million for the three months ended September 30, 2022, and 2021, respectively. For the nine months ended September 30, 2022 and 2021, the compensation expense recorded for RSUs was $5.2 million and $4.1 million, respectively. Unrecognized stock-based compensation expense related to RSUs was $10.7 million and $10.3 million as of September 30, 2022 and 2021, respectively. As of September 30, 2022, these costs are expected to be recognized over the next 1.9 years for time-based and performance-based RSUs.

 

As of September 30, 2022, 1,659,495 shares were available for future grants under the Company’s 2005 Incentive Plan, as amended and restated.

  

 

 

8. Investment Securities

 

The following tables set forth the amortized cost, gross unrealized gains, gross unrealized losses, and fair value of securities available-for-sale as of September 30, 2022, and December 31, 2021:

 

  

September 30, 2022

 
      

Gross

  

Gross

     
  

Amortized

  

Unrealized

  

Unrealized

     
  

Cost

  

Gains

  

Losses

  

Fair Value

 
  

(In thousands)

 

Securities Available-for-Sale

                

U.S. treasury securities 

 $242,510  $  $1,110  $241,400 

U.S. government agency entities 

  68,712   526   126   69,112 

Mortgage-backed securities 

  1,001,832   58   140,402   861,488 

Collateralized mortgage obligations

  35,378      3,669   31,709 

Corporate debt securities

  228,879      18,177   210,702 

Total

 $1,577,311  $584  $163,484  $1,414,411 

 

12

 
  

December 31, 2021

 
      

Gross

  

Gross

     
  

Amortized

  

Unrealized

  

Unrealized

     
  

Cost

  

Gains

  

Losses

  

Fair Value

 
  

(In thousands)

 

Securities Available-for-Sale

                

U.S. government agency entities

 $86,475  $1,169  $135  $87,509 

Mortgage-backed securities

  886,614   9,465   7,414   888,665 

Collateralized mortgage obligations

  9,547      430   9,117 

Corporate debt securities

  144,231   441   2,654   142,018 

Total

 $1,126,867  $11,075  $10,633  $1,127,309 

 

As of September 30, 2022, the amortized cost of AFS debt securities excluded accrued interest receivables of $4.5 million, which are included in “accrued interest receivable” on the Consolidated Balance Sheets. For the Company’s accounting policy related to AFS debt securities’ accrued interest receivable, see Note 1 - Summary of Significant Accounting Policies Securities Available for Sale Allowance for Credit Losses on Available for Sale Securities to the Consolidated Financial Statements in the Company’s 2021 Form 10-K.

 

The amortized cost and fair value of securities available-for-sale as of September 30, 2022, by contractual maturities, are set forth in the tables below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or repay obligations with or without call or repayment penalties.  

 

  

September 30, 2022

 
  

Securities Available-For-Sale

 
  

Amortized Cost

  

Fair Value

 
  

(In thousands)

 
         

Due in one year or less

 $282,514  $280,897 

Due after one year through five years

  176,541   159,389 

Due after five years through ten years

  147,198   138,428 

Due after ten years

  971,058   835,697 

Total

 $1,577,311  $1,414,411 

 

 

Equity Securities - The Company recognized a net loss of $3.7 million for the three months ended September 30, 2022, due to the decrease in fair value during the quarter of equity investments with readily determinable fair values compared to a net gain of $3 thousand for the three months ended September 30, 2021. The Company recognized a net gain of $1.3 million for the nine months ended September 30, 2022 due to the increase in fair value of equity investments with readily determinable fair values compared to a net loss of $3.6 million for the nine months ended September 30, 2021. Equity securities were $23.1 million and $22.3 million as of September 30, 2022, and December 31, 2021, respectively.

 

13

 

The following tables set forth the gross unrealized losses and related fair value of the Company’s investment portfolio, aggregated by investment category and the length of time that individual security has been in a continuous unrealized loss position, as of  September 30, 2022, and  December 31, 2021:

 

  

September 30, 2022

 
  

Less than 12 Months

  

12 Months or Longer

  

Total

 
      

Gross

      

Gross

      

Gross

 
  

Fair

  

Unrealized

  

Fair

  

Unrealized

  

Fair

  

Unrealized

 
  

Value

  

Losses

  

Value

  

Losses

  

Value

  

Losses

 
  

(In thousands)

 
                         

Securities Available-for-Sale

                        

U.S. treasury securities

 $241,400  $1,110  $  $  $241,400  $1,110 

U.S. government agency entities

        2,155   126   2,155   126 

Mortgage-backed securities

  551,053   69,037   309,737   71,365   860,790   140,402 

Collateralized mortgage obligations

  24,901   1,794   6,809   1,875   31,710   3,669 

Corporate debt securities

  118,913   4,364   91,790   13,813   210,703   18,177 

Total

 $936,267  $76,305  $410,491  $87,179  $1,346,758  $163,484 

 

  

December 31, 2021

 
  

Less than 12 Months

  

12 Months or Longer

  

Total

 
      

Gross

      

Gross

      

Gross

 
  

Fair

  

Unrealized

  

Fair

  

Unrealized

  

Fair

  

Unrealized

 
  

Value

  

Losses

  

Value

  

Losses

  

Value

  

Losses

 
  

(In thousands)

 
                         

Securities Available-for-Sale

                        

U.S. government agency entities

 $  $  $2,337  $135  $2,337  $135 

Mortgage-backed securities

  527,276   6,659   6,496   755   533,772   7,414 

Collateralized mortgage obligations

  8,989   417   128   13   9,117   430 

Corporate debt securities

  103,720   2,122   19,468   532   123,188   2,654 

Total

 $639,985  $9,198  $28,429  $1,435  $668,414  $10,633 

 

 

As of September 30, 2022, the Company had a total of 195 AFS debt securities in a gross unrealized loss position with no credit impairment, consisting primarily of 160 U.S. government-sponsored mortgage-backed securities, and 21 Corporate debt securities. In comparison, as of December 31, 2021, the Company has a total of 88 AFS debt securities in a gross unrealized loss position with no impairment, consisting primarily of 70 U.S. government-sponsored mortgage-backed securities, and 12 Corporate debt securities.

 

Allowance for Credit Losses

 

The securities that were in an unrealized loss position at September 30, 2022, were evaluated to determine whether the decline in fair value below the amortized cost basis resulted from a credit loss or other factors. For a discussion of the factors and criteria the Company uses in analyzing securities for impairment related to credit losses, see Note 1 - Summary of Significant Accounting Policies - Allowance for Credit Losses on Available for Sale Securities to the Consolidated Financial Statements in the Company’s 2021 Form 10-K.

 

The Company concluded the unrealized losses were primarily attributed to yield curve movement, together with widened liquidity spreads and credit spreads. The issuers have not, to the Company’s knowledge, established any cause for default on these securities. The Company expects to recover the amortized cost basis of its securities and has no present intent to sell and will not be required to sell available-for-sale securities that have declined below their cost before their anticipated recovery. Accordingly, no allowance for credit losses was recorded as of September 30, 2022, against these securities, and there was no provision for credit losses recognized for the three months and nine months ended September 30, 2022. For the three months and nine months ended September 30, 2021, there were no credit losses recognized.

 

14

  

Securities available-for-sale having a carrying value of $144.3 million and $30.5 million as of September 30, 2022, and December 31, 2021, respectively, were pledged to secure public deposits and other borrowings.

 

 

9. Loans

 

Most of the Company’s business activities are with customers located in the high-density Asian-populated areas of Southern and Northern California; New York City, New York; Dallas and Houston, Texas; Seattle, Washington; Boston, Massachusetts; Chicago, Illinois; Edison, New Jersey; Rockville, Maryland; and Las Vegas, Nevada. The Company also has loan customers in Hong Kong. The Company has no specific industry concentration, and generally its loans, when secured, are secured by real property or other collateral of the borrowers. The Company generally expects loans to be paid off from the operating profits of the borrowers, from refinancing by other lenders, or through sale by the borrowers of the secured collateral.

 

The types of loans in the Company’s Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021, were as follows:

 

  

September 30, 2022

  

December 31, 2021

 
  

(In thousands)

 
         

Commercial loans

 $3,367,437  $2,982,399 

Real estate construction loans

  573,421   611,031 

Commercial mortgage loans

  8,677,733   8,143,272 

Residential mortgage loans

  5,130,650   4,182,006 

Equity lines

  350,448   419,487 

Installment and other loans

  7,114   4,284 

Gross loans

 $18,106,803  $16,342,479 

Allowance for loan losses

  (148,817)  (136,157)

Unamortized deferred loan fees, net

  (6,936)  (4,321)

Total loans, net

 $17,951,050  $16,202,001 

 

 

As of September 30, 2022, recorded investment in non-accrual loans was $68.1 million. As of December 31, 2021, recorded investment in non-accrual loans totaled $65.8 million. For non-accrual loans, the amounts previously charged off represent 12.2% and 10.7% of the contractual balances for non-accrual loans as of September 30, 2022 and December 31, 2021.

 

15

 

The following tables present the average recorded investment and interest income recognized on non-accrual loans for the period indicated:

 

  

Three Months Ended

  

Nine Months Ended

 
  

September 30, 2022

  

September 30, 2022

 
  

Average

Recorded

Investment

  

Interest

Income

Recognized

  

Average

Recorded

Investment

  

Interest

Income

Recognized

 
  

(In thousands)

 
                 

Commercial loans

 $26,809  $  $28,691  $ 

Commercial mortgage loans

  18,861   191   28,878   508 

Residential mortgage loans and equity lines

  16,743   7   14,838   20 

Installment and other loans

  61      35    

Total non-accrual loans

 $62,474  $198  $72,442  $528 

 

  

Three Months Ended

  

Nine Months Ended

 
  

September 30, 2021

  

September 30, 2021

 
  

Average

Recorded

Investment

  

Interest

Income

Recognized

  

Average

Recorded

Investment

  

Interest

Income

Recognized

 
  

(In thousands)

 
                 

Commercial loans

 $16,379  $  $22,989  $ 

Real estate construction loans

  4,548   50   4,310   220 

Commercial mortgage loans

  37,017   140   37,964   297 

Residential mortgage loans and equity lines

  9,831   7   8,976   23 

Total non-accrual loans

 $67,775  $197  $74,239  $540 

 

16

 

The following table presents non-accrual loans and the related allowance as of September 30, 2022 and December 31, 2021:

 

 

  

September 30, 2022

 
  

Unpaid

Principal

Balance

  

Recorded

Investment

  

Allowance

 
  

(In thousands)

 
             

With no allocated allowance

            

Commercial loans

 $10,171  $6,887  $ 

Commercial mortgage loans

  14,148   10,956    

Residential mortgage loans and equity lines

  5,582   5,407    

Installment and other loans

  10   9    

Subtotal

 $29,911  $23,259  $ 
             

With allocated allowance

            

Commercial loans

 $32,426  $19,717  $4,013 

Commercial mortgage loans

  16,002   15,955   2,146 

Residential mortgage loans and equity lines

  9,951   9,194   39 

Subtotal

 $58,379  $44,866  $6,198 

Total non-accrual loans

 $88,290  $68,125  $6,198 

 

 

  

December 31, 2021

 
  

Unpaid

Principal

Balance

  

Recorded

Investment

  

Allowance

 
  

(In thousands)

 
             

With no allocated allowance

            

Commercial loans

 $15,879  $11,342  $ 

Commercial mortgage loans

  24,437   21,209    

Residential mortgage loans and equity lines

  6,020   5,850    

Subtotal

 $46,336  $38,401  $ 
             

With allocated allowance

            

Commercial loans

 $14,294  $5,217  $894 

Commercial mortgage loans

  17,930   16,964   3,631 

Residential mortgage loans and equity lines

  6,048   5,264   22 

Subtotal

 $38,272  $27,445  $4,547 

Total non-accrual loans

 $84,608  $65,846  $4,547 

 

17

 

The following tables present the aging of the loan portfolio by type as of September 30, 2022, and as of December 31, 2021:

 

  

September 30, 2022

 
  

30-59 Days

Past Due

  

60-89 Days

Past Due

  

90 Days or

More Past

Due

  

Non-accrual

Loans

  

Total Past

Due

  

Loans Not

Past Due

  

Total

 
  

(In thousands)

 

Type of Loans:

                            

Commercial loans

 $7,223  $3,151  $1,112  $26,604  $38,090  $3,329,347  $3,367,437 

Real estate construction loans

                 573,421   573,421 

Commercial mortgage loans

     1,107   2,060   26,911   30,078   8,647,655   8,677,733 

Residential mortgage loans and equity lines

  3,383   4,690      14,601   22,674   5,458,424   5,481,098 

Installment and other loans

  35         9   44   7,070   7,114 

Total loans

 $10,641  $8,948  $3,172  $68,125  $90,886  $18,015,917  $18,106,803 

 

  

December 31, 2021

 
  

30-59 Days

Past Due

  

60-89 Days

Past Due

  

90 Days or

More Past

Due

  

Non-accrual

Loans

  

Total Past

Due

  

Loans Not

Past Due

  

Total

 
  

(In thousands)

 

Type of Loans:

                            

Commercial loans

 $4,294  $9,877  $1,439  $16,558  $32,168  $2,950,231  $2,982,399 

Real estate construction loans

                 611,031   611,031 

Commercial mortgage loans

  8,389         38,173   46,562   8,096,710   8,143,272 

Residential mortgage loans and equity lines

  20,129   3,138      11,115   34,382   4,567,111   4,601,493 

Installment and other loans

                 4,284   4,284 

Total loans

 $32,812  $13,015  $1,439  $65,846  $113,112  $16,229,367  $16,342,479 

 

 

A TDR is a formal modification of the terms of a loan when the lender, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower. The concessions may be granted in various forms, including a change in the stated interest rate, a reduction in the loan balance or accrued interest, or an extension of the maturity date. Although these loan modifications are considered TDRs, TDR loans that have, pursuant to the Bank’s policy, performed under the restructured terms and have demonstrated sustained performance under the modified terms for six months are returned to accrual status. The sustained performance considered by management pursuant to its policy includes the periods prior to the modification if the prior performance met or exceeded the modified terms. This would include cash paid by the borrower prior to the restructure to set up interest reserves. Loans classified as TDRs are reported as individually evaluated loans.

 

The allowance for credit loss on a TDR is measured using the same method as all other loans held for investment, except when the value of a concession cannot be measured using a method other than the discounted cash flow method. When the value of a concession is measured using the discounted cash flow method, the allowance for credit loss is determined by discounting the expected future cash flows at the original interest rate of the loan.

 

The Company establishes a specific reserve for individually evaluated loans that do not share similar risk characteristics with the loans included in the quantitative baseline. These individually evaluated loans are removed from the pooling approach discussed in Note 1 - Summary of Significant Accounting Policies to the Consolidated Financial Statements of the Company’s 2021 Form 10-K, for the quantitative baseline, and include non-accrual loans, TDRs, and other loans as deemed appropriate by management. In addition, the Company individually evaluates “reasonably expected” TDRs, which are identified by the Company as a commercial loan expected to be classified as a TDR. Individually evaluated loans also includes “reasonably expected” TDRs, identified by the Company as a consumer loan for which a borrower’s application of loan modification due to hardship has been received by the Company. Management judgment is utilized to make this determination.

 

18

 

Although the Company took steps to incorporate the impact of the COVID-19 pandemic on the economic conditions and other factors utilized to determine the expected loan losses, if the economic conditions or other factors worsen relative to the assumptions the Company utilized, the expected loan losses will increase accordingly in future periods.

 

As of September 30, 2022, accruing TDRs were $15.2 million and non-accrual TDRs were $6.4 million compared to accruing TDRs of $12.8 million and non-accrual TDRs of $8.2 million as of December 31, 2021. The Company allocated $10 thousand in reserves to accruing TDRs and $499 thousand to non-accrual TDRs as of September 30, 2022, compared to seven thousand to accruing TDRs and three thousand to non-accrual TDRs as of December 31, 2021.

 

The following tables set forth TDRs that were modified during the three months and nine months ended September 30, 2022 and 2021, their specific reserves as of September 30, 2022, and 2021, and charge-offs for the three months and six months ended September 30, 2022, and 2021:

 

 

  

Three Months Ended September 30, 2022

  

September 30, 2022

 
  

No. of

Contracts

  

Pre-Modification

Outstanding

Recorded

Investment

  

Post-Modification

Outstanding

Recorded

Investment

  

Charge-offs

  

Specific Reserve

 
  

(In thousands)

 
                     

Commercial mortgage loans

  2  $2,572  $2,572  $  $ 

Residential mortgage loans and equity lines

  4   1,466   1,442       

Total

  6  $4,038  $4,014  $  $ 

 

  

Three Months Ended September 30, 2021

  

September 30, 2021

 
  

No. of

Contracts

  

Pre-Modification

Outstanding

Recorded

Investment

  

Post-Modification

Outstanding

Recorded

Investment

  

Charge-offs

  

Specific Reserve

 
  

(In thousands)

 
                     

Residential mortgage loans and equity lines

  1  $479  $479  $  $14 

Total

  1  $479  $479  $  $14 

 

  

Nine Months Ended September 30, 2022

  

September 30, 2022

 
  

No. of

Contracts

  

Pre-Modification

Outstanding

Recorded

Investment

  

Post-Modification

Outstanding

Recorded

Investment

  

Charge-offs

  

Specific Reserve

 
  

(In thousands)

 
                     

Commercial loans

  4  $6,115  $6,115  $  $2,566 

Commercial mortgage loans

  2   2,572   2,572       

Residential mortgage loans and equity lines

  8   2,190   2,162      4 

Total

  14  $10,877  $10,849  $  $2,570 

 

  

Nine Months Ended September 30, 2021

  

September 30, 2021

 
  

No. of

Contracts

  

Pre-Modification

Outstanding

Recorded

Investment

  

Post-Modification Outstanding

Recorded

Investment

  

Charge-offs

  

Specific Reserve

 
  

(In thousands)

 
                     

Commercial loans

  1  $686  $686  $  $ 

Residential mortgage loans and equity lines

  1   479   479      14 

Total

  2  $1,165  $1,165  $  $14 

 

19

 

Modifications of the loan terms in the three and nine months ended September 30, 2022, were in the form of extensions of maturity dates, which ranged generally from three to twelve months from the modification date.

 

We expect that the TDRs on accruing status as of September 30, 2022, which were all performing in accordance with their restructured terms, will continue to comply with the restructured terms because of the reduced principal or interest payments on these loans.  The ongoing impact of the COVID pandemic or worsening economy, however, could increase the risk that such TDRs become non-accrual due to the borrowers’ inability to continue to comply with their restructured terms.

 

A summary of TDRs by type of concession and by type of loan, as of September 30, 2022, and December 31, 2021, is set forth in the table below:

 

  

September 30, 2022

 
  

Payment

Deferral

  

Rate

Reduction

  

Rate Reduction

and Payment

Deferral

  

Total

 
  

(In thousands)

 

Accruing TDRs

                

Commercial loans

 $2,643  $  $  $2,643 

Commercial mortgage loans

  2,734      5,874   8,608 

Residential mortgage loans

  2,198   459   1,300   3,957 

Total accruing TDRs

 $7,575  $459  $7,174  $15,208 

 

  

September 30, 2022

 
  

Payment

Deferral

  

Rate

Reduction

  

Rate Reduction

and Payment

Deferral

  

Total

 
  

(In thousands)

 

Non-accrual TDRs

                

Commercial loans

 $4,805  $  $  $4,805 

Residential mortgage loans

  1,635         1,635 

Total non-accrual TDRs

 $6,440  $  $  $6,440 

 

20

 
  

December 31, 2021

 
  

Payment

Deferral

  

Rate

Reduction

  

Rate Reduction

and Payment

Deferral

  

Total

 
  

(In thousands)

 

Accruing TDRs

                

Commercial loans

 $3,368  $  $  $3,368 

Commercial mortgage loans

  438   5,522   168   6,128 

Residential mortgage loans

  1,464   249   1,628   3,341 

Total accruing TDRs

 $5,270  $5,771  $1,796  $12,837 

 

  

December 31, 2021

 
  

Payment

Deferral

  

Rate

Reduction

  

Rate Reduction

and Payment

Deferral

  

Total

 
  

(In thousands)

 

Non-accrual TDRs

                

Commercial loans

 $7,717  $  $  $7,717 

Residential mortgage loans

  458         458 

Total non-accrual TDRs

 $8,175  $  $  $8,175 

 

 

The Company considers a loan to be in payment default once it is 60 to 90 days contractually past due under the modified terms.  The Company did not have any loans that were modified as a TDR during the previous twelve months and which had subsequently defaulted as of September 30, 2022.

 

Under the Company’s internal underwriting policy, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification in order to determine whether a borrower is experiencing financial difficulty.

 

As of September 30, 2022, there were no commitments to lend additional funds to those borrowers whose loans had been restructured, were considered individually evaluated, or were on non-accrual status.

 

The CARES Act, signed into law on March 27, 2020, and as extended by the CAA, permits financial institutions to suspend requirements under GAAP for loan modifications to borrowers affected by COVID-19 that would otherwise be characterized as TDRs and suspend any determination related thereto if (i) the loan modification is made between March 1, 2020, and the earlier of January 1, 2022 or 60 days after the end of the coronavirus emergency declaration and (ii) the applicable loan was not more than 30 days past due as of December 31, 2019. In addition, federal bank regulatory authorities have issued guidance to encourage financial institutions to make loan modifications for borrowers affected by COVID-19 and have assured financial institutions that they will neither receive supervisory criticism for such prudent loan modifications, nor be required by examiners to automatically categorize COVID-19-related loan modifications as TDRs. The Company is applying this guidance to qualifying loan modifications.

 

21

 

As part of the on-going monitoring of the credit quality of our loan portfolio, the Company utilizes a risk grading matrix to assign a risk grade to each loan. Loans are risk rated based on analysis of the current state of the borrower’s credit quality. The analysis of credit quality includes a review of sources of repayment, the borrower’s current financial and liquidity status and other relevant information. The risk rating categories can be generally described by the following grouping for non-homogeneous loans: 

 

 

Pass/Watch – These loans range from minimal credit risk to lower than average, but still acceptable, credit risk.● Special Mention – Borrower is fundamentally sound, and loan is currently protected but adverse trends are apparent that, if not corrected, may affect ability to repay. Primary source of loan repayment remains viable but there is increasing reliance on collateral or guarantor support.

 

 

Substandard – These loans are inadequately protected by current sound net worth, paying capacity, or collateral. Well-defined weaknesses exist that could jeopardize repayment of debt. Loss may not be imminent, but if weaknesses are not corrected, there is a good possibility of some loss.

 

 

Doubtful – The possibility of loss is extremely high, but due to identifiable and important pending events (which may strengthen the loan), a loss classification is deferred until the situation is better defined.

 

 

Loss – These loans are considered uncollectible and of such little value that to continue to carry the loan as an active asset is no longer warranted.

 

22

 

The following table summarizes the Company’s loan held for investment as of September 30, 2022 and December 31, 2021, presented by loan portfolio segments, internal risk ratings and vintage year. The vintage year is the year of origination, renewal or major modification:

 

  

Loans Amortized Cost Basis by Origination Year

             

September 30, 2022

 

2022

  

2021

  

2020

  

2019

  

2018

  

Prior

  

Revolving

Loans

  

Revolving

Converted to

Term Loans

  

Total

 
  

(In thousands)

 

Commercial loans

                                    

Pass/Watch

 $440,389  $487,748  $201,540  $127,595  $115,076  $131,652  $1,749,754  $6,429  $3,260,183 

Special Mention

  1,212   4,494   2,869   72   2,697   11,418   22,703   250   45,715 

Substandard

     12,324   4,973   6,511   2,852   5,226   25,278   38   57,202 

Doubtful

           1,088   2,185      232      3,505 

Total

 $441,601  $504,566  $209,382  $135,266  $122,810  $148,296  $1,797,967  $6,717  $3,366,605 
                                     

YTD period charge-offs

 $  $134  $169  $71  $1,786  $  $202  $  $2,362 

YTD period recoveries

  (7)     (31)     (164)  (202)  (1,705)     (2,109)

Net charge-offs/(recoveries)

 $(7) $134  $138  $71  $1,622  $(202) $(1,503) $  $253 
                                     

Real estate construction loans

                                    

Pass/Watch

 $80,633  $271,855  $114,015  $58,922  $24,650  $  $  $  $550,075 

Special Mention

        8,579                  8,579 

Substandard

           2,005   9,352            11,357 

Total

 $80,633  $271,855  $122,594  $60,927  $34,002  $  $  $  $570,011 
                                     

YTD period charge-offs

 $  $  $  $  $  $  $  $  $ 

YTD period recoveries

                 (6)        (6)

Net charge-offs/(recoveries)

 $  $  $  $  $  $(6) $  $  $(6)
                                     

Commercial mortgage loans

                                    

Pass/Watch

 $1,597,328  $1,781,573  $1,084,550  $1,124,054  $941,945  $1,573,895  $179,343  $  $8,282,688 

Special Mention

  43,636   51,488   25,686   42,685   18,952   63,473   1,300      247,220 

Substandard

     7,269   1,744   12,383   31,933   86,222   3,371      142,922 

Total

 $1,640,964  $1,840,330  $1,111,980  $1,179,122  $992,830  $1,723,590  $184,014  $  $8,672,830 
                                     

YTD period charge-offs

 $  $  $  $  $  $  $  $  $ 

YTD period recoveries

           (180)     (7)  (83)     (270)

Net charge-offs/(recoveries)

 $  $  $  $(180) $  $(7) $(83) $  $(270)

Residential mortgage loans

                                    

Pass/Watch

 $995,736  $976,137  $595,493  $610,410  $433,398  $1,495,370  $  $  $5,106,544 

Special Mention

        33   1,552   755   911         3,251 

Substandard

  8   1,108   2,343   4,897   3,248   10,439         22,043 

Total

 $995,744  $977,245  $597,869  $616,859  $437,401  $1,506,720  $  $  $5,131,838 
                                     

YTD period charge-offs

 $  $  $  $  $  $  $58  $  $58 

YTD period recoveries

                 (45)        (45)

Net charge-offs/(recoveries)

 $  $  $  $  $  $(45) $58  $  $13 
                                     

Equity lines

                                    

Pass/Watch

 $878  $  $  $  $  $  $325,751  $23,229  $349,858 

Special Mention

  28                        28 

Substandard

  18                  2,251   236   2,505 

Total

 $924  $  $  $  $  $  $328,002  $23,465  $352,391 
                                     

YTD period charge-offs

 $  $  $  $  $  $  $  $  $ 

YTD period recoveries

                    (8)  (12)  (20)

Net charge-offs/(recoveries)

 $  $  $  $  $  $  $(8) $(12) $(20)
                                     

Installment and other loans

                                    

Pass/Watch

 $1,246  $4,848  $98  $  $  $  $  $  $6,192 

Total

 $1,246  $4,848  $98  $  $  $  $  $  $6,192 
                                     

YTD period charge-offs

 $80  $  $  $  $  $  $

 

 $  $80 

YTD period recoveries

  (1)                       (1)

Net charge-offs/(recoveries)

 $79  $  $  $  $  $  $  $  $79 

Total loans

 $3,161,112  $3,598,844  $2,041,923  $1,992,174  $1,587,043  $3,378,606  $2,309,983  $30,182  $18,099,867 

Net charge-offs/(recoveries)

 $72  $134  $138  $(109) $1,622  $(260) $(1,536) $(12) $49 

 

23

 
  

Loans Amortized Cost Basis by Origination Year

             

December 31, 2021

 

2021

  

2020

  

2019

  

2018

  

2017

  

Prior

  

Revolving

Loans

  

Revolving

Converted to

Term Loans

  

Total

 
  

(In thousands)

 

Commercial loans

                                    

Pass/Watch

 $606,770  $268,756  $183,468  $142,419  $80,701  $100,496  $1,437,463  $7,433  $2,827,506 

Special Mention

  395   780   1,138   1,645   3,157      40,761   49   47,925 

Substandard

  450   5,879   22,513   16,423   14,309   5,221   34,713   5,716   105,224 

Doubtful

                    900      900 

Total

 $607,615  $275,415  $207,119  $160,487  $98,167  $105,717  $1,513,837  $13,198  $2,981,555 
                                     

YTD period charge-offs

 $  $1,478  $507  $366  $  $50  $17,650  $  $20,051 

YTD period recoveries

     (1)  (29)  (124)     (191)  (1,361)     (1,706)

Net

 $  $1,477  $478  $242  $  $(141) $16,289  $  $18,345 
                                     

Real estate construction loans

                                    

Pass/Watch

 $199,188  $188,782  $125,316  $24,548  $  $  $  $  $537,834 

Special Mention

     23,107   27,672   17,374               68,153 

Substandard

        1,919                  1,919 

Total

 $199,188  $211,889  $154,907  $41,922  $  $  $  $  $607,906 
                                     

YTD period charge-offs

 $  $  $  $  $  $  $  $  $ 

YTD period recoveries

                 (76)        (76)

Net

 $  $  $  $  $  $(76) $  $  $(76)
                                     

Commercial mortgage loans

                                    

Pass/Watch

 $1,893,807  $1,201,825  $1,253,548  $1,031,191  $727,916  $1,313,882  $198,869  $  $7,621,038 

Special Mention

  45,719   59,182   49,796   103,101   61,105   60,448   750      380,101 

Substandard

  1,110      13,483   42,803   1,580   76,906   3,297      139,179 

Total

 $1,940,636  $1,261,007  $1,316,827  $1,177,095  $790,601  $1,451,236  $202,916  $  $8,140,318 
                                     

YTD period charge-offs

 $  $  $  $  $  $  $  $  $ 

YTD period recoveries

        (240)        (28)  (111)     (379)

Net

 $  $  $(240) $  $  $(28) $(111) $  $(379)

Residential mortgage loans

                                    

Pass/Watch

 $978,375  $622,999  $678,775  $502,325  $453,992  $929,846  $  $  $4,166,312 

Special Mention

     46   1,576   1,064   836   438         3,960 

Substandard

  1,684   147   2,698   2,574   862   5,255         13,220 

Total

 $980,059  $623,192  $683,049  $505,963  $455,690  $935,539  $  $  $4,183,492 
                                     

YTD period charge-offs

 $  $  $  $  $3  $  $  $  $3 

YTD period recoveries

                 (208)        (208)

Net

 $  $  $  $  $3  $(208) $  $  $(205)
                                     

Equity lines

                                    

Pass/Watch

 $  $  $  $  $  $5  $389,069  $30,025  $419,099 

Substandard

                    1,230   273   1,503 

Total

 $  $  $  $  $  $5  $390,299  $30,298  $420,602 
                                     

YTD period charge-offs

 $  $  $  $  $  $  $  $  $ 

YTD period recoveries

                    (10)  (64)  (74)

Net

 $  $  $  $  $  $  $(10) $(64) $(74)
                                     

Installment and other loans

                                    

Pass/Watch

 $4,117  $168  $  $  $  $  $  $  $4,285 

Total

 $4,117  $168  $  $  $  $  $  $  $4,285 
                                     

YTD period charge-offs

 $  $  $  $  $  $  $  $  $ 

YTD period recoveries

                           

Net

 $  $  $  $  $  $  $  $  $ 

Total loans

 $3,731,615  $2,371,671  $2,361,902  $1,885,467  $1,344,458  $2,492,497  $2,107,052  $43,496  $16,338,158 

Net charge-offs/(recoveries)

 $  $1,477  $238  $242  $3  $(453) $16,168  $(64) $17,611 

 

 

Revolving loans that are converted to term loans presented in the table above are excluded from the term loans by vintage year columns.

 

24

 

Allowance for Credit Losses

 

The Company has an allowance framework under ASU 2016-13 for all financial assets measured at amortized cost and certain off-balance sheet credit exposures. The measurement of the allowance for credit losses is based on management’s best estimate of lifetime expected credit losses inherent in the Company’s relevant financial assets. The forward-looking concept of current expected credit loss (“CECL”) approach requires loss estimates to consider historical experience, current conditions and reasonable and supportable economic forecasts of future events and circumstances.

 

The ACL on loans held for investment is the combination of the allowance for loan losses and the reserve for unfunded loan commitments. The allowance for loan losses is reported as a reduction of the amortized cost basis of loans, while the reserve for unfunded loan commitments is included within "other liabilities" on the Consolidated Balance Sheets (Unaudited). The amortized cost basis of loans does not include accrued interest receivable, which is included in "accrued interest receivable" on the Consolidated Balance Sheets. The "Provision for credit losses" on the Consolidated Statements of Operations and Comprehensive Income (Unaudited) is a combination of the provision for loan losses and the provision for unfunded loan commitments.

 

Under the Company’s CECL approach, management estimates the ACL using relevant available information from internal and external sources, relating to past events, current conditions, and reasonable and supportable economic forecasts that vary by loan portfolio. We use economic forecasts from Moody’s Analytics in this process. The economic forecast is updated monthly; therefore, the one used for each quarter-end calculation is generally based on a one-month lag based on the timing of when the forecast is released. The Company does not consider a one-month lag to create a material difference but considers any subsequent material changes to our estimated loss forecasts as deemed appropriate. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as for changes in environmental conditions, such as changes in gross domestic product (or “GDP”), unemployment rates, property values, or other relevant factors.

 

Under the CECL methodology, quantitative and qualitative loss factors are applied to our population of loans on a collective pool basis when similar risk characteristics exist. When loans do not share similar risk characteristics, the Company would evaluate the loan for expected credit losses on an individual basis. The Company evaluates loans for expected credit losses on an individual basis if, based on current information and events, the loan does not share similar credit risk characteristics with other loans. The Company may choose to measure expected credit losses on an individual loan basis by using one of the following methods: (1) the present value of the expected future cash flows of the loan discounted at the loan’s original effective interest rate, or (2) if the loan is collateral dependent, the fair value of the collateral less costs to sell. For loans that are not collateral-dependent, the Company uses the present value of future cash flows.

 

Quantitative Factors

 

Under the Company’s CECL methodology, nine portfolio segments with similar risk characteristics are evaluated for expected loss. Six portfolios are modeled using econometric models and three smaller portfolios are evaluated using a simplified loss-rate method that calculates lifetime expected credit losses for the respective pools (simplified approach). The six portfolios subject to econometric modeling include residential mortgages; commercial and industrial loans (“C&I”); construction loans; commercial real estate (“CRE”) for multifamily loans; CRE for owner-occupied loans; and other CRE loans. We estimate the probability of default during the reasonable and supportable forecast period using separate econometric regression models developed to correlate macroeconomic variables, (GDP, unemployment, CRE prices and residential mortgage prices) to historical credit performance for each of the six loan portfolios from the fourth quarter of 2007 to the first quarter of 2022. Loss given default rates are computed based on the charge-offs recognized divided by the exposure at default of defaulted loans starting with the fourth quarter of 2007 through the third quarter of 2022. The probability of default and the loss given default rates are applied to the expected amount at default at the loan level based on contractual scheduled payments and estimated prepayments. The amounts so calculated comprise the quantitative portion of the allowance for credit losses.

 

25

 

The Company’s CECL methodology utilizes an eight-quarter reasonable and supportable (“R&S”) forecast period, and a four-quarter reversion period. Management relies on multiple forecasts, blending them into a single loss estimate. Generally speaking, the blended scenario approach would include the Baseline, the Alternative Scenario 1 – Upside – 10th Percentile and the Alternative Scenario 3 – Downside – 90th Percentile forecasts. After the R&S period, the Company reverts linearly for the four-quarter reversion period to the long-term loss rates for each of the six portfolios of loans.

 

The Company’s CECL methodology estimates expected credit losses over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies: (i) management has a reasonable expectation at the reporting date that a troubled debt restructuring will be executed with an individual borrower or (ii) the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company.

 

The simplified approach portfolios include Small Business Administration (“SBA”) loans, Home Equity Lines of Credit (“HELOCs”) and cash-secured loans, which are not modelled econometrically due to the low loss history for these three pools of loans. The forecasted loss rate is based on the forecasted GDP and unemployment rates during the first eight quarters of the portfolio’s contractual life, reversion loss rates for the next four quarters of the portfolio’s contractual life on a linear declining rate, and the long-term loss rate projected over the remainder of the portfolio’s contractual life.

 

Qualitative Factors

 

Under the Company’s CECL methodology, the qualitative portion of the reserve on pooled loans represents management’s judgment of additional considerations to account for internal and external risk factors that are not adequately measured in the quantitative reserve. The qualitative loss factors consider idiosyncratic risk factors, conditions that may not be reflected in quantitatively derived results, or other relevant factors to seek to ensure the allowance for credit losses reflects our best estimate of current expected credit losses. The qualitative reserves include reserves for policy exceptions, experience of management and staff, level of competition in the lending environment, weak risk identification, lack of historical experience with residential mortgage loans made to non-U.S. residents, oil & gas, included as part of the C&I loan portfolio, and the higher risk characteristics of purchased syndicated loans, and an adjustment to reflect the time gap between the preparation of the Moody's forecast of future GDP, unemployment rates, CRE and home price indexes and the higher likelihood of an economic slowdown resulting from the impact of higher interest rates. Current and forecasted economic trends and underlying market values for collateral dependent loans also are considered within the econometric models described above.

 

The Company’s CECL methodology requires a significant amount of management judgment in determining the appropriate allowance for credit losses. Several of the steps in the methodology involve judgment and are subjective in nature including, among other things:

 

 

Segmenting the loan portfolio

 

Determining the amount of loss history to consider

 

Selecting predictive econometric regression models that use appropriate macroeconomic variables

 

Determining the methodology to forecast prepayments

 

26

 
 

Selecting the most appropriate economic forecast scenario

 

Determining the length of the R&S forecast and reversion periods

 

Estimating expected utilization rates on unfunded loan commitments

 

Assessing relevant and appropriate qualitative factors.

 

In addition, the CECL methodology is dependent on economic forecasts that are inherently imprecise and will change from period to period. Although the allowance for credit losses is considered by management to be appropriate, there can be no assurance that it will be sufficient to absorb future losses.

 

Management believes the allowance for credit losses is appropriate for the CECL in our loan portfolio and associated unfunded commitments, and the credit risk ratings and inherent loss rates currently assigned are reasonable and appropriate as of the reporting date.

 

Individually Evaluated Loans 

 

When a loan no longer shares similar risk characteristics with other loans, such as in the case of certain nonaccrual or TDR loans, the Company estimates the allowance for loan losses on an individual loan basis. Generally, the allowance for loan losses for individually evaluated loans is measured as the difference between the recorded value of the loans and the collaterals fair value. For loans evaluated individually, the Company uses one of three different asset valuation measurement methods: (1) the fair value of collateral less costs to sell; (2) the present value of expected future cash flows; and (3) the loan's observable market price. If an individually evaluated loan is determined to be collateral dependent, the Company applies the fair value of the collateral less costs to sell method. If an individually evaluated loan is determined not to be collateral dependent, the Company uses the present value of future cash flows or the observable market value of the loan.

 

 

Unfunded Loan Commitments

 

Unfunded loan commitments are generally related to providing credit facilities to clients of the Bank and are not actively traded financial instruments. These unfunded commitments are disclosed as off-balance sheet financial instruments in Note 10 in the Notes to Consolidated Financial Statements (Unaudited).

 

The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company, using the same loss factors as used for the allowance for loan losses. The reserve for unfunded loan commitments uses a three-year historical usage rate of the unfunded commitments during the contractual life of the commitments. The allowance for unfunded commitments is included in “other liabilities” on the Consolidated Balance Sheets. Changes in the allowance for unfunded commitments are included in the provision for loan losses.

 

27

 

The following tables set forth activity in the allowance for loan losses by portfolio segment for the three months and nine months ended September 30, 2022, and September 30, 2021.

 

Three months ended September 30, 2022 and 2021

                     
              

Residential

         
      

Real Estate

  

Commercial

  

Mortgage Loans

  

Installment

     
  

Commercial

  

Construction

  

Mortgage

  

and

  

and Other

     
  

Loans

  

Loans

  

Loans

  

Equity Lines

  

Loans

  

Total

 

Allowance for Loan Losses:

 

(In thousands)

 
                         

June 30, 2022 Ending Balance

 $49,069  $7,276  $68,600  $23,692  $135  $148,772 

Provision/(reversal) for possible credit losses

  1,845   (1,065)  1,362   (1,612)  72   602 

Charge-offs

  (2,091)        (58)  (79)  (2,228)

Recoveries

  1,576      88   7      1,671 

Net (charge-offs)/recoveries

  (515)     88   (51)  (79)  (557)

September 30, 2022 Ending Balance

 $50,399  $6,211  $70,050  $22,029  $128  $148,817 
                         

Allowance for unfunded credit commitments:

                        

June 30, 2022 Ending Balance

 $2,804  $3,306  $26  $  $  $6,136 

Provision/(reversal) for possible credit losses

  1,576   (152)  (26)        1,398 

September 30, 2022 Ending Balance

 $4,380  $3,154  $  $  $  $7,534 

 

              

Residential

         
      

Real Estate

  

Commercial

  

Mortgage Loans

  

Installment

     
  

Commercial

  

Construction

  

Mortgage

  

and

  

and Other

     
  

Loans

  

Loans

  

Loans

  

Equity Lines

  

Loans

  

Total

 

Allowance for Loan Losses:

 

(In thousands)

 
                         

June 30, 2021 Ending Balance

 $40,067  $6,119  $58,026  $27,043  $1  $131,256 

Provision/(reversal) for possible credit losses

  674   149   2,786   (609)     3,000 

Charge-offs

  (2,649)        (3)     (2,652)

Recoveries

  121   76   144         341 

Net (charge-offs)/recoveries

  (2,528)  76   144   (3)     (2,311)

September 30, 2021 Ending Balance

 $38,213  $6,344  $60,956  $26,431  $1  $131,945 
                         

Allowance for unfunded credit commitments:

                        

June 30, 2021 Ending Balance

 $4,388  $3,581  $81  $  $  $8,050 

Provision/(reversal) for possible credit losses

  329   (396)  117         50 

September 30, 2021 Ending Balance

 $4,717  $3,185  $198  $  $  $8,100 

 

28

 

Nine months ended September 30, 2022 and 2021

                     
              

Residential

         
      

Real Estate

  

Commercial

  

Mortgage Loans

  

Installment

     
  

Commercial

  

Construction

  

Mortgage

  

and

  

and Other

     
  

Loans

  

Loans

  

Loans

  

Equity Lines

  

Loans

  

Total

 

Allowance for Loan Losses:

 

(In thousands)

 
                         

December 31, 2021 Ending Balance

 $43,394  $6,302  $61,081  $25,379  $1  $136,157 

Provision/(reversal) for possible credit losses

  7,258   (97)  8,699   (3,357)  206   12,709 

Charge-offs

  (2,362)        (58)  (80)  (2,500)

Recoveries

  2,109   6   270   65   1   2,451 

Net (charge-offs)/recoveries

  (253)  6   270   7   (79)  (49)

September 30, 2022 Ending Balance

 $50,399  $6,211  $70,050  $22,029  $128  $148,817 
                         

Allowance for unfunded credit commitments:

                        

December 31, 2021 Ending Balance

 $3,725  $3,375  $  $  $  $7,100 

Provision/(reversal) for possible credit losses

  655   (221)           434 

September 30, 2022 Ending Balance

 $4,380  $3,154  $  $  $  $7,534 

 

              

Residential

         
      

Real Estate

  

Commercial

  

Mortgage Loans

  

Installment

     
  

Commercial

  

Construction

  

Mortgage

  

and

  

and Other

     
  

Loans

  

Loans

  

Loans

  

Equity Lines

  

Loans

  

Total

 

Allowance for Loan Losses:

 

(In thousands)

 
                         

December 31, 2020 Ending Balance

 $68,742  $30,854  $49,205  $17,737  $  $166,538 

Impact of ASU 2016-13 adoption

  (31,466)  (24,307)  34,993   19,211   9   (1,560)

January 1, 2021 Beginning Balance

  37,276   6,547   84,198   36,948   9   164,978 

Provision/(reversal) for possible credit losses

  18,891   (279)  (23,526)  (10,788)  (8)  (15,710)

Charge-offs

  (19,499)        (3)     (19,502)

Recoveries

  1,545   76   284   274      2,179 

Net (charge-offs)/recoveries

  (17,954)  76   284   271      (17,323)

September 30, 2021 Ending Balance

 $38,213  $6,344  $60,956  $26,431  $1  $131,945 
                         

Allowance for unfunded credit commitments:

                        

December 31, 2020 Ending Balance

 $4,802  $690  $101  $284  $3  $5,880 

Impact of ASU 2016-13 adoption

  3,236   3,135   (66)  (284)  (3)  6,018 

January 1, 2021 Beginning Balance

  8,038   3,825   35         11,898 

Provision/(reversal) for possible credit losses

  (3,321)  (640)  163         (3,798)

September 30, 2021 Ending Balance

 $4,717  $3,185  $198  $  $  $8,100 

 

  

 

10. Commitments and Contingencies

 

From time to time, Bancorp and its subsidiaries are parties to litigation that arise in the ordinary course of business or otherwise are incidental to various aspects of its operations. Based upon information available to the Company and its review of any such litigation with counsel, management presently believes that the liability relating to such litigation, if any, would not be expected to have a material adverse impact on the Company’s consolidated financial condition, results of operations or liquidity taken as a whole. The outcome of litigation and other legal and regulatory matters is inherently uncertain, however, and it is possible that one or more of the legal matters currently pending or threatened against the Company could have a material adverse effect on the Company’s consolidated financial condition, results of operations or liquidity taken as a whole.

 

Although the Company establishes accruals for legal proceedings when information related to the loss contingencies represented by those matters indicates both that a loss is probable and that the amount of loss can be reasonably estimated, the Company does not have accruals for all legal proceedings where there is a risk of loss. In addition, amounts accrued may not represent the ultimate loss to the Company from the legal proceedings in question. Thus, ultimate losses may be higher or lower, and possibly significantly so, than the amounts accrued for legal loss contingencies.

 

29

  

In the normal course of business, the Company from time to time becomes a party to financial instruments with off-balance sheet risk to meet the financing needs of its customers. These financial instruments include commitments to extend credit in the form of loans, or through commercial or standby letters of credit and financial guarantees. These instruments represent varying degrees of exposure to risk in excess of the amounts included in the accompanying Consolidated Balance Sheets. The contractual or notional amount of these instruments indicates a level of activity associated with a particular class of financial instrument and is not a reflection of the level of expected losses, if any.

 

The Company’s unfunded commitments related to investments in qualified affordable housing and alternative energy partnerships were $152.2 million and $107.7 million as of September 30, 2022, and December 31, 2021, respectively.

  

 

11. Borrowed Funds

 

Borrowings from the Federal Home Loan Bank (FHLB) – There were $225.0 million over-night borrowings from the FHLB as of September 30, 2022, and no over-night borrowings as of December 31, 2021. Advances from the FHLB were $360.0 million at a weighted average rate of 3.10% as of September 30, 2022, and $20.0 million at a weighted average rate of 2.89% as of December 31, 2021. As of September 30, 2022, FHLB advances of $325.0 million will mature in October 2022, $20.0 million will mature in May 2023 and $15.0 million will mature in September 2024.

 

Junior Subordinated Notes The Company established three special purpose trusts in 2003 and two in 2007 for the purpose of issuing Guaranteed Preferred Beneficial Interests in their Subordinated Debentures to outside investors (“Capital Securities”). The proceeds from the issuance of the Capital Securities as well as our purchase of the common stock of the special purpose trusts were invested in Junior Subordinated Notes of the Company (“Junior Subordinated Notes”). The trusts exist for the purpose of issuing the Capital Securities and investing in Junior Subordinated Notes. Subject to some limitations, payment of distributions out of the monies held by the trusts and payments on liquidation of the trusts, or the redemption of the Capital Securities, are guaranteed by the Company to the extent the trusts have funds on hand at such time. The obligations of the Company under the guarantees and the Junior Subordinated Notes are subordinate and junior in right of payment to all indebtedness of the Company and are structurally subordinated to all liabilities and obligations of the Company’s subsidiaries. The Company has the right to defer payments of interest on the Junior Subordinated Notes at any time or from time to time for a period of up to twenty consecutive quarterly periods with respect to each deferral period. Under the terms of the Junior Subordinated Notes, the Company may not, with certain exceptions, declare or pay any dividends or distributions on its capital stock or purchase or acquire any of its capital stock if it has deferred payment of interest on any Junior Subordinated Notes.

 

At September 30, 2022, Junior Subordinated Notes totaled $119.1 million with a weighted average interest rate of 5.59%, compared to $119.1 million with a weighted average rate of 2.38% at December 31, 2021. The Junior Subordinated Notes have a stated maturity term of 30 years.

  

 

12. Income Taxes

 

The effective tax rate for the first nine months of 2022 was 22.9% compared to 21.3% for the first nine months of 2021. The effective tax rate includes the impact of low-income housing and alternative energy investment tax credits.

 

The Company’s tax returns are open for audit by the Internal Revenue Service back to 2018 and by the California Franchise Tax Board back to 2017.

 

It is reasonably possible that unrecognized tax benefits could change significantly over the next twelve months. The Company does not expect that any such changes would have a material impact on its annual effective tax rate.

 

30

  
 

13. Fair Value Measurements and Fair Value of Financial Instruments

 

The Company uses fair value to measure certain assets and liabilities on a recurring basis, primarily securities available-for-sale and derivatives. For assets measured at the lower of cost or fair value, the fair value measurement criteria may or may not be met during a reporting period and such measurements are therefore considered “nonrecurring” for purposes of disclosing our fair value measurements. Fair value is used on a nonrecurring basis to adjust carrying values for individually evaluated loans and other real estate owned and also to record impairment on certain assets, such as goodwill, CDI, and other long-lived assets.

 

The Company used valuation methodologies to measure assets at fair value under ASC Topic 820 and ASC Topic 825, as amended by ASU 2016-01 and ASU 2018-03, to estimate the fair value of financial instruments not recorded at fair value. The fair value of the Company’s assets and liabilities is classified and disclosed in one of the following three categories:

 

 

Level 1 - Quoted prices in active markets for identical assets or liabilities.

 

Level 2 - Observable prices in active markets for similar assets or liabilities; prices for identical or similar assets or liabilities in markets that are not active; directly observable market inputs for substantially the full term of the asset and liability; market inputs that are not directly observable but are derived from or corroborated by observable market data.

 

Level 3 – Unobservable inputs based on the Company’s own judgment about the assumptions that a market participant would use.

 

The classification of assets and liabilities within the hierarchy is based on whether inputs to the valuation methodology used are observable or unobservable, and the significance of those inputs in the fair value measurement. The Company’s assets and liabilities are classified in their entirety based on the lowest level of input that is significant to their fair value measurements.

 

Financial assets and liabilities measured at fair value on a recurring basis

 

The Company uses the following methodologies to measure the fair value of its financial assets and liabilities on a recurring basis:

 

Securities Available-for-Sale and Equity Securities - For certain actively traded agency preferred stocks, mutual funds, U.S. Treasury securities, and other equity securities, the Company measures the fair value based on quoted market prices in active exchange markets at the reporting date, a Level 1 measurement. The Company also measures securities by using quoted market prices for similar securities or dealer quotes, a Level 2 measurement. This category generally includes U.S. Government agency securities, U.S. Government sponsored entities, state and municipal securities, mortgage-backed securities (“MBS”), collateralized mortgage obligations and corporate bonds.

 

Warrants - The Company measures the fair value of warrants based on unobservable inputs based on assumptions and management judgment, a Level 3 measurement.

 

Interest Rate Swaps – The Company measures the fair value of interest rate swaps using third party models with observable market data, a Level 2 measurement.

 

Currency Option Contracts and Foreign Exchange Contracts - The Company measures the fair value of currency option contracts and foreign exchange contracts based on observable market rates on a recurring basis, a Level 2 measurement.

 

31

 

The following tables present financial assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2022 and December 31, 2021:

 

  

September 30, 2022

     
  

Fair Value Measurements Using

  

Total Fair Value

 
  

Level 1

  

Level 2

  

Level 3

  

Measurements

 
  

(In thousands)

 

Assets

                

Securities available-for-sale

                

U.S. Treasury securities

 $241,400  $  $  $241,400 

U.S. government agency entities

     69,112      69,112 

Mortgage-backed securities

     861,488      861,488 

Collateralized mortgage obligations

     31,709      31,709 

Corporate debt securities

     210,702      210,702 

Total securities available-for-sale

  241,400   1,173,011      1,414,411 
                 

Equity securities

                

Mutual funds

  5,497         5,497 

Preferred stock of government sponsored entities

  2,110         2,110 

Other equity securities

  15,516         15,516 

Total equity securities

  23,123         23,123 
                 

Warrants

        46   46 

Interest rate swaps

     98,498      98,498 

Foreign exchange contracts

     752      752 

Total assets

 $264,523  $1,272,261  $46  $1,536,830 
                 

Liabilities

                

Interest rate swaps

 $  $54,443  $  $54,443 

Foreign exchange contracts

     2,054      2,054 

Total liabilities

 $  $56,497  $  $56,497 

 

  

December 31, 2021

     
  

Fair Value Measurements Using

  

Total Fair Value

 
  

Level 1

  

Level 2

  

Level 3

  

Measurements

 
  

(In thousands)

 

Assets

                

Securities available-for-sale

                

U.S. government agency entities

 $  $87,509  $  $87,509 

Mortgage-backed securities

     888,665      888,665 

Collateralized mortgage obligations

     9,117      9,117 

Corporate debt securities

     142,018      142,018 

Total securities available-for-sale

     1,127,309      1,127,309 
                 

Equity securities

                

Mutual funds

  6,230         6,230 

Preferred stock of government sponsored entities

  1,811         1,811 

Other equity securities

  14,278         14,278 

Total equity securities

  22,319         22,319 
                 

Warrants

        23   23 

Interest rate swaps

     10,090      10,090 

Foreign exchange contracts

     1,113      1,113 

Total assets

 $22,319  $1,138,512  $23  $1,160,854 
                 

Liabilities

                

Interest rate swaps

 $  $12,642  $  $12,642 

Foreign exchange contracts

     327      327 

Total liabilities

 $  $12,969  $  $12,969 

 

32

 

Financial assets and liabilities measured at estimated fair value on a non-recurring basis:

 

Certain assets or liabilities are required to be measured at estimated fair value on a nonrecurring basis subsequent to initial recognition. Generally, these adjustments are the result of lower-of-cost-or-fair value or other impairment write-downs of individual assets. In determining the estimated fair values during the period, the Company determined that substantially all the changes in estimated fair value were due to declines in market conditions versus instrument specific credit risk. For the periods ended September 30, 2022, and December 31, 2021, there were no material adjustments to fair value for the Company’s assets and liabilities measured at fair value on a nonrecurring basis in accordance with GAAP.

 

For financial assets measured at fair value on a nonrecurring basis that were still reflected in the Consolidated Balance Sheets as of September 30, 2022, the following tables set forth the level of valuation assumptions used to determine each adjustment, the carrying value of the related individual assets as of September 30, 2022, and December 31, 2021, and the total losses for the periods indicated:

 

  

As of September 30, 2022

  

Total Losses

 
  

Fair Value Measurements Using

  

Total Fair Value

  

For the Three Months Ended

  

For the Nine Months Ended

 
  

Level 1

  

Level 2

  

Level 3

  

Measurements

  

September 30, 2022

  

September 30, 2021

  

September 30, 2022

  

September 30, 2021

 
  

(In thousands)

 

Assets

                                

Non accrual loans by type:

                                

Commercial loans

 $  $  $6,887  $6,887  $1,786  $  $1,786  $2,037 

Commercial mortgage loans

        10,956   10,956             

Residential mortgage loans and equity lines

        5,407   5,407             

Other installment loans

        9   9             

Total non accrual loans

        23,259   23,259   1,786      1,786   2,037 

Other real estate owned (1)

        4,269   4,269      (55)     (8)

Investments in venture capital

        836   836      8      143 

Total assets

 $  $  $28,364  $28,364  $1,786  $(47) $1,786  $2,172 

 

(1) Other real estate owned balance of $4.1 million in the Consolidated Balance Sheets is net of estimated disposal costs.

                 

 

 

  

As of December 31, 2021

  

Total Losses

 
  

Fair Value Measurements Using

  

Total Fair Value

  

For the Twelve Months Ended

 
  

Level 1

  

Level 2

  

Level 3

  

Measurements

  

December 31, 2021

  

December 31, 2020

 
  

(In thousands)

         

Assets

                        

Non accrual loans by type:

                        

Commercial loans

 $  $  $4,327  $4,327  $1,012  $7,012 

Commercial mortgage loans

        13,335   13,335       

Residential mortgage loans and equity lines

        5,243   5,243       

Total non accrual loans

        22,905   22,905   1,012   7,012 

Other real estate owned (1)

        4,589   4,589   17   717 

Investments in venture capital

        952   952   143   107 

Total assets

 $  $  $28,446  $28,446  $1,172  $7,836 

 

(1) Other real estate owned balance of $4.4 million in the Consolidated Balance Sheets is net of estimated disposal costs.

         

 

 

The significant unobservable (Level 3) inputs used in the fair value measurement of collateral for collateral-dependent individually evaluated loans are primarily based on the appraised value of collateral adjusted by estimated sales cost and commissions. The Company generally obtains new appraisal reports every twelve months as appropriate. As the Company’s primary objective in the event of default would be to monetize the collateral to settle the outstanding balance of the loan, less marketable collateral would receive a larger discount. In the current year, the Company used borrower specific collateral discounts with various discount levels.

 

33

 

The fair value of individually evaluated loans is calculated based on the net realizable fair value of the collateral or the observable market price of the most recent sale or quoted price 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 individually evaluated loans are recorded based on the current appraised value of the collateral, a Level 2 measurement, or management’s judgment and estimation of value using discounted future cash flows or old appraisals which are then adjusted based on recent market trends, a Level 3 measurement.

 

The significant unobservable inputs (Level 3) used in the fair value measurement of other real estate owned (“OREO”) are primarily based on the appraised value of OREO adjusted by estimated sales cost and commissions. The Company applies estimated sales cost and commissions ranging from 3% to 6% of the collateral value of individually evaluated loans, quoted price, or loan sale price of loans held for sale, and appraised value of OREO.

 

The significant unobservable inputs in the Black-Scholes option pricing model for the fair value of warrants are their expected life ranging from one to five years, risk-free interest rate from 4.21% to 4.49%, and stock volatility from 19.45% to 25.29%.

 

Fair value is estimated in accordance with ASC Topic 825. Fair value estimates are made at specific points in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Bank’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Bank’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

 

The following table sets forth the carrying and notional amounts and estimated fair value of financial instruments as of September 30, 2022, and December 31, 2021:

 

  

September 30, 2022

  

December 31, 2021

 
  

Carrying

      

Carrying

     
  

Amount

  

Fair Value

  

Amount

  

Fair Value

 
  

(In thousands)

 

Financial Assets

                

Cash and due from banks

 $200,051  $200,051  $134,141  $134,141 

Short-term investments

  1,063,294   1,063,294   2,315,563   2,315,563 

Securities available-for-sale

  1,414,411   1,414,411   1,127,309   1,127,309 

Loans, net

  17,951,050   17,676,365   16,202,001   16,499,869 

Equity securities

  23,123   23,123   22,319   22,319 

Investment in Federal Home Loan Bank stock

  17,250   17,250   17,250   17,250 

Warrants

  46   46   23   23 
                 

 

  

Notional

      

Notional

     
  

Amount

  

Fair Value

  

Amount

  

Fair Value

 

Foreign exchange contracts

 $162,518  $752  $181,997  $1,113 

Interest rate swaps

  1,464,567   98,498   904,635   10,090 

 

34

 
  

Carrying

      

Carrying

     
  

Amount

  

Fair Value

  

Amount

  

Fair Value

 

Financial Liabilities

                

Deposits

 $18,575,751  $18,573,442  $18,058,842  $18,051,720 

Advances from Federal Home Loan Bank

  360,000   359,416   20,000   21,279 

Other borrowings

  22,651   18,357   23,145   18,945 

Long-term debt

  119,136   56,317   119,136   62,274 
                 

 

  

Notional

      

Notional

     
  

Amount

  

Fair Value

  

Amount

  

Fair Value

 

Option contracts

 $  $  $676  $3 

Foreign exchange contracts

  45,990   2,054   51,782   327 

Interest rate swaps

  691,872   54,443   872,400   12,642 
                 

 

  

Notional

      

Notional

     
  

Amount

  

Fair Value

  

Amount

  

Fair Value

 

Off-Balance Sheet Financial Instruments

                

Commitments to extend credit

 $3,537,547  $(14,650) $3,297,362  $(12,594)

Standby letters of credit

  290,618   (2,048)  266,490   (2,640)

Other letters of credit

  13,070   (12)  16,652   (13)

 

The following tables set forth the level in the fair value hierarchy for the estimated fair values of financial instruments as of September 30, 2022, and December 31, 2021.

 

 

  

As of September 30, 2022

 
  

Estimated

             
  

Fair Value

             
  

Measurements

  

Level 1

  

Level 2

  

Level 3

 
  

(In thousands)

 

Financial Assets

                

Cash and due from banks

 $200,051  $200,051  $  $ 

Short-term investments

  1,063,294   1,063,294       

Securities available-for-sale

  1,414,411   241,400   1,173,011    

Loans, net

  17,676,365         17,676,365 

Equity securities

  23,123   23,123       

Investment in Federal Home Loan Bank stock

  17,250      17,250    

Warrants

  46         46 

Financial Liabilities

                

Deposits

  18,573,442         18,573,442 

Advances from Federal Home Loan Bank

  359,416      359,416    

Other borrowings

  18,357         18,357 

Long-term debt

  56,317      56,317    

 

35

 
  

As of December 31, 2021

 
  

Estimated

             
  

Fair Value

             
  

Measurements

  

Level 1

  

Level 2

  

Level 3

 
  

(In thousands)

 

Financial Assets

                

Cash and due from banks

 $134,141  $134,141  $  $ 

Short-term investments

  2,315,563   2,315,563       

Securities available-for-sale

  1,127,309      1,127,309    

Loans, net

  16,499,869         16,499,869 

Equity securities

  22,319   22,319       

Investment in Federal Home Loan Bank stock

  17,250      17,250    

Warrants

  23         23 

Financial Liabilities

                

Deposits

  18,051,720         18,051,720 

Advances from Federal Home Loan Bank

  21,279      21,279    

Other borrowings

  18,945         18,945 

Long-term debt

  62,274      62,274    

 

  

 

14. Goodwill and Goodwill Impairment

 

Total goodwill was $375.7 million as of September 30, 2022 compared with $372.2 million as of December 31, 2021. The increase of $3.5 million is a result of the acquisition of HSBC’s West Coast mass retail market consumer banking business and retail business banking business on February 7, 2022. The Company’s policy is to assess goodwill for impairment at the reporting unit level on an annual basis or between annual assessments if a triggering event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.  Impairment is the condition that exists when the carrying amount of goodwill exceeds its implied fair value.

 

36

  
 

15. Financial Derivatives

 

It is our policy not to speculate on the future direction of interest rates. However, from time to time, we may enter into financial derivatives in order to seek mitigation of exposure to interest rate risks related to our interest-earning assets and interest-bearing liabilities. We believe that these transactions, when properly structured and managed, may provide a hedge against inherent interest rate risk in our assets or liabilities and against risk in specific transactions. In such instances, we may enter into interest rate swap contracts or other types of financial derivatives. Prior to considering any hedging activities, we seek to analyze the costs and benefits of the hedge in comparison to other viable alternative strategies. All hedges must be approved by the Bank’s Investment Committee.

 

The Company follows ASC Topic 815 that establishes accounting and reporting standards for financial derivatives, including certain financial derivatives embedded in other contracts, and hedging activities. It requires the recognition of all financial derivatives as assets or liabilities in the Company’s Consolidated Balance Sheets and measurement of those financial derivatives at fair value. The accounting treatment of changes in fair value is dependent upon whether or not a financial derivative is designated as a hedge and, if so, the type of hedge. Fair value is determined using third-party models with observable market data. For derivatives designated as cash flow hedges, changes in fair value are recognized in other comprehensive income and are reclassified to earnings when the hedged transaction is reflected in earnings. For derivatives designated as fair value hedges, changes in the fair value of the derivatives are reflected in current earnings, together with changes in the fair value of the related hedged item if there is a highly effective correlation between changes in the fair value of the interest rate swaps and changes in the fair value of the underlying asset or liability that is intended to be hedged. If there is not a highly effective correlation between changes in the fair value of the interest rate swap and changes in the fair value of the underlying asset or liability that is intended to be hedged, then only the changes in the fair value of the interest rate swaps are reflected in the Company’s Consolidated Financial Statements.

 

The Company offers various interest rate derivative contracts to its customers. When derivative transactions are executed with its customers, the derivative contracts are offset by paired trades with third-party financial institutions including with central counterparties (“CCP”). Certain derivative contracts entered with CCPs are settled-to-market daily to the extent the CCP’s rulebooks legally characterize the variation margin as settlement. Derivative contracts are intended to allow borrowers to lock in attractive intermediate and long-term fixed rate financing while not increasing the interest rate risk to the Company. These transactions are generally not linked to specific Company assets or liabilities on the Consolidated Balance Sheets or to forecasted transactions in a hedging relationship and, therefore, are economic hedges. The contracts are marked to market at each reporting period. The changes in fair values of the derivative contracts traded with third-party financial institutions are expected to be largely comparable to the changes in fair values of the derivative transactions executed with customers throughout the terms of these contracts, except for the credit valuation adjustment component.  The Company records credit valuation adjustments on derivatives to properly reflect the variances of credit worthiness between the Company and the counterparties, considering the effects of enforceable master netting agreements and collateral arrangements.

 

37

 

In May 2014, Bancorp entered into interest rate swap contracts in the notional amount of $119.1 million for a period of ten years. The objective of these interest rate swap contracts, which were designated as hedging instruments in cash flow hedges, was to hedge the quarterly interest payments on Bancorp’s $119.1 million of Junior Subordinated Debentures that had been issued to five trusts, throughout the ten-year period beginning in June 2014 and ending in June 2024, from the risk of variability of these payments resulting from changes in the three-month LIBOR interest rate. As of September 30, 2022, and 2021, the ineffective portion of these interest rate swaps was not significant. The notional amount and net unrealized loss of the Company’s cash flow derivative financial instruments as of September 30, 2022, and December 31, 2021, were as follows:

 

 

  

September 30, 2022

  

December 31, 2021

 

Cash flow swap hedges:

 

(In thousands)

 

Notional

 $119,136  $119,136 

Weighted average fixed rate-pay

  2.61%  2.61%

Weighted average variable rate-receive

  2.07%  0.16%
         

Unrealized gain/(loss), net of taxes (1)

 $2,527  $(3,276)

 

  

Three months ended

  

Nine months ended

 
  

September 30, 2022

  

September 30, 2021

  

September 30, 2022

  

September 30, 2021

 

Periodic net settlement of swaps (2)

 $138  $754  $1,311  $2,196 

 

(1) Included in other comprehensive income.

(2) the amount of periodic net settlement of interest rate swaps was included in interest expense.

 

 

The Bank entered into interest rate swap contracts that are matched to fixed-rate CRE loans in the Bank’s loan portfolio. These contracts have been designated as hedging instruments to hedge the risk of changes in the fair value of the underlying CRE loans due to changes in interest rates. As of September 30, 2022, the Bank’s outstanding interest rate swap contracts had a notional amount of $877.2 million for various terms from three to ten years. The swap contracts are structured so that the notional amounts reduce over time to match the contractual amortization of the underlying loan and allow prepayments with the same pre-payment penalty amounts as the related loan. As of September 30, 2022 and 2021, the ineffective portion of these interest rate swaps was not significant.

 

The Company has designated as a partial-term hedging election $670.2 million notional as last-of-layer hedge on pools of loans with a notational value of $1.2 billion as of September 30, 2022. The loans are not expected to be affected by prepayment, defaults, or other factors affecting the timing and amount of cash flows under the last-of-layer method. The Company has entered into these pay-fixed and receive 1-Month LIBOR interest rate swaps to convert the last-of-layer $670.2 million portion of $1.2 billion fixed rate loan pools in order to reduce the Company’s exposure to higher interest rates for the last-of-layer tranches. As of September 30, 2022, the last-of-layer loan tranche had a fair value basis adjustment of $32.8 million. The interest rate swap converts this last-of-layer tranche into a floating rate instrument. The Company’s risk management objective with respect to this last-of-layer interest rate swap is to reduce interest rate exposure as to the last-of-layer tranche.

 

Interest rate swap contracts involve the risk of dealing with institutional derivative counterparties and their ability to meet contractual terms. Institutional counterparties must have a strong credit profile and be approved by the Company’s Board of Directors. The Company’s credit exposure on interest rate swaps is limited to the net favorable value and interest payments of all swaps by each counterparty. Credit exposure may be reduced by the amount of collateral pledged by the counterparty. Bancorp’s interest rate swaps have been assigned by the counterparties to a derivative clearing organization and daily margin is indirectly maintained with the derivative clearing organization. There was no cash collateral deposit posted by Bancorp related to derivative contracts as of September 30, 2022 and $5.9 million as of December 31, 2021.

 

38

 

The notional amount and net unrealized loss of the Company’s fair value derivative financial instruments as of September 30, 2022, and December 31, 2021, were as follows:

  

September 30, 2022

  

December 31, 2021

 

Fair value swap hedges:

 

(In thousands)

 

Notional

 $877,188  $729,280 

Weighted average fixed rate-pay

  2.14%  2.65%

Weighted average variable rate spread

  0.54%  1.31%

Weighted average variable rate-receive

  1.98%  1.43%
         

Unrealized gain/(loss), net of taxes (1)

 $40,465  $(1,013)

 

  

Three months ended

  

Nine months ended

 
  

September 30, 2022

  

September 30, 2021

  

September 30, 2022

  

September 30, 2021

 

Periodic net settlement of swaps (2)

 $1,461  $(2,363) $(1,628) $(7,137)

 

(1) the amount is included in other non-interest income.

(2) the amount of periodic net settlement of interest rate swaps was included in interest income.

 

The Company enters into foreign exchange forward contracts with various counterparties to mitigate the risk of fluctuations in foreign currency exchange rates for foreign exchange certificates of deposit or foreign exchange contracts entered into with our clients. These contracts are not designated as hedging instruments and are recorded at fair value in our Consolidated Balance Sheets. Changes in the fair value of these contracts as well as the related foreign exchange certificates of deposit and foreign exchange contracts are recognized immediately in net income as a component of non-interest income. Period end gross positive fair values are recorded in other assets and gross negative fair values are recorded in other liabilities.

 

The notional amount and fair value of the Company’s derivative financial instruments not designated as hedging instruments as of September 30, 2022, and December 31, 2021, were as follows:

 

Derivative financial instruments

 

September 30, 2022

  

December 31, 2021

 

not designated as hedging instruments:

 

(In thousands)

 

Notional amounts:

        

Option contracts

 $-  $676 

Spot, forward, and swap contracts with positive fair value

 $162,518  $181,997 

Spot, forward, and swap contracts with negative fair value

 $45,990  $51,782 

Fair value:

        

Option contracts

 $-  $3 

Spot, forward, and swap contracts with positive fair value

 $752  $1,113 

Spot, forward, and swap contracts with negative fair value

 $(2,054) $(327)

 

39

  
 

16. Balance Sheet Offsetting

 

Certain financial instruments, including resell and repurchase agreements, securities lending arrangements and derivatives, may be eligible for offset in the Consolidated Balance Sheets and/or subject to master netting arrangements or similar agreements. The Company’s securities sold with agreements to repurchase and derivative transactions with upstream financial institution counterparties are generally executed under International Swaps and Derivative Association master agreements that include “right of set-off” provisions. In such cases, there is generally a legally enforceable right to offset recognized amounts and there may be an intention to settle such amounts on a net basis. Nonetheless, the Company does not generally offset such financial instruments for financial reporting purposes.

 

Financial instruments that are eligible for offset in the Consolidated Balance Sheets, as of September 30, 2022, and December 31, 2021, are set forth in the following table:

 

              

Gross Amounts Not Offset in the

Balance Sheet

 
                         
  

Gross

Amounts

Recognized

  

Gross Amounts

Offset in the

Balance Sheet

  

Net Amounts

Presented in the

Balance Sheet

  

Financial

Instruments

  

Collateral

Posted

  

Net Amount

 

September 30, 2022

 

(In thousands)

 

Assets:

                        

Derivatives

 $98,498  $  $98,498  $  $95,783  $2,715 
                         

Liabilities:

                        

Derivatives

 $54,443  $  $54,443  $  $  $54,443 
                         

December 31, 2021

                        

Assets:

                        

Derivatives

 $10,090  $  $10,090  $  $  $10,090 
                         

Liabilities:

                        

Derivatives

 $15,748  $(3,106) $12,642  $  $  $12,642 

  

  

 

17. Revenue from Contracts with Customers

 

The following is a summary of revenue from contracts with customers that are in-scope and not in-scope under ASC 606:

 

 

  

Three months Ended September 30,

  

Nine months Ended September 30,

 
  

2022

  

2021

  

2022

  

2021

 
  

(In thousands)

 

Non-interest income, in-scope:

                

Fees and service charges on deposit accounts

 $2,398  $2,130  $7,156  $6,386 

Wealth management fees

  4,184   3,578   12,494   11,074 

Other service fees(1)

  4,451   3,735   12,723   11,109 

Total noninterest income

  11,033   9,443   32,373   28,569 
                 

Noninterest income, not in-scope(2)

  (1,157)  2,773   12,353   6,230 

Total noninterest income

 $9,876  $12,216  $44,726  $34,799 

 

(1) Other service fees comprise of fees related to letters of credit, wire fees, fees on foreign exchange transactions and other immaterial individual revenue streams.

(2) These amounts primarily represent revenue from interest rate swap fees, unrealized net gains on equity securities and other miscellaneous income.

 

40

 

The major revenue streams by fee type that are within the scope of ASC 606 presented in the above table are described in additional detail below:

 

Fees and Services Charges on Deposit Accounts

 

Fees and service charges on deposit accounts include charges for analysis, overdraft, cash checking, ATM, and safe deposit activities executed by our deposit clients, as well as interchange income earned through card payment networks for the acceptance of card-based transactions. Fees earned from our deposit clients are governed by contracts that provide for overall custody and access to deposited funds and other related services and can be terminated at will by either party. Fees received from deposit clients for the various deposit activities are recognized as revenue by the Company once the performance obligations are met.

 

Wealth Management Fees

 

The Company employs financial consultants to provide investment planning services for customers including wealth management services, asset allocation strategies, portfolio analysis and monitoring, investment strategies, and risk management strategies. The fees the Company earns are variable and are generally received monthly by the Company. The Company recognizes revenue for the services performed at quarter end based on actual transaction details received from the broker dealer the Company engages.

 

Practical Expedients and Exemptions

 

The Company applies the practical expedient in ASC 606-10-50-14 and does not disclose the value of unsatisfied performance obligations as the Company’s contracts with customers generally have a term that is less than one year, are open-ended with a cancellation period that is less than one year or allow the Company to recognize revenue in the amount to which the Company has the right to invoice.

 

In addition, given the short-term nature of the contracts, the Company also applies the practical expedient in ASC 606-10-32-18 and does not adjust the consideration from customers for the effects of a significant financing component, if at contract inception the period between when the entity transfers the goods or services and when the customer pays for that good or service is one year or less.

  

 

18. Stockholders Equity

 

Total equity was $2.42 billion as of September 30, 2022, a decrease of $26.7 million, from $2.45 billion as of December 31, 2021, primarily due to net income of $263.0 million, stock-based compensation of $5.2 million, proceeds from dividend reinvestment of $2.8 million, and stock issued to directors of $0.8 million offset by other comprehensive loss of $109.8 million, purchases of treasury stock of $109.8 million, common stock cash dividends of $76.1 million and shares withheld related to net share settlement of RSUs of $2.9 million.

 

41

 

Activity in accumulated other comprehensive income/(loss), net of tax, and reclassification out of accumulated other comprehensive income/(loss) for the three and nine months ended September 30, 2022, and September 30, 2021, was as follows:

 

 

  

Three months ended September 30, 2022

  

Three months ended September 30, 2021

 
  

Pre-tax

  

Tax expense/

(benefit)

  

Net-of-tax

  

Pre-tax

  

Tax expense/

(benefit)

  

Net-of-tax

 

Beginning balance, gain/(loss), net of tax

 

(In thousands)

 

Securities available-for-sale

      $(72,210)         $7,560 

Cash flow hedge derivatives

       882           (5,188)

Total

         $(71,328)         $2,372 
                         

Net unrealized gains/(losses) arising during the period

                        

Securities available-for-sale

 $(61,316) $(18,125) $(43,191) $(4,588) $(1,356) $(3,232)

Cash flow hedge derivatives

  2,677   791   1,886   2,224   657   1,567 

Total

 $(58,639) $(17,334) $(41,305) $(2,364) $(699) $(1,665)
                         

Reclassification adjustment for net losses in net income

                        

Securities available-for-sale

                  

Cash flow hedge derivatives

  (342)  (101)  (241)  (1,526)  (451)  (1,075)

Total

  (342)  (101)  (241)  (1,526)  (451)  (1,075)
                         

Total other comprehensive income/(loss)

                        

Securities available-for-sale

 $(61,316) $(18,125) $(43,191) $(4,588) $(1,356) $(3,232)

Cash flow hedge derivatives

  2,335   690   1,645   698   206   492 

Total

 $(58,981) $(17,435) $(41,546) $(3,890) $(1,150) $(2,740)
                         

Ending balance, gain/(loss), net of tax

                        

Securities available-for-sale

      $(115,401)         $4,328 

Cash flow hedge derivatives

       2,527           (4,696)

Total

         $(112,874)         $(368)

 

 

  

Nine months ended September 30, 2022

  

Nine months ended September 30, 2021

 
  

Pre-tax

  

Tax expense/

(benefit)

  

Net-of-tax

  

Pre-tax

  

Tax expense/

(benefit)

  

Net-of-tax

 

Beginning balance, gain/(loss), net of tax

 

(In thousands)

 

Securities available-for-sale

      $211          $12,200 

Cash flow hedge derivatives

       (3,276)          (6,890)

Total

         $(3,065)         $5,310 
                         

Net unrealized gains/(losses) arising during the period

                        

Securities available-for-sale

 $(164,128) $(48,516) $(115,612) $(10,322) $(3,051) $(7,271)

Cash flow hedge derivatives

  11,060   3,269   7,791   7,600   2,247   5,353 

Total

 $(153,068) $(45,247) $(107,821) $(2,722) $(804) $(1,918)
                         

Reclassification adjustment for net losses in net income

                        

Securities available-for-sale

           (853)  (252)  (601)

Cash flow hedge derivatives

  (2,822)  (834)  (1,988)  (4,485)  (1,326)  (3,159)

Total

  (2,822)  (834)  (1,988)  (5,338)  (1,578)  (3,760)
                         

Total other comprehensive income/(loss)

                        

Securities available-for-sale

 $(164,128) $(48,516) $(115,612) $(11,175) $(3,303) $(7,872)

Cash flow hedge derivatives

  8,238   2,435   5,803   3,115   921   2,194 

Total

 $(155,890) $(46,081) $(109,809) $(8,060) $(2,382) $(5,678)
                         

Ending balance, gain/(loss), net of tax

                        

Securities available-for-sale

      $(115,401)         $4,328 

Cash flow hedge derivatives

       2,527           (4,696)

Total

         $(112,874)         $(368)

 

42

  
 

19. Stock Repurchase Program

 

On May 26, 2022, the Board of Directors approved a new stock repurchase program to buy back up to $125.0 million of the Company’s common stock. The Company repurchased 1.08 million shares for $46.3 million, at an average cost of $42.88 per share during the three months ended September 30, 2022.

  

 

20. Subsequent Events

 

The Company has evaluated the effect of events that have occurred subsequent to September 30, 2022, through the date of issuance of the Consolidated Financial Statements, and, based on such evaluation, the Company believes that there have been no material events during such period that would require recognition in the Consolidated Financial Statements or disclosure in the Notes to the Consolidated Financial Statements.

 

43

  
 

Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

The following discussion is based on the assumption that the reader has access to and has read the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

 

Critical Accounting Policies

 

The discussion and analysis of the Company’s financial condition and results of operations are based upon its unaudited Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these Consolidated Financial Statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues, and expenses, and related disclosures of contingent assets and liabilities at the date of the Consolidated Financial Statements. Actual results may differ from these estimates under different assumptions or conditions.

 

Critical accounting policies involve significant judgments, assumptions and uncertainties and are essential to understanding the Company’s results of operations and financial condition. Management of the Company considers the following to be critical accounting policies:

 

Accounting for the allowance for loan losses involves significant judgments and assumptions by management, which have a material impact on, among other things, the carrying value of net loans. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances as described in “Allowance for Credit Losses” under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in the 2021 Form 10-K. For more information, please also see Note 3 to the Company’s unaudited Consolidated Financial Statements.

 

 

Highlights

 

Total loans increased to $18.1 billion, or 7.8% annualized, in the third quarter.

Net interest margin increased to 3.83% in the third quarter of 2022 from 3.22% in third quarter of 2021.

Earnings per share increased 14.1% compared to second quarter of 2022 and 45.2% when compared to same quarter in 2021.

 

 

Quarterly Statement of Operations Review

 

Net Income

 

Net income for the quarter ended September 30, 2022, was $99.0 million, an increase of $26.6 million, or 36.7%, compared to net income of $72.4 million for the same quarter a year ago. Diluted earnings per share for the quarter ended September 30, 2022, was $1.35 per share compared to $0.93 per share for the same quarter a year ago.

 

Return on average stockholders’ equity was 15.94% and return on average assets was 1.81% for the quarter ended September 30, 2022, compared to a return on average stockholders’ equity of 11.61% and a return on average assets of 1.45% for the same quarter a year ago.

 

 

Financial Performance

 

   

Three months ended

 
   

September 30, 2022

   

September 30, 2021

 

Net income

 

$99.0 million

   

$72.4 million

 

Basic earnings per common share

  $ 1.35     $ 0.93  

Diluted earnings per common share

  $ 1.35     $ 0.93  

Return on average assets

    1.81 %     1.45 %

Return on average total stockholders' equity

    15.94 %     11.61 %

Efficiency ratio

    36.35 %     43.85 %

 

Net Interest Income Before Provision for Credit Losses

 

Net interest income before provision for credit losses increased $45.0 million, or 29.5%, to $197.5 million during the third quarter of 2022, compared to $152.5 million during the same quarter a year ago. The increase was due primarily to an increase in interest income from loans and securities and a decrease in interest expense from deposits.

 

The net interest margin was 3.83% for the third quarter of 2022 compared to 3.22% for the third quarter of 2021 and 3.52% for the second quarter of 2022.

 

For the third quarter of 2022, the yield on average interest-earning assets was 4.38%, the cost of funds on average interest-bearing liabilities was 0.78%, and the cost of interest-bearing deposits was 0.69%. In comparison, for the third quarter of 2021, the yield on average interest-earning assets was 3.56%, the cost of funds on average interest-bearing liabilities was 0.48%, and the cost of interest-bearing deposits was 0.44%. The increase in the yield on average interest-earning assets resulted mainly from higher interest rates. The net interest spread, defined as the difference between the yield on average interest-earning assets and the cost of funds on average interest-bearing liabilities, was 3.60% for the quarter ended September 30, 2022 compared to 3.08% for the same quarter a year ago.

 

 

The following table sets forth information concerning average interest-earning assets, average interest-bearing liabilities, and the average yields and rates paid on those assets and liabilities for the three months ended September 30, 2022, and 2021. Average outstanding amounts included in the table are daily averages.

 

 

   

Interest-Earning Assets and Interest-Bearing Liabilities

 
   

Three months ended September 30,

 
   

2022

   

2021

 
           

Interest

   

Average

           

Interest

   

Average

 
   

Average

   

Income/

   

Yield/

   

Average

   

Income/

   

Yield/

 
   

Balance

   

Expense

   

Rate (1)(2)

   

Balance

   

Expense

   

Rate (1)(2)

 
   

(In thousands)

 

Interest-earning assets:

                                               

Total loans (1)

  $ 17,923,495     $ 211,541       4.68 %   $ 15,798,496     $ 163,948       4.12 %

Investment securities

    1,364,013       7,483       2.18       1,058,004       3,707       1.39  

Federal Home Loan Bank stock

    18,756       258       5.46       17,250       258       5.93  

Deposits with banks

    1,178,261       6,732       2.27       1,893,785       714       0.15  

Total interest-earning assets

    20,484,525       226,014       4.38       18,767,535       168,627       3.56  

Non-interest earning assets:

                                               

Cash and due from banks

    174,298                       155,604                  

Other non-earning assets

    1,156,141                       1,027,921                  

Total non-interest earning assets

    1,330,439                       1,183,525                  

Less: Allowance for loan losses

    (150,064 )                     (131,316 )                

Deferred loan fees

    (6,040 )                     (7,302 )                

Total assets

  $ 21,658,860                     $ 19,812,442                  
                                                 

Interest-bearing liabilities:

                                               

Interest-bearing demand accounts

  $ 2,508,526     $ 1,913       0.30 %   $ 2,109,632     $ 525       0.10 %

Money market accounts

    5,153,566       11,740       0.90       4,228,025       4,554       0.43  

Savings accounts

    1,151,126       218       0.07       914,540       164       0.07  

Time deposits

    5,013,213       10,218       0.81       5,882,576       9,299       0.63  

Total interest-bearing deposits

    13,826,431       24,089       0.69       13,134,773       14,542       0.44  
                                                 

Other borrowings

    498,234       2,941       2.34       43,246       146       1.34  

Long-term debt

    119,136       1,455       4.85       119,136       1,455       4.84  

Total interest-bearing liabilities

    14,443,801       28,485       0.78       13,297,155       16,143       0.48  
                                                 

Non-interest bearing liabilities:

                                               

Demand deposits

    4,456,214                       3,830,485                  

Other liabilities

    293,653                       211,636                  

Total equity

    2,465,192                       2,473,166                  

Total liabilities and equity

  $ 21,658,860                     $ 19,812,442                  
                                                 

Net interest spread

                    3.60 %                     3.08 %

Net interest income

          $ 197,529                     $ 152,484          

Net interest margin

                    3.83 %                     3.22 %

 

(1) Yields and amounts of interest earned include loan fees. Non-accrual loans are included in the average balance.

(2) Calculated by dividing net interest income by average outstanding interest-earning assets.

 

 

The following table summarizes the changes in interest income and interest expense attributable to changes in volume and changes in interest rates for the three months ended September 30, 2022 and 2021:

 

Taxable-Equivalent Net Interest Income — Changes Due to Volume and Rate(1)
    Three months ended September 30,  
    2022-2021  
    Increase/(Decrease) in  
    Net Interest Income Due to:  
   

Changes in

Volume

   

Changes in

Rate

   

Total

Change

 
   

(In thousands)

 

Interest-earning assets:

                       

Loans

  $ 23,551     $ 24,042     $ 47,593  

Investment securities

    1,277       2,499       3,776  

Federal Home Loan Bank stock

    21       (21 )      

Deposits with other banks

    (365 )     6,383       6,018  

Total changes in interest income

    24,484       32,903       57,387  
                         

Interest-bearing liabilities:

                       

Interest-bearing demand accounts

    116       1,274       1,390  

Money market accounts

    1,179       6,006       7,185  

Savings accounts

    44       9       53  

Time deposits

    (1,494 )     2,413       919  

Other borrowed funds

    2,608       187       2,795  

Total changes in interest expense

    2,453       9,889       12,342  

Changes in net interest income

  $ 22,031     $ 23,014     $ 45,045  
                         

 

(1) Changes in interest income and interest expense attributable to changes in both volume and rate have been   allocated proportionately to changes due to volume and changes due to rate.

                 

 

 

Provision/(reversal) for credit losses

 

As permitted under the Coronavirus, Aid, Relief and Economic Security Act (the “CARES Act”) and as extended by the Consolidated Appropriations Act, 2021, the Company adopted the Current Expected Credit Losses (“CECL”) methodology for estimated credit losses effective as of January 1, 2021. The Company recorded a provision for credit losses of $2.0 million in the third quarter of 2022 compared to a provision for credit losses of $2.5 million in the second quarter of 2022 and a provision for credit losses of $3.1 million in the third quarter of 2021. In 2022, the third quarter provision for credit losses were primarily driven by the growth in loans during the period. As of September 30, 2022, the allowance for loan losses increased by $12.7 million to $148.8 million, or 0.82% of gross loans, compared to $136.2 million, or 0.83% of gross loans, as of December 31, 2021. The change in the allowance for loan losses during the third quarter of 2022 consisted of a $602 thousand provision for loan losses, and $557 thousand in net charge-offs. The Company will continue to monitor the continuing impact of the COVID-19 pandemic on credit risks and losses, as well as on customer deposits and other liabilities and assets.

 

 

The following table sets forth the charge-offs and recoveries for the periods indicated:

 

   

Three months ended September 30,

   

Nine months ended September 30,

 
   

2022

   

2021

   

2022

   

2021

 
   

(In thousands)

 

Charge-offs:

                               

Commercial loans

  $ 2,091     $ 2,649     $ 2,362     $ 19,499  

Real estate loans (1)

    137       3       138       3  

Total charge-offs

    2,228       2,652       2,500       19,502  

Recoveries:

                               

Commercial loans

    1,576       121       2,109       1,545  

Real estate loans (1)

    95       76       336       76  

Real estate Construction loans

          144       6       558  

Total recoveries

    1,671       341       2,451       2,179  

Net charge-offs/(recoveries)

  $ 557     $ 2,311     $ 49     $ 17,323  

 

(1) Real estate loans include commercial mortgage loans, residential mortgage loans, equity lines and Installment & other.

   

 

 

Non-Interest Income

 

Non-interest income, which includes revenues from depository service fees, letters of credit commissions, securities gains (losses), wire transfer fees, and other sources of fee income, was $9.9 million for the third quarter of 2022, a decrease of $2.3 million, or 18.9%, compared to $12.2 million for the third quarter of 2021. The decrease was primarily due to an increase of $3.7 million in unrealized losses on equity securities, when compared to the same quarter a year ago.

 

Non-Interest Expense

 

Non-interest expense increased $3.2 million, or 4.4%, to $75.4 million in the third quarter of 2022 compared to $72.2 million in the same quarter a year ago. The increase in non-interest expense in the third quarter of 2022 was primarily due to an increase of $1.2 million in salaries and employee benefits, and an increase of $1.1 million in marketing expense, when compared to the same quarter a year ago. The efficiency ratio was 36.4% in the third quarter of 2022 compared to 43.9% for the same quarter a year ago.

 

Income Taxes

 

The effective tax rate for the third quarter of 2022 was 23.8% compared to 19.1% for the third quarter of 2021. The effective tax rate includes the impact of alternative energy investments and low-income housing tax credits.

 

Year-to-Date Statement of Operations Review

 

Net income for the nine months ended September 30, 2022, was $263.0 million, an increase of $40.1 million, or 18.0%, compared to net income of $223.0 million for the same period a year ago. Diluted earnings per share was $3.52 compared to $2.82 per share for the same period a year ago. The net interest margin for the nine months ended September 30, 2022, was 3.54% compared to 3.22% for the same period a year ago.

 

Return on average stockholders’ equity was 14.35% and return on average assets was 1.66% for the nine months ended September 30, 2022, compared to a return on average stockholders’ equity of 12.11% and a return on average assets of 1.54% for the same period a year ago. The efficiency ratio for the nine months ended September 30, 2022, was 38.54% compared to 44.71% for the same period a year ago.

 

 

The following table sets forth information concerning average interest-earning assets, average interest-bearing liabilities, and the average yields and rates paid on those assets and liabilities for the nine months ended September 30, 2022, and 2021. Average outstanding amounts included in the table are daily averages.

 

   

Interest-Earning Assets and Interest-Bearing Liabilities

 
   

Nine months ended September 30,

 
   

2022

   

2021

 
           

Interest

   

Average

           

Interest

   

Average

 
   

Average

   

Income/

   

Yield/

   

Average

   

Income/

   

Yield/

 
   

Balance

   

Expense

   

Rate (1)(2)

   

Balance

   

Expense

   

Rate (1)(2)

 
   

(In thousands)

 

Interest-earning assets:

                                               

Total loans (1)

  $ 17,468,247     $ 558,657       4.28 %   $ 15,725,324     $ 485,162       4.12 %

Investment securities

    1,263,341       18,059       1.91       1,010,328       9,963       1.32  

Federal Home Loan Bank stock

    17,757       774       5.83       17,250       730       5.66  

Interest-bearing deposits

    1,332,491       10,003       1.00       1,605,851       1,467       0.12  

Total interest-earning assets

    20,081,836       587,493       3.91       18,358,753       497,322       3.62  

Non-interest earning assets:

                                               

Cash and due from banks

    169,394                       153,790                  

Other non-earning assets

    1,102,206                       1,034,752                  

Total non-interest earning assets

    1,271,600                       1,188,542                  

Less: Allowance for loan losses

    (144,284 )                     (146,640 )                

Deferred loan fees

    (5,234 )                     (6,224 )                

Total assets

  $ 21,203,918                     $ 19,394,431                  
                                                 

Interest-bearing liabilities:

                                               

Interest-bearing demand accounts

  $ 2,456,556     $ 3,206       0.17 %   $ 1,989,833     $ 1,819       0.12 %

Money market accounts

    5,088,227       22,078       0.58       3,913,073       13,893       0.47  

Savings accounts

    1,137,485       610       0.07       885,863       590       0.09  

Time deposits

    5,060,286       22,002       0.58       6,105,604       33,362       0.73  

Total interest-bearing deposits

    13,742,554       47,896       0.47       12,894,373       49,664       0.51  
                                                 

Other borrowings

    209,679       3,396       2.17       86,410       1,037       1.60  

Long-term debt

    119,136       4,318       4.85       119,136       4,318       4.85  

Total interest-bearing liabilities

    14,071,369       55,610       0.53       13,099,919       55,019       0.56  
                                                 

Non-interest bearing liabilities:

                                               

Demand deposits

    4,403,195                       3,613,026                  

Other liabilities

    278,704                       219,591                  

Total equity

    2,450,650                       2,461,895                  

Total liabilities and equity

  $ 21,203,918                     $ 19,394,431                  
                                                 

Net interest spread

                    3.38 %                     3.06 %

Net interest income

          $ 531,883                     $ 442,303          

Net interest margin

                    3.54 %                     3.22 %
                                                 

 

(1) Yields and amounts of interest earned include loan fees. Non-accrual loans are included in the average balance.

 

(2) Calculated by dividing net interest income by average outstanding interest-earning assets.

 

 

 

The following table summarizes the changes in interest income and interest expense attributable to changes in volume and changes in interest rates for the nine months ended September 30, 2022 and 2021:

 

 

Taxable-Equivalent Net Interest Income — Changes Due to Volume and Rate(1)
    Nine months ended September 30,  
    2022-2021  
    Increase/(Decrease) in  
    Net Interest Income Due to:  
   

Changes in

Volume

   

Changes in

Rate

   

Total

Change

 
   

(In thousands)

 

Interest-earning assets:

                       

Loans

  $ 55,251     $ 18,244     $ 73,495  

Investment securities

    2,896       5,200       8,096  

Federal Home Loan Bank stock

    22       22       44  

Deposits with other banks

    (293 )     8,829       8,536  

Total changes in interest income

    57,876       32,295       90,171  
                         

Interest-bearing liabilities:

                       

Interest-bearing demand accounts

    491       894       1,385  

Money market accounts

    4,705       3,481       8,186  

Savings accounts

    149       (128 )     21  

Time deposits

    (5,180 )     (6,181 )     (11,361 )

Other borrowed funds

    1,890       470       2,360  

Total changes in interest expense

    2,055       (1,464 )     591  

Changes in net interest income

  $ 55,821     $ 33,759     $ 89,580  

 

(1) Changes in interest income and interest expense attributable to changes in both volume and rate have been allocated proportionately to changes due to volume and changes due to rate.

 

Balance Sheet Review

 

Assets

 

Total assets were $21.9 billion as of September 30, 2022 an increase of $1.0 billion or 4.8% from $20.9 billion as of December 31, 2021.

 

Securities Available-for-Sale

 

Effective January 1, 2021, upon the adoption of ASU 2016-13, Financial Instruments - Credit Losses, debt securities available-for-sale are measured at fair value and subject to impairment testing. When an available-for-sale debt security is considered impaired, the Company must determine if the decline in fair value has resulted from a credit-related loss or other factors and then, (1) recognize an allowance for credit losses by a charge to earnings for the credit-related component (if any) of the decline in fair value, and (2) recognize in other comprehensive income (loss) any non-credit related components of the fair value change. If the amount of the amortized cost basis expected to be recovered increases in a future period, the valuation reserve would be reduced, but not more than the amount of the current existing reserve for that security.

 

 

For available-for-sale (“AFS”) debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value. For AFS debt securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors with the credit component of the unrealized loss of the impaired AFS debt security recognized as an allowance for credit losses, and a corresponding provision for credit losses on the consolidated statement of income.

 

In making this assessment, management considers the extent to which fair value is less than amortized cost, the payment structure of the security, failure of the issuer of the security to make scheduled interest or principal payments, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. Any fair value changes that have not been recorded through an allowance for credit losses is recognized in other comprehensive income.

 

Losses are charged against the allowance when management believes the uncollectability of an AFS debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met. Changes in the allowance for credit losses are recorded as provision for credit loss expense.

 

The amortized cost of the Company’s AFS debt securities exclude accrued interest, which is included in “accrued interest income” on the Consolidated Balance Sheets. The Company has made an accounting policy election not to measure an allowance for credit losses for accrued interest receivables on AFS debt securities since the Company timely reverses any previously accrued interest when the debt security remains in default for an extended period. As each AFS debt security has a unique security structure, where the accrual status is clearly determined when certain criteria listed in the terms are met, the Company assesses the default status of each security as defined by the debt security’s specific security structure. At September 30, 2022, no AFS debt securities were in default.

 

In the current period, management evaluated the securities in an unrealized loss position and determined that their unrealized losses were a result of the level of market interest rates relative to the types of securities and pricing changes caused by shifting supply and demand dynamics and not a result of downgraded credit ratings or other indicators of deterioration of the underlying issuers' ability to repay. Accordingly, we determined the unrealized losses were not credit-related and recognized the unrealized losses in "other comprehensive income" in stockholders' equity. Although we periodically sell securities for portfolio management purposes, we do not foresee having to sell any impaired securities strictly for liquidity needs and believe that it is more likely than not we would not be required to sell any impaired securities before recovery of their amortized cost.

 

Securities available-for-sale represented 6.5% of total assets as of September 30, 2022, compared to 5.4% of total assets as of December 31, 2021. Securities available-for-sale were $1.4 billion as of September 30, 2022, compared to $1.1 billion as of December 31, 2021.

 

 

The following tables set forth the amortized cost, gross unrealized gains, gross unrealized losses, and fair value of securities available-for-sale as of September 30, 2022, and December 31, 2021:

 

   

September 30, 2022

 
           

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

         
   

Cost

   

Gains

   

Losses

   

Fair Value

 
   

(In thousands)

 

Securities Available-for-Sale

                               

U.S. treasury securities

  $ 242,510     $     $ 1,110     $ 241,400  

U.S. government agency entities

    68,712       526       126       69,112  

Mortgage-backed securities

    1,001,832       58       140,402       861,488  

Collateralized mortgage obligations

    35,378             3,669       31,709  

Corporate debt securities

    228,879             18,177       210,702  

Total

  $ 1,577,311     $ 584     $ 163,484     $ 1,414,411  

 

   

December 31, 2021

 
           

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

         
   

Cost

   

Gains

   

Losses

   

Fair Value

 
   

(In thousands)

 

Securities Available-for-Sale

                               

U.S. government agency entities

  $ 86,475     $ 1,169     $ 135     $ 87,509  

Mortgage-backed securities

    886,614       9,465       7,414       888,665  

Collateralized mortgage obligations

    9,547             430       9,117  

Corporate debt securities

    144,231       441       2,654       142,018  

Total

  $ 1,126,867     $ 11,075     $ 10,633     $ 1,127,309  

 

 

For additional information, see Note 8 to the Company’s unaudited Consolidated Financial Statements.

 

Securities available-for-sale having a carrying value of $144.3 million as of September 30, 2022, and $30.5 million as of December 31, 2021, were pledged to secure public deposits and other borrowings.

 

 

Equity Securities

 

The Company recognized a net loss of $3.7 million for the three months ended September 30, 2022, due to the decrease in fair value of equity investments with readily determinable fair values compared to a net gain of $3 thousand for the three months ended September 30, 2021. The Company recognized a net gain of $1.3 million for the nine months ended September 30, 2022 due to the increase in fair value of equity investments with readily determinable fair values compared to a net loss of $3.6 million for the nine months ended September 30, 2021. Equity securities were $23.1 million and $22.3 million as of September 30, 2022, and December 31, 2021, respectively.

 

Loans

 

Gross loans were $18.1 billion at September 30, 2022, an increase of $1.8 billion, or 11.0%, from $16.3 billion at December 31, 2021. The increase was primarily due to increases of $385.0 million, or 12.9%, in commercial loans, an increase of $948.6 million, or 22.7% in residential mortgage loans, which included $568.5 million acquired from the acquisition of certain HSBC West Coast branches, and an increase of $534.5 million, or 6.6% in commercial mortgage loans, offset, in part, by a decrease of $69.0 million, or 16.5%, in home equity loans. For the third quarter of 2022, total loans, increased by $318.9 million or 7.8% annualized.

 

The loan balances and composition at September 30, 2022, compared to December 31, 2021, are set forth below:

 

 

   

September 30, 2022

   

% of

Gross

Loans

   

December 31, 2021

   

% of

Gross

Loans

   

%

Change

 
   

(in thousands)

 
                                         

Commercial loans

  $ 3,367,437       18.6 %   $ 2,982,399       18.2 %     12.9 %

Residential mortgage loans and equity lines

    5,481,098       30.3       4,601,493       28.2       19.1  

Commercial mortgage loans

    8,677,733       47.9       8,143,272       49.8       6.6  

Real estate construction loans

    573,421       3.2       611,031       3.8       (6.2 )

Installment and other loans

    7,114       0.0       4,284       0.0       66.1  

Gross loans

  $ 18,106,803       100 %   $ 16,342,479       100 %     10.8 %

Allowance for loan losses

    (148,817 )             (136,157 )             9.3  

Unamortized deferred loan fees

    (6,936 )             (4,321 )             60.5  

Total loans, net

  $ 17,951,050             $ 16,202,001               10.8 %

 

Non-performing Assets

 

Non-performing assets include loans past due 90 days or more and still accruing interest, non-accrual loans, and OREO. Our policy is to place loans on non-accrual status if interest and/or principal is past due 90 days or more, or in cases where management deems the full collection of principal and interest unlikely. After a loan is placed on non-accrual status, any previously accrued but unpaid interest is reversed and charged against current income and subsequent payments received are generally first applied towards the outstanding principal balance of the loan. Depending on the circumstances, management may elect to continue the accrual of interest on certain past due loans if partial payment is received and/or the loan is well collateralized and in the process of collection. The loan is generally returned to accrual status when the borrower has brought the past due principal and interest payments current and, in the opinion of management, the borrower has demonstrated the ability to make future payments of principal and interest as scheduled.

 

Management reviews the loan portfolio regularly to seek to identify problem loans. During the ordinary course of business, management may become aware of borrowers that may not be able to meet the contractual requirements of their loan agreements. Such loans generally are placed under closer supervision with consideration given to placing the loans on non-accrual status, the need for an additional allowance for loan losses, and (if appropriate) partial or full charge-off.

 

 

The ratio of non-performing assets to total assets was 0.3% as of September 30, 2022, compared to 0.3% as of December 31, 2021. Total non-performing assets increased $3.7 million, or 5.2%, to $75.4 million at September 30, 2022, compared to $71.7 million at December 31, 2021, primarily due to an increase of $2.3 million, or 3.5%, in non-accrual loans, and an increase of $1.7 million, or 120.4% in accruing loans past due 90 days or more, offset in part, by decrease of $301 thousand, or 6.9%, in other real estate owned.

 

As a percentage of gross loans, excluding loans held for sale, plus OREO, our non-performing assets were 0.42% as of September 30, 2022, compared to 0.44% as of December 31, 2021. The non-performing loan portfolio coverage ratio, defined as the allowance for credit losses to non-performing loans, increased to 219.3% as of September 30, 2022, from 212.9% as of December 31, 2021.

 

The following table sets forth the changes in non-performing assets and TDRs as of September 30, 2022, compared to December 31, 2021, and to September 30, 2021:

 

   

September 30, 2022

   

December 31, 2021

   

% Change

   

September 30, 2021

   

% Change

 
   

(in thousands)

 

Non-performing assets

                                       

Accruing loans past due 90 days or more

  $ 3,172     $ 1,439       120     $ 4,333       (27 )

Non-accrual loans:

                                       

Construction loans

                -       5,491       (100 )

Commercial mortgage loans

    26,911       38,173       (30 )     36,968       (27 )

Commercial loans

    26,604       16,558       61       17,098       56  

Residential mortgage loans

    14,601       11,115       31       9,125       60  

Installment and other loans

    9             -             -  

Total non-accrual loans

  $ 68,125     $ 65,846       3     $ 68,682       (1 )

Total non-performing loans

    71,297       67,285       6       73,015       (2 )

Other real estate owned

    4,067       4,368       (7 )     5,251       (23 )

Total non-performing assets

  $ 75,364     $ 71,653       5     $ 78,266       (4 )

Accruing troubled debt restructurings (TDRs)

  $ 15,208     $ 12,837       18     $ 24,406       (38 )
                                         

Allowance for loan losses

  $ 148,817     $ 136,157       9     $ 131,945       13  
                                         

Total gross loans outstanding, at period-end

  $ 18,106,803     $ 16,342,479       11     $ 15,976,781       13  
                                         

Allowance for loan losses to non-performing loans, at period-end

    208.73 %     202.36 %             180.71 %        

Allowance for loan losses to gross loans, at period-end

    0.82 %     0.83 %             0.83 %        

 

 

Non-accrual Loans

 

As of September 30, 2022, total non-accrual loans were $68.1 million, a decrease of $2.3 million, or 3.5%, from $65.8 million at December 31, 2021, and a decrease of $557 thousand, or 0.8%, from $68.7 million at September 30, 2021. The allowance for the collateral-dependent loans is calculated based on the difference between the outstanding loan balance and the value of the collateral as determined by recent appraisals, sales contracts, or other available market price information, less cost 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 non-performing. We continue to monitor the collateral coverage of these loans, based on recent appraisals, on a quarterly basis and adjust the allowance accordingly.

 

 

The following tables set forth the type of properties securing the non-accrual portfolio loans and the type of businesses the borrowers engaged in as of the dates indicated:

 

   

September 30, 2022

   

December 31, 2021

 
   

Real

                   

Real

         
   

Estate (1)

   

Commercial

   

Other

   

Estate (1)

   

Commercial

 
   

(In thousands)

 

Type of Collateral

                                       

Single/multi-family residence

  $ 15,893     $ 2,019     $     $ 12,456     $ 7,697  

Commercial real estate

    25,619       151             36,832       338  

Land

          2,584                   2,744  

Personal property (UCC)

          21,850       9             5,779  

Total

  $ 41,512     $ 26,604     $ 9     $ 49,288     $ 16,558  

 

(1) Real estate includes commercial mortgage loans, real estate construction loans, residential mortgage loans and equity lines.

 

   

September 30, 2022

   

December 31, 2021

 
   

Real

                   

Real

         
   

Estate (1)

   

Commercial

   

Other

   

Estate (1)

   

Commercial

 
   

(In thousands)

 

Type of Business

                                       

Real estate development

  $ 25,020     $     $     $ 13,775     $  

Wholesale/Retail

    2,069       12,569             24,600       12,468  

Food/Restaurant

    90                          

Import/Export

          13,803                   3,190  

Other

    14,332       232       9       10,913       900  

Total

  $ 41,511     $ 26,604     $ 9     $ 49,288     $ 16,558  

 

(1) Real estate includes commercial mortgage loans, real estate construction loans, residential mortgage loans and equity lines.

 

 

As of September 30, 2022, recorded investment in non-accrual loans was $68.1 million. As of December 31, 2021, recorded investment in non-accrual loans totaled $65.8 million. For non-accrual loans, the amounts previously charged off represent 12.2% of the contractual balances for non-accrual loans as of September 30, 2022 and 10.7% as of December 31, 2021. As of September 30, 2022, $41.5 million, or 60.9%, of the $68.1 million of non-accrual loans were secured by real estate compared to $49.3 million, or 74.9%, of the $65.8 million of non-accrual loans that were secured by real estate as of December 31, 2021. The Bank generally seeks to obtain current appraisals, sales contracts, or other available market price information intended to provide updated factors in evaluating potential loss.

 

As of September 30, 2022, $6.2 million of the $148.8 million allowance for loan losses was allocated for non-accrual loans and $142.6 million was allocated to the general allowance.

 

The allowance for loan losses to non-performing loans was 208.7% as of September 30, 2022, compared to 202.4% as of December 31, 2021, primarily due to an increase in the non-accrual loans. Non-accrual loans also include those TDRs that do not qualify for accrual status.

 

 

The following table presents non-accrual loans and the related allowance as of September 30, 2022 and December 31, 2021:

 

   

September 30, 2022

 
   

Unpaid

Principal

Balance

   

Recorded

Investment

   

Allowance

 
   

(In thousands)

 
                         

With no allocated allowance

                       

Commercial loans

  $ 10,171     $ 6,887     $  

Commercial mortgage loans

    14,148       10,956        

Residential mortgage loans and equity lines

    5,582       5,407        

Installment and other loans

    10       9        

Subtotal

  $ 29,911     $ 23,259     $  
                         

With allocated allowance

                       

Commercial loans

  $ 32,426     $ 19,717     $ 4,013  

Commercial mortgage loans

    16,002       15,955       2,146  

Residential mortgage loans and equity lines

    9,951       9,194       39  

Subtotal

  $ 58,379     $ 44,866     $ 6,198  

Total non-accrual loans

  $ 88,290     $ 68,125     $ 6,198  

 

   

December 31, 2021

 
   

Unpaid

Principal

Balance

   

Recorded

Investment

   

Allowance

 
   

(In thousands)

 
                         

With no allocated allowance

                       

Commercial loans

  $ 15,879     $ 11,342     $  

Commercial mortgage loans

    24,437       21,209        

Residential mortgage loans and equity lines

    6,020       5,850        

Subtotal

  $ 46,336     $ 38,401     $  
                         

With allocated allowance

                       

Commercial loans

  $ 14,294     $ 5,217     $ 894  

Commercial mortgage loans

    17,930       16,964       3,631  

Residential mortgage loans and equity lines

    6,048       5,264       22  

Subtotal

  $ 38,272     $ 27,445     $ 4,547  

Total non-accrual loans

  $ 84,608     $ 65,846     $ 4,547  

 

 

Loan Interest Reserves

 

In accordance with customary banking practice, construction loans and land development loans generally are originated where interest on the loan is disbursed from pre-established interest reserves included in the total original loan commitment. Our construction loans and land development loans generally include optional renewal terms after the maturity of the initial loan term. New appraisals are obtained prior to extension or renewal of these loans in part to determine the appropriate interest reserve to be established for the new loan term. Loans with interest reserves are generally underwritten to the same criteria, including loan to value and, if applicable, pro forma debt service coverage ratios, as loans without interest reserves. Construction loans with interest reserves are monitored on a periodic basis to gauge progress towards completion. Interest reserves are frozen if it is determined that additional draws would result in a loan to value ratio that exceeds policy maximums based on collateral property type. Our policy limits in this regard are consistent with supervisory limits and range from 50% in the case of land to 85% in the case of one to four family residential construction projects.

 

As of September 30, 2022, construction loans of $400.1 million were disbursed with pre-established interest reserves of $58.0 million, compared to $520.5 million with pre-established interest reserves of $51.1 million at December 31, 2021.  The balance for construction loans with interest reserves that have been extended was $33.1 million with pre-established interest reserves of $0.4 million at September 30, 2022, compared to $20.4 million with pre-established interest reserves of $0.4 million at December 31, 2021.  Land loans of $43.5 million were disbursed with pre-established interest reserves of $1.0 million at September 30, 2022, compared to $46.2 million of land loans disbursed with pre-established interest reserves of $0.6 million at December 31, 2021.  At September 30, 2022 and December 31, 2021, the balance for land loans with interest reserves that have been extended was $0.9 million with pre-established interest reserves of $58 thousand.  

 

At September 30, 2022 and December 31, 2021, the Bank had no loans on non-accrual status with available interest reserves.  At September 30, 2022 and December 31, 2021, there were zero non-accrual non-residential construction loans, residential construction loans, and land loans that were originated with pre-established interest reserves.  While we typically expect loans with interest reserves to be repaid in full according to the original contractual terms, some loans may require one or more extensions beyond the original maturity before full repayment.  Typically, these extensions are required due to construction delays, delays in the sale or lease of the property, or some combination of these two factors.

 

Loan Concentration

 

Most of the Company’s business activities are with customers located in the high-density Asian-populated areas of Southern and Northern California; New York City, New York; Dallas and Houston, Texas; Seattle, Washington; Boston, Massachusetts; Chicago, Illinois; Edison, New Jersey; Rockville, Maryland; and Las Vegas, Nevada. The Company also has loan customers in Hong Kong. The Company has no specific industry concentration, and generally our loans are collateralized with real property or other pledged collateral of the borrowers. The Company generally expects loans to be paid off from the operating profits of the borrowers, refinancing by another lender, or through sale by the borrowers of the collateral. There were no loan concentrations to multiple borrowers in similar activities that exceeded 10% of total loans as of September 30, 2022, or as of December 31, 2021.

 

 

The federal banking regulatory agencies issued final guidance on December 6, 2006, regarding risk management practices for financial institutions with high or increasing concentrations of commercial real estate (“CRE”) loans on their balance sheets. The regulatory guidance reiterates the need for sound internal risk management practices for those institutions that have experienced rapid growth in CRE lending, have notable exposure to specific types of CRE, or are approaching or exceeding the supervisory criteria used to evaluate the CRE concentration risk, but the guidance is not to be construed as a limit for CRE exposure. The supervisory criteria are: (1) total reported loans for construction, land development, and other land represent 100% of the institution’s total risk-based capital, and (2) both total CRE loans represent 300% or more of the institution’s total risk-based capital and the institution’s CRE loan portfolio has increased 50% or more within the last thirty-six months. The Bank’s loans for construction, land development, and other land represented 29.0% of the Bank’s total risk-based capital as of September 30, 2022, and December 31, 2021. Total CRE loans represented 289.9% of total risk-based capital as of September 30, 2022, and 284.7% as of December 31, 2021 which were within the Bank’s internal limit of 400%, of total capital.

 

Allowance for Credit Losses

 

The Bank maintains the allowance for credit losses at a level that the Bank’s management considers appropriate to cover the estimated and known risks in the loan portfolio and off-balance sheet unfunded credit commitments. Allowance for credit losses is comprised of the allowance for loan losses and for off-balance sheet unfunded credit commitments. With this risk management objective, the Bank’s management has an established monitoring system that is designed to identify individually evaluated and potential problem loans, and to permit periodic evaluation of impairment and the appropriate level of the allowance for credit losses in a timely manner.

 

In addition, the Company’s Board of Directors has established a written credit policy that includes a credit review and control system that it believes should be effective in ensuring that the Bank maintains an appropriate allowance for credit losses. The Board of Directors provides oversight for the allowance evaluation process, including quarterly evaluations, and determines whether the allowance is appropriate to absorb losses in the credit portfolio. The determination of the amount of the allowance for credit losses and the provision for credit losses are based on management’s current judgment about the credit quality of the loan portfolio and take into consideration known relevant internal and external factors that affect collectability when determining the appropriate level for the allowance for credit losses. The nature of the process by which the Bank determines the appropriate allowance for credit losses requires the exercise of considerable judgment. Additions or reductions to the allowance for credit losses are made by charges or credits to the provision for credit losses. While management utilizes its business judgment based on the information available, the ultimate appropriateness of the allowance is dependent upon a variety of factors, many of which are beyond the Bank’s control, including but not limited to the performance of the Bank’s loan portfolio, the economy and market conditions, changes in interest rates, and the view of the regulatory authorities toward loan classifications. Identified credit exposures that are determined to be uncollectible are charged against the allowance for credit losses. Recoveries of previously charged off amounts, if any, are credited to the allowance for credit losses. A weakening of the economy or other factors that adversely affect asset quality could result in an increase in the number of delinquencies, bankruptcies, or defaults, and a higher level of non-performing assets, net charge-offs, and provision for credit losses.

 

The allowance for loan losses was $148.8 million and the allowance for off-balance sheet unfunded credit commitments was $7.5 million at September 30, 2022, which represented the amount believed by management to be appropriate to absorb credit losses inherent in the loan portfolio, including unfunded credit commitments. The allowance for credit losses represented 0.86% of period-end gross loans and 219.3% of non-performing loans at September 30, 2022. The comparable ratios were 0.88% of period-end gross loans and 212.9% of non-performing loans at December 31, 2021.

 

 

Critical Accounting Policies and Estimates

 

Our accounting policies are fundamental to understanding management’s discussion and analysis of results of operations and financial condition. We identify critical policies and estimates as those that require management to make particularly difficult, subjective, and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. We have identified the policy and estimates related to the allowance for credit losses on loans as a critical accounting policy.

 

Our critical accounting policies and estimates are described in Item 7 - Managements Discussion and Analysis of Financial Condition and Results of Operations included in the 2021 Form 10-K. For more information, please also see Note 3 to the Company’s unaudited Consolidated Financial Statements.

 

Expected Credit Losses Estimate for Loans

 

The allowance for credit losses on loans held for investment is the combination of the allowance for loan losses and the reserve for unfunded loan commitments. The allowance for loan losses is reported as a reduction of the amortized cost basis of loans, while the reserve for unfunded loan commitments is included within "Other liabilities" on the Consolidated Balance Sheets. The amortized cost basis of loans does not include interest receivable, which is included in "Other assets" on the Consolidated Balance Sheets. The "Provision for credit losses" on the Consolidated Statement of Operations and Comprehensive Income is a combination of the provision for loan losses and the provision for unfunded loan commitments.

 

Under the CECL methodology, expected credit losses reflect losses over the remaining contractual life of an asset, considering the effect of prepayments and available information about the collectability of cash flows, including information about relevant historical experience, current conditions, and reasonable and supportable forecasts of future events and circumstances. Thus, the CECL methodology incorporates a broad range of information in developing credit loss estimates. For further information regarding the calculation of the allowance for credit losses on loans held for investment using the CECL methodology, see Note 9 to the unaudited Consolidated Financial Statements contained in "Item 1. Consolidated Financial Statements."

 

In calculating our allowance for credit losses in the third quarter of 2022, management included an additional reserve adjustment to reflect the time gap between the preparation of the September 2022 Moody’s forecast of future GDP, unemployment rates, CRE and home price indexes and the higher likelihood of an economic slowdown resulting for the impact of higher interest rates. Our methodology and framework along with the 8-quarter reasonable and supportable forecast period and the 4-quarter reversion period have remained consistent since the implementation of CECL on January 1, 2021. Certain management assumptions are reassessed every quarter based on current expectations for credit losses, while other assumptions are assessed and updated on at least an annual basis.

 

The use of different economic forecasts, whether based on different scenarios, the use of multiple or single scenarios, or updated economic forecasts and scenarios, can change the outcome of the calculations. In addition to the economic forecasts, there are numerous components and assumptions that are integral to the overall estimation of allowance for credit losses.

 

The determination of the allowance for credit losses is complex and dependent on numerous models, assumptions, and judgments made by management. Management's current expectation for credit losses as quantified in the allowance for credit losses, considers the impact of assumptions and is reflective of historical credit experience, economic forecasts viewed to be reasonable and supportable, current loan composition, and relative credit risks known as of the balance sheet date.

 

 

The Company’s CECL methodology utilizes an eight-quarter reasonable and supportable (“R&S”) forecast period, and a four-quarter reversion period. Management relies on multiple forecasts, blending them into a single loss estimate. Generally speaking, the blended scenario approach would include the Baseline, the Alternative Scenario 1 – Upside – 10th Percentile and the Alternative Scenario 3 – Downside – 90th Percentile forecasts. After the R&S period, the Company will revert straight-line for the four-quarter reversion period to the long-term loss rates for each of the six portfolios of loans. The contractual term excludes renewals and modifications but includes pre-approved extensions and prepayment assumptions where applicable.

 

Our allowance for credit losses is sensitive to a number of inputs, including macroeconomic forecast assumptions and credit rating migrations during the period. Our macroeconomic forecasts used in determining the September 30, 2022, allowance for credit losses consisted of three scenarios. The baseline scenario reflects ongoing GDP growth and falling unemployment in 2022, generally in line with market expectations, and consistent with waning COVID transmission and improved supply chains. The upside scenario reflects a faster recovery in consumer spending and stronger productivity growth in 2022 relative to the baseline scenario. The downside scenario contemplates a short recession due to the Russian invasion of Ukraine worsens significantly, worsening supply-chain disruptions, resurgent COVID infections that results in negative GDP growth, and rising unemployment beginning in the third quarter of 2022. We placed the most weight on our baseline scenario, with the remaining weighting split equally between the upside and downside scenarios.

 

Keeping all other factors constant, we estimate that if we had applied 100% weighting to the downside scenario, the allowance for credit losses as of September 30, 2022, would have been approximately $40.8 million higher. This estimate is intended to reflect the sensitivity of the allowance for credit losses to changes in our scenario weights and is not intended to be indicative of future changes in the allowance for credit losses.

 

Management believes the allowance for credit losses is appropriate for the current expected credit losses in our loan portfolio and associated unfunded commitments, and the credit risk ratings and inherent loss rates currently assigned are reasonable and appropriate as of the reporting date. It is possible that others, given the same information, may at any point in time reach different conclusions that could result in a significant impact to the Company's financial statements.

 

 

The following table sets forth information relating to the allowance for loan losses, charge-offs, recoveries, and the reserve for off-balance sheet credit commitments for the periods indicated:

 

   

Three months ended September 30,

   

Nine months ended September 30,

 
   

2022

   

2021

   

2022

   

2021

 
   

(In thousands)

 

Allowance for loan losses

                               

Balance at beginning of period

  $ 148,772     $ 131,256     $ 136,157     $ 166,538  

Impact of ASU 2016-13 adoption

                      (1,560 )

Adjusted beginning balance

  $ 148,772     $ 131,256     $ 136,157     $ 164,978  

Provision/(Reversal) for credit losses

    602       3,000       12,709       (15,710 )

Charge-offs:

                               

Commercial loans

    (2,091 )     (2,649 )     (2,362 )     (19,499 )

Real estate loans

    (137 )     (3 )     (138 )     (3 )

Total charge-offs

    (2,228 )     (2,652 )     (2,500 )     (19,502 )

Recoveries:

                               

Commercial loans

    1,576       121       2,109       1,545  

Construction loans

          76       6       76  

Real estate loans

    95       144       336       558  

Total recoveries

    1,671       341       2,451       2,179  

Balance at the end of period

  $ 148,817     $ 131,945     $ 148,817     $ 131,945  
                                 

Reserve for off-balance sheet credit commitments

                               

Balance at beginning of period

  $ 6,136     $ 8,050     $ 7,100     $ 5,880  

Impact of ASU 2016-13 adoption

                      6,018  

Adjusted beginning balance

    6,136       8,050       7,100       11,898  

Reversal for credit losses

    1,398       50       434       (3,798 )

Balance at the end of period

  $ 7,534     $ 8,100     $ 7,534     $ 8,100  
                                 

Average loans outstanding during the period

  $ 17,923,495     $ 15,798,496     $ 17,468,247     $ 15,725,324  

Total gross loans outstanding, at period-end

  $ 18,106,803     $ 15,976,781     $ 18,106,803     $ 15,976,781  

Total non-performing loans, at period-end

  $ 71,297     $ 73,015     $ 71,297     $ 73,015  

Ratio of net (recoveries)/charge-offs to average loans outstanding during the period

    0.01 %     0.06 %     0.00 %     0.15 %

Provision for credit losses to average loans outstanding during the period

    0.04 %     0.08 %     0.10 %     (0.17% )

Allowance for credit losses to non-performing loans, at period-end

    219.30 %     191.80 %     219.30 %     191.80 %

Allowance for credit losses to gross loans, at period-end

    0.86 %     0.88 %     0.86 %     0.88 %

 

 

The table set forth below reflects management’s allocation of the allowance for loan losses by loan category and the ratio of each loan category to the average gross loans as of the dates indicated:

 

   

September 30, 2022

   

December 31, 2021

 
           

Percentage of

           

Percentage of

 
           

Loans in Each

           

Loans in Each

 
           

Category

           

Category

 
           

to Average

           

to Average

 
   

Amount

   

Gross Loans

   

Amount

   

Gross Loans

 
   

(In thousands)

 

Type of Loan:

                               

Commercial loans

  $ 50,399       18.2 %   $ 43,394       18.4 %

Real estate construction loans

    6,211       3.5       6,302       4.2  

Commercial mortgage loans

    70,050       48.3       61,081       48.7  

Residential mortgage loans and equity lines

    22,029       30.0       25,379       28.7  

Installment and other loans

    128       0.0       1        

Total loans

  $ 148,817       100 %   $ 136,157       100 %

 

 

The allowance allocated to commercial loans increased $7.0 million, or 16.1%, to $50.4 million at September 30, 2022, from $43.4 million at December 31, 2021. The increase is due primarily to an increase in allocated allowance for non-accrual commercial loans.

 

The allowance allocated to real estate construction loans decreased $91 thousand, or 1.4%, to $6.2 million at September 30, 2022, from $6.3 million at December 31, 2021. The decrease is due primarily to a decrease in loan volume.

 

The allowance allocated to commercial mortgage loans increased $9.0 million, or 14.7%, to $70.1 million at September 30, 2022, from $61.1 million at December 31, 2021. The increase is due primarily to an increase in commercial mortgage loans and an increase in the expected life for multifamily loans as a result of our annual CECL recalibration.

 

The allowance allocated for residential mortgage loans and equity lines decreased by $3.4 million, or 13.2%, to $22.0 million as of September 30, 2022, from $25.4 million at December 31, 2021. The decrease is due primarily to a decrease in the expected life for residential mortgages as a result of our annual CECL recalibration.

 

Deposits

 

Total deposits were $18.6 billion as September 30, 2022, an increase of $516.9 million, or 2.9%, from $18.1 billion as December 31, 2021. During the third quarter of 2022, our deposits increased by $288.4 million, or 6.4% annualized.

 

 

The following table sets forth the deposit mix as of the dates indicated:

 

   

September 30, 2022

   

December 31, 2021

 
   

Amount

   

Percentage

   

Amount

   

Percentage

 

Deposits

 

(In thousands)

 

Non-interest-bearing demand deposits

  $ 4,398,152       23.7 %   $ 4,492,054       24.9 %

NOW deposits

    2,570,036       13.8       2,522,442       14.0  

Money market deposits

    4,935,266       26.6       4,611,579       25.5  

Savings deposits

    1,128,823       6.1       915,515       5.1  

Time deposits

    5,543,474       29.8       5,517,252       30.5  

Total deposits

  $ 18,575,751       100.0 %   $ 18,058,842       100.0 %

 

 

The following table sets forth the maturity distribution of time deposits at September 30, 2022:

 

   

At September 30, 2022

 
   

Time Deposits -

under $100,000

   

Time Deposits -

$100,000 and over

 

   

Total Time

Deposits

 
   

(In thousands)

 

Three months or less

  $ 411,459     $ 1,189,398     $ 1,600,857  

Over three to six months

    376,119       890,147       1,266,266  

Over six to twelve months

    217,030       2,307,237       2,524,267  

Over twelve months

    28,896       123,188       152,084  

Total

  $ 1,033,504     $ 4,509,970     $ 5,543,474  
                         

Percent of total deposits

    5.6 %     24.3 %     29.8 %

 

Borrowings

 

Borrowings include securities sold under agreements to repurchase, Federal funds purchased, funds obtained as advances from the FHLB of San Francisco, and borrowings from other financial institutions.

 

Borrowings from the FHLB – There were $225.0 million over-night borrowings from the FHLB as of September 30, 2022, and no over-night borrowings as of December 31, 2021. Advances from the FHLB were $360.0 million at an average rate of 3.10% as of September 30, 2022, compared to $20.0 million at an average rate of 2.89% as of December 31, 2021. As of September 30, 2022, FHLB advances of $325.0 million will mature in October 2022, $20.0 million will mature in May 2023 and $15.0 million will mature in September 2024.

 

Junior Subordinated Notes – At September 30, 2022, Junior Subordinated Notes totaled $119.1 million with a weighted average interest rate of 5.6%, compared to $119.1 million with a weighted average rate of 2.38% at December 31, 2021. The Junior Subordinated Notes have a stated maturity term of 30 years. The trusts are not consolidated with the Company in accordance with an accounting pronouncement that took effect in December 2003.

 

For additional information, see Note 11 to the Company’s unaudited Consolidated Financial Statements.

 

 

 

Off-Balance-Sheet Arrangements and Contractual Obligations

 

The following table summarizes the Company’s contractual obligations to make future payments as of September 30, 2022. Payments for deposits and borrowings do not include interest. Payments related to leases are based on actual payments specified in the underlying contracts.

 

   

Payment Due by Period

 
           

More than

   

3 years or

                 
           

1 year but

   

more but

                 
   

1 year

   

less than

   

less than

   

5 years

         
   

or less

   

3 years

   

5 years

   

or more

   

Total

 
   

(In thousands)

 

Contractual obligations:

                                       

Deposits with stated maturity dates

  $ 5,391,390     $ 147,705     $ 4,359     $ 20     $ 5,543,474  

Advances from the Federal Home Loan Bank

    345,000       15,000                   360,000  

Other borrowings

                      22,651       22,651  

Long-term debt

                      119,136       119,136  

Operating leases

    11,064       14,905       7,659       2,366       35,994  

Total contractual obligations and other commitments

  $ 5,747,454     $ 177,610     $ 12,018     $ 144,173     $ 6,081,255  

 

 

In the normal course of business, we enter into various transactions, which, in accordance with GAAP, are not included in our Consolidated Balance Sheets. We enter into these transactions to meet the financing needs of our customers. These transactions include commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the Consolidated Balance Sheets.

 

Loan Commitments - We enter into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Substantially all of our commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of loan funding. We minimize our exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures. Management assesses the credit risk associated with certain commitments to extend credit in determining the level of the allowance for credit losses.

 

Standby Letters of Credit - Standby letters of credit are written conditional commitments issued by us to secure the obligations of a customer to a third party. In the event the customer does not perform in accordance with the terms of an agreement with the third party, we would be required to fund the commitment. The maximum potential amount of future payments we could be required to make is represented by the contractual amount of the commitment. If the commitment is funded, we would be entitled to seek reimbursement from the customer. Our policies generally require that standby letter of credit arrangements contain security and debt covenants similar to those contained in loan agreements.

 

Capital Resources

 

Total equity was $2.42 billion as of September 30, 2022, a decrease of $26.7 million, from $2.45 billion as of December 31, 2021, primarily due to net income of $263.0 million, stock-based compensation of $5.2 million, proceeds from dividend reinvestment of $2.8 million and stock issued to directors of $0.8 million, offset by, other comprehensive loss of $109.8 million, purchases of treasury stock of $109.8 million, common stock cash dividends of $76.1 million and shares withheld related to net share settlement of RSUs of $2.8 million.

 

 

The following table summarizes changes in total equity for the nine months ended September 30, 2022:

 

   

Nine months ended

 
   

September 30, 2022

 
   

(In thousands)

 

Net income

  $ 263,041  

Proceeds from shares issued through the Dividend Reinvestment Plan

    2,792  

Shares withheld related to net share settlement of RSUs

    (2,864 )

Purchase of treasury stock

    (109,774 )

Stock issued to directors

    849  

RSU vested

    1  

Share-based compensation

    5,183  

Cash dividends paid to common stockholders

    (76,111 )

Other comprehensive loss

    (109,809 )

Net decrease in total equity

  $ (26,692 )

 

 

Capital Adequacy Review

 

Management seeks to retain our capital at a level sufficient to support future growth, protect depositors and stockholders, and comply with various regulatory requirements.

 

The following tables set forth actual and required capital ratios as of September 30, 2022 and December 31, 2021 for Bancorp and the Bank under the Basel III Capital Rules. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules. See the 2021 Form 10-K for a more detailed discussion of the Basel III Capital Rules.

 

   

Actual

   

Minimum Capital

Required - Basel III

   

Required to be Considered

Well Capitalized

 
   

Capital Amount

   

Ratio

   

Capital Amount

   

Ratio

   

Capital Amount

   

Ratio

 

September 30, 2022

 

(In thousands)

 
                                                 

Common Equity Tier 1 to Risk-Weighted Assets

                                         

Cathay General Bancorp

  $ 2,136,403       12.06     $ 1,240,523       7.00     $ 1,151,914       6.50  

Cathay Bank

    2,221,644       12.54       1,239,943       7.00       1,151,376       6.50  
                                                 

Tier 1 Capital to Risk-Weighted Assets

                                               

Cathay General Bancorp

    2,136,403       12.06       1,506,349       8.50       1,417,741       8.00  

Cathay Bank

    2,221,644       12.54       1,505,646       8.50       1,417,078       8.00  
                                                 

Total Capital to Risk-Weighted Assets

                                               

Cathay General Bancorp

    2,408,255       13.59       1,860,785       10.50       1,772,176       10.00  

Cathay Bank

    2,377,996       13.42       1,859,915       10.50       1,771,348       10.00  
                                                 

Leverage Ratio

                                               

Cathay General Bancorp

    2,136,403       10.02       853,269       4.00       1,066,586       5.00  

Cathay Bank

    2,221,644       10.42       852,622       4.00       1,065,778       5.00  

 

 

   

Actual

   

Minimum Capital

Required - Basel III

   

Required to be Considered

Well Capitalized

 
   

Capital Amount

   

Ratio

   

Capital Amount

   

Ratio

   

Capital Amount

   

Ratio

 

December 31, 2021

 

(In thousands)

 
                                                 

Common Equity Tier 1 to Risk-Weighted Assets

                                         

Cathay General Bancorp

  $ 2,056,601       12.80     $ 1,124,381       7.00     $ 1,044,068       6.50  

Cathay Bank

    2,137,925       13.32       1,123,721       7.00       1,043,455       6.50  
                                                 

Tier 1 Capital to Risk-Weighted Assets

                                               

Cathay General Bancorp

    2,056,601       12.80       1,365,320       8.50       1,285,007       8.00  

Cathay Bank

    2,137,925       13.32       1,364,519       8.50       1,284,253       8.00  
                                                 

Total Capital to Risk-Weighted Assets

                                               

Cathay General Bancorp

    2,315,358       14.41       1,686,572       10.50       1,606,259       10.00  

Cathay Bank

    2,281,182       14.21       1,685,582       10.50       1,605,316       10.00  
                                                 

Leverage Ratio

                                               

Cathay General Bancorp

    2,056,601       10.40       791,226       4.00       989,033       5.00  

Cathay Bank

    2,137,925       10.82       790,430       4.00       988,037       5.00  

 

 

As of September 30, 2022, capital levels at Bancorp and the Bank exceed all capital adequacy requirements under the fully phased-in Basel III Capital Rules. Based on the ratios presented above, capital levels as of September 30, 2022 at Bancorp and the Bank exceed the minimum levels necessary to be considered “well capitalized.”

 

Dividend Policy

 

Holders of common stock are entitled to dividends as and when declared by our Board of Directors out of funds legally available for the payment of dividends. Although we have historically paid cash dividends on our common stock, we are not required to do so. We increased the common stock dividend from $0.24 per share in the fourth quarter of 2017, to $0.31 per share in the fourth quarter of 2018, to $0.34 per share in the fourth quarter of 2021. The amount of future dividends, if any, will depend on our earnings, financial condition, capital requirements and other factors, and will be determined by our Board of Directors. The terms of our Junior Subordinated Notes also limit our ability to pay dividends. If we are not current in our payment of dividends on our Junior Subordinated Notes, we may not pay dividends on our common stock.

 

The Company declared a cash dividend of $0.34 per share on 73,774,691 shares outstanding on August 30, 2022, for distribution to holders of our common stock on September 9, 2022. The Company paid total cash dividends of $25.1 million in the third quarter of 2022.

 

Financial Derivatives

 

It is our policy not to speculate on the future direction of interest rates. However, from time to time, we may enter into financial derivatives in order to seek mitigation of exposure to interest rate risks related to our interest-earning assets and interest-bearing liabilities. We believe that these transactions, when properly structured and managed, may provide a hedge against inherent interest rate risk in our assets or liabilities and against risk in specific transactions. In such instances, we may enter into interest rate swap contracts or other types of financial derivatives. Prior to considering any hedging activities, we seek to analyze the costs and benefits of the hedge in comparison to other viable alternative strategies. All hedges must be approved by the Bank’s Investment Committee.

 

The Company follows ASC Topic 815 that establishes accounting and reporting standards for financial derivatives, including certain financial derivatives embedded in other contracts, and hedging activities. It requires the recognition of all financial derivatives as assets or liabilities in the Company’s Consolidated Balance Sheets and measurement of those financial derivatives at fair value. The accounting treatment of changes in fair value is dependent upon whether or not a financial derivative is designated as a hedge and, if so, the type of hedge. Fair value is determined using third-party models with observable market data. For derivatives designated as cash flow hedges, changes in fair value are recognized in other comprehensive income and are reclassified to earnings when the hedged transaction is reflected in earnings. For derivatives designated as fair value hedges, changes in the fair value of the derivatives are reflected in current earnings, together with changes in the fair value of the related hedged item if there is a highly effective correlation between changes in the fair value of the interest rate swaps and changes in the fair value of the underlying asset or liability that is intended to be hedged. If there is not a highly effective correlation between changes in the fair value of the interest rate swap and changes in the fair value of the underlying asset or liability that is intended to be hedged, then only the changes in the fair value of the interest rate swaps are reflected in the Company’s Consolidated Financial Statements.

 

 

The Company offers various interest rate derivative contracts to its customers. When derivative transactions are executed with its customers, the derivative contracts are offset by paired trades with third-party financial institutions including with central counterparties (“CCP”). Certain derivative contracts entered with CCPs are settled-to-market daily to the extent the CCP’s rulebooks legally characterize the variation margin as settlement. Derivative contracts are intended to allow borrowers to lock in attractive intermediate and long-term fixed rate financing while not increasing the interest rate risk to the Company. These transactions are generally not linked to specific Company assets or liabilities on the Consolidated Balance Sheets or to forecasted transactions in a hedging relationship and, therefore, are economic hedges. The contracts are marked to market at each reporting period. The changes in fair values of the derivative contracts traded with third-party financial institutions are expected to be largely comparable to the changes in fair values of the derivative transactions executed with customers throughout the terms of these contracts, except for the credit valuation adjustment component.  The Company records credit valuation adjustments on derivatives to properly reflect the variances of credit worthiness between the Company and the counterparties, considering the effects of enforceable master netting agreements and collateral arrangements.

 

In May 2014, Bancorp entered into interest rate swap contracts in the notional amount of $119.1 million for a period of ten years. The objective of these interest rate swap contracts, which were designated as hedging instruments in cash flow hedges, was to hedge the quarterly interest payments on Bancorp’s $119.1 million of Junior Subordinated Debentures that had been issued to five trusts, throughout the ten-year period beginning in June 2014 and ending in June 2024, from the risk of variability of these payments resulting from changes in the three-month LIBOR interest rate. As of September 30, 2022, and 2021, the ineffective portion of these interest rate swaps was not significant.

 

The notional amount and net unrealized loss of the Company’s cash flow derivative financial instruments as of September 30, 2022, and December 31, 2021, were as follows:

 

 

   

September 30, 2022

   

December 31, 2021

 

Cash flow swap hedges:

 

(In thousands)

 

Notional

  $ 119,136     $ 119,136  

Weighted average fixed rate-pay

    2.61 %     2.61 %

Weighted average variable rate-receive

    2.07 %     0.16 %
                 

Unrealized gain/(loss), net of taxes (1)

  $ 2,527     $ (3,276 )

 

   

Three months ended

   

Nine months ended

 
   

September 30, 2022

   

September 30, 2021

   

September 30, 2022

   

September 30, 2021

 

Periodic net settlement of swaps (2)

  $ 138     $ 754     $ 1,311     $ 2,196  

 

(1) Included in other comprehensive income.

(2) the amount of periodic net settlement of interest rate swaps was included in interest expense.

 

 

The Bank entered into interest rate swap contracts that are matched to fixed-rate commercial real estate loans in the Bank’s loan portfolio. These contracts have been designated as hedging instruments to hedge the risk of changes in the fair value of the underlying commercial real estate loans due to changes in interest rates. As of September 30, 2022, the Bank’s outstanding interest rate swap contracts had a notional amount of $877.2 million for various terms from three to ten years. The swap contracts are structured so that the notional amounts reduce over time to match the contractual amortization of the underlying loan and allow prepayments with the same pre-payment penalty amounts as the related loan. As of September 30, 2022, and 2021, the ineffective portion of these interest rate swaps was not significant.

 

The Company has designated as a partial-term hedging election $670.2 million notional as last-of-layer hedge on pools of loans with a notational value of $1.2 billion as of September 30, 2022. The loans are not expected to be affected by prepayment, defaults, or other factors affecting the timing and amount of cash flows under the last-of-layer method. The Company has entered into these pay-fixed and receive 1-Month LIBOR interest rate swaps to convert the last-of-layer $670.2 million portion of $1.2 billion fixed rate loan pools in order to reduce the Company’s exposure to higher interest rates for the last-of-layer tranches. As of September 30, 2022, the last-of-layer loan tranche had a fair value basis adjustment of $32.8 million. The interest rate swap converts this last-of-layer tranche into a floating rate instrument. The Company’s risk management objective with respect to this last-of-layer interest rate swap is to reduce interest rate exposure as to the last-of-layer tranche.

 

Interest rate swap contracts involve the risk of dealing with institutional derivative counterparties and their ability to meet contractual terms. Institutional counterparties must have a strong credit profile and be approved by our Board of Directors. The Company’s credit exposure on interest rate swaps is limited to the net favorable value and interest payments of all swaps by each counterparty. Credit exposure may be reduced by the amount of collateral pledged by the counterparty. Bancorp’s interest rate swaps have been assigned by the counterparties to a derivative clearing organization and daily margin is indirectly maintained with the derivative clearing organization. There was no cash collateral deposit posted by Bancorp related to derivative contracts as of September 30, 2022 and $5.9 million as of December 31, 2021.

 

 

The notional amount and net unrealized loss of the Company’s fair value derivative financial instruments as of September 30, 2022, and December 31, 2021, were as follows:

 

 

   

September 30, 2022

   

December 31, 2021

 

Fair value swap hedges:

 

(In thousands)

 

Notional

  $ 877,188     $ 729,280  

Weighted average fixed rate-pay

    2.14 %     2.65 %

Weighted average variable rate spread

    0.54 %     1.31 %

Weighted average variable rate-receive

    1.98 %     1.43 %
                 

Unrealized gain/(loss), net of taxes (1)

  $ 40,465     $ (1,013 )

 

   

Three months ended

   

Nine months ended

 
   

September 30, 2022

   

September 30, 2021

   

September 30, 2022

   

September 30, 2021

 

Periodic net settlement of swaps (2)

  $ 1,461     $ (2,363 )   $ (1,628 )   $ (7,137 )

 

(1) the amount is included in other non-interest income.

(2) the amount of periodic net settlement of interest rate swaps was included in interest income.

 

 

From time to time, the Company enters into foreign exchange forward contracts with various counterparties to mitigate the risk of fluctuations in foreign currency exchange rates for foreign exchange certificates of deposit or foreign exchange contracts entered into with our clients. These contracts are not designated as hedging instruments and are recorded at fair value in our Consolidated Balance Sheets. Changes in the fair value of these contracts as well as the related foreign exchange certificates of deposit and foreign exchange contracts are recognized immediately in net income as a component of non-interest income. Period end gross positive fair values are recorded in other assets and gross negative fair values are recorded in other liabilities.

 

The notional amount and fair value of the Company’s derivative financial instruments not designated as hedging instruments as of September 30, 2022, and December 31, 2021, were as follows:

 

Derivative financial instruments

 

September 30, 2022

   

December 31, 2021

 

not designated as hedging instruments:

 

(In thousands)

 

Notional amounts:

               

Option contracts

  $ -     $ 676  

Spot, forward, and swap contracts with positive fair value

  $ 162,518     $ 181,997  

Spot, forward, and swap contracts with negative fair value

  $ 45,990     $ 51,782  

Fair value:

               

Option contracts

  $ -     $ 3  

Spot, forward, and swap contracts with positive fair value

  $ 752     $ 1,113  

Spot, forward, and swap contracts with negative fair value

  $ (2,054 )   $ (327 )

 

 

Liquidity

 

Liquidity is our ability to maintain sufficient cash flow to meet maturing financial obligations and customer credit needs, and to take advantage of investment opportunities as they are presented in the marketplace. Our principal sources of liquidity are growth in deposits, proceeds from the maturity or sale of securities and other financial instruments, repayments from securities and loans, Federal funds purchased, securities sold under agreements to repurchase, and advances from the FHLB. As of September 30, 2022, our average monthly liquidity ratio (defined as net cash plus short-term and marketable securities to net deposits and short-term liabilities) was 13.7% compared to 17.3% as of December 31, 2021.

 

The Bank is a shareholder of the FHLB, which enables the Bank to have access to lower-cost FHLB financing when necessary. At September 30, 2022, the Bank had an approved credit line with the FHLB of San Francisco totaling $5.3 billion. Total advances from the FHLB of San Francisco were $360.0 million and standby letters of credit issued by the FHLB on the Company’s behalf were $754.8 million as of September 30, 2022. These borrowings bear fixed rates and are secured by the Bank’s loans. See Note 11 to the Consolidated Financial Statements. At September 30, 2022, the Bank pledged $630.4 thousand of its commercial loans and $1.6 million of securities to the Federal Reserve Bank’s Discount Window under the Borrower-in-Custody program. The Bank had borrowing capacity of $1.9 million from the Federal Reserve Bank Discount Window at September 30, 2022.

 

Liquidity can also be provided through the sale of liquid assets, which consist of federal funds sold, securities purchased under agreements to resell, and securities available-for-sale. At September 30, 2022, investment securities totaled $1.4 billion, with $144.3 million pledged as collateral for borrowings and other commitments. The remaining balance was available as additional liquidity or to be pledged as collateral for additional borrowings.

 

Approximately 97.3% of our time deposits mature within one year or less as of September 30, 2022. Management anticipates that there may be some outflow of these deposits upon maturity due to the keen competition in the Bank’s marketplace. However, based on our historical runoff experience, we expect the outflow will not be significant and can be replenished through our normal growth in deposits. As of September 30, 2022, management believes all the above-mentioned sources will provide adequate liquidity during the next twelve months for the Bank to meet its operating needs. Deposits and other sources of liquidity, however, may be adversely impacted by the COVID-19 pandemic and its related economic impacts.

 

The business activities of Bancorp consist primarily of the operation of the Bank and limited activities in other investments. The Bank paid dividends to Bancorp totaling $185.0 million and $155.0 million during the third quarter of 2022 and 2021, respectively.

 

 

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We use a net interest income simulation model to measure the extent of the differences in the behavior of the lending and funding rates to changing interest rates, to project future earnings or market values under alternative interest rate scenarios. Interest rate risk arises primarily through the Company’s traditional business activities of extending loans and accepting deposits. Many factors, including but not limited to economic, market and financial conditions, movements in interest rates, and consumer preferences, affect the spread between interest earned on assets and interest paid on liabilities. The net interest income simulation model is designed to measure the volatility of net interest income and net portfolio value, defined as net present value of assets and liabilities, under immediate rising or falling interest rate scenarios in 100 basis point increments.

 

Although the modeling can be helpful in managing interest rate risk, it does require significant assumptions for the projection of loan prepayment rates on mortgage related assets, loan volumes and pricing, and deposit and borrowing volume and pricing, that might prove inaccurate. Because these assumptions are inherently uncertain, the model cannot precisely estimate net interest income, or precisely predict the effect of higher or lower interest rates on net interest income. Actual results will differ from simulated results due to the timing, magnitude, and frequency of interest rate changes, the differences between actual experience and the assumed volume, changes in market conditions, and management strategies, among other factors. The Company monitors its interest rate sensitivity and seeks to reduce the risk of a significant decrease in net interest income caused by a change in interest rates.

 

We have established a tolerance level in our policy to define and limit net interest income volatility to a change of plus or minus 5% when the hypothetical rate change is plus or minus 200 basis points. When the net interest rate simulation projects that our tolerance level will be met, or exceeded, we seek corrective action after considering, among other things, market conditions, customer reaction, and the estimated impact on profitability. The Company’s simulation model also projects the net economic value of our portfolio of assets and liabilities. We have established a tolerance level in our policy to limit the loss in the net economic value of our portfolio of assets and liabilities to zero when the hypothetical rate change is plus or minus 200 basis points.

 

The table below shows the estimated impact of changes in interest rates on net interest income and market value of equity as of September 30, 2022:

 

     

Net Interest

   

Market Value

 
     

Income

   

of Equity

 

Change in Interest Rate (Basis Points)

   

Volatility (1)

   

Volatility (2)

 

+200

      10.6       3.5  

+100

      5.3       2.2  
-100       -7.5       1.0  
-200       -18.3       5.2  

 

(1) The percentage change in this column represents net interest income of the Company for 12 months in a stable interest rate environment versus the net interest income in the various rate scenarios.

(2) The percentage change in this column represents the net portfolio value of the Company in a stable interest rate environment versus the net portfolio value in the various rate scenarios.

 

 

Item 4. CONTROLS AND PROCEDURES.

 

The Company’s principal executive officer and principal financial officer have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this quarterly report. Based upon their evaluation, the principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

There has not been any change in our internal control over financial reporting that occurred during the third quarter of 2022 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II OTHER INFORMATION

 

Item 1. LEGAL PROCEEDINGS.

 

From time to time, Bancorp and its subsidiaries are parties to litigation that arise in the ordinary course of business or otherwise are incidental to various aspects of its operations. Based upon information available to the Company and its review of any such litigation with counsel, management presently believes that the liability relating to such litigation, if any, would not be expected to have a material adverse impact on the Company’s consolidated financial condition, results of operations or liquidity taken as a whole. The outcome of litigation and other legal and regulatory matters is inherently uncertain, however, and it is possible that one or more of the legal matters currently pending or threatened against the Company could have a material adverse effect on the Company’s consolidated financial condition, results of operations or liquidity taken as a whole.

 

 

Item 1A.         RISK FACTORS.

 

The Company is not aware of any material change to the risk factors as previously disclosed in Part I, Item 1A, of the Company’s 2021 Form 10-K. In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors disclosed in Part I, Item 1A, of the Company’s 2021 Form 10-K, which could materially and adversely affect the Company’s business, financial condition, results of operations and stock price. The risk factors disclosed in the 2021 Form 10-K are not the only risks facing the Company. Additional risks and uncertainties, including those not presently known to the Company or that the Company presently believes not to be material, could also materially and adversely affect the Company’s business, financial condition, and results of operations and stock price.

 

 

ITEM 2.         UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

Issuer Purchases of Equity Securities

Period

(a) Total Number of

Shares (or Units)

Purchased

(b) Average

Price Paid per

Share (or Unit)

(c) Total Number of

Shares (or Units)

Purchased as Part of

Publicly Announced

Plans or Programs

(d) Maximum Number (or

Approximate Dollar

Value) of Shares (or

Units) that May Yet Be

Purchased Under the

Plans or Programs

(July 1, 2022 - July 31, 2022)

65,000

$41.29

65,000

$91,728,331

(August 1, 2022 - August 31, 2022)

804,929

$43.34

804,929

$56,840,800

(September 1, 2022 - September 30, 2022)

209,611

$41.59

209,611

$48,122,085

Total

1,079,540

$42.02

1,079,540

$48,122,085

 

 

For a discussion of limitations on the payment of dividends, see “Dividend Policy” and “Liquidity” under Part I—Item 2— “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

 

Item 3.         DEFAULTS UPON SENIOR SECURITIES.

 

Not applicable.

 

Item 4.         MINE SAFETY DISCLOSURES.

 

Not applicable.

 

Item 5.         OTHER INFORMATION.

 

None.

 

Item 6.         EXHIBITS.

 

Exhibit 3.1

Restated Certificate of Incorporation. Previously filed with the Securities and Exchange Commission on February 29, 2016, as an exhibit to Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2015, and incorporated herein by reference.

   
   

Exhibit 3.1.1

Amendment to Restated Certificate of Incorporation. Previously filed with the Securities and Exchange Commission on February 29, 2016, as an exhibit to Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2015, and incorporated herein by reference.

   
   

Exhibit 3.2

Amended and Restated Bylaws, effective February 16, 2017. Previously filed with the Securities and Exchange Commission on February 17, 2017, as an exhibit to the Bancorp’s Current Report on Form 8-K and incorporated herein by reference.

   
   

Exhibit 3.3

Certificate of Designation of Series A Junior Participating Preferred Stock. Previously filed with the Securities and Exchange Commission on February 28, 2012, as an exhibit to the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2011, and incorporated herein by reference.

   
   

Exhibit 3.4

Certificate of Designation of Fixed Rate Cumulative Perpetual Preferred Stock, Series B. Previously filed with the Securities and Exchange Commission on March 3, 2014, as an exhibit to the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2013 and incorporated herein by reference.

   
   

Exhibit 31.1

Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.+

   
   

Exhibit 31.2

Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.+

 

 

Exhibit 32.1

Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.++

   
   

Exhibit 32.2

Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.++

   
   

Exhibit 101.INS

XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document*

   
   

Exhibit 101.SCH

Inline XBRL Taxonomy Extension Schema Document*

   
   

Exhibit 101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document*

   
   

Exhibit 101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document*

   
   

Exhibit 101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document*

   
   

Exhibit 101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document*

   
   

Exhibit 104

Cover Page Interactive Data File – the cover page XBRL tags are embedded within the Inline XBRL document*

 

 


+

Filed herewith.

 

++

Furnished herewith.

 

*

Filed electronically herewith.

 

 

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.

 

 

  Cathay General Bancorp  
  (Registrant)  
     
     
     
Date: November 8, 2022    
  /s/ Chang M. Liu  
  Chang M. Liu  
  President and Chief Executive Officer  
     
     
     
Date: November 8, 2022    
  /s/ Heng W. Chen  
  Heng W. Chen  
  Executive Vice President and  
  Chief Financial Officer  

 

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