UNITED STATES
securities and exchange commissionSECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
form 10-qFORM 10-Q
(Mark One)
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☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
| For the quarterly period ended |
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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| to |
For the transition period from to
| Commission file number | 001-31830 |
Cathay General Bancorp
| CATHAY GENERAL BANCORP |
(Exact name of registrant as specified in its charter)
| Delaware | 95-4274680 | |
(State of other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| 777 North Broadway, Los Angeles, California | 90012 | |
| (Address of principal executive offices) | (Zip Code) |
| Registrant's telephone number, including area code: |
(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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large“large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☑ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐ |
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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’sissuer’s classes of common stock, as of the latest practicable date.
Common stock, $.01 par value, 80,819,96774,469,620 shares outstanding as of OctoberJuly 31, 2017.2022.
CATHAY GENERAL BANCORP AND SUBSIDIARSUBSIDIARIESies
3RD2quarterND 2017QUARTER 2022 REPORT ON FORM 10-Q
table of contentsTABLE OF CONTENTS
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 uncertaintiesother factors that could cause actual results to differ materially from our historical experience and our present expectations or projections. Such risks, and uncertainties and other factors include, but are not limited to, adverse developments or conditions related to or arising from:
to:
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● | 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 |
● | increased costs of compliance and other risks associated with changes in |
● | 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; |
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● | 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 |
● | 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; |
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● | failures, interruptions, or security breaches of our information systems; |
● | our ability to adapt our systems to |
● | risk management processes and strategies; |
● | adverse results in legal proceedings; |
● | the impact of regulatory |
● | 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 |
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● | issuances of preferred stock; |
● | capital level requirements and successfully raising additional capital, if needed, and the resulting |
● | the soundness of other financial institutions. |
These and other factors are further described in Bancorp’sBancorp’s Annual Report on Form 10-K for the year ended December 31, 20162021 (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, which speak to the date of this report.statements. We have no intention and undertake no obligation to update any forward-looking statement or to announce publicly announce any revision of any forward-looking statement to reflect future developments, events, occurrences or events,circumstances after the date of such statement, except as required by law.
Bancorp’sBancorp’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) 279-3286.279-3296.
PART I – FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS (Unaudited)
CATHAY GENERAL BANCORP AND SUBSIDIARIESSUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share and per share data) | September 30, 2017 | December 31, 2016 | ||||||||||||||
June 30, 2022 | December 31, 2021 | |||||||||||||||
(In thousands, except share and per share data) | ||||||||||||||||
Assets | ||||||||||||||||
Cash and due from banks | $ | 167,886 | $ | 218,017 | $ | 141,734 | $ | 134,141 | ||||||||
Short-term investments and interest bearing deposits | 573,059 | 967,067 | ||||||||||||||
Securities available-for-sale (amortized cost of $1,364,955 in 2017 and $1,317,012 in 2016) | 1,368,487 | 1,314,345 | ||||||||||||||
Loans held for sale | - | 7,500 | ||||||||||||||
Short-term investments and interest-bearing deposits | 1,012,228 | 2,315,563 | ||||||||||||||
Securities available-for-sale (amortized cost of $1,336,293 at June 30, 2022 and $1,126,867 at December 31, 2021) | 1,234,571 | 1,127,309 | ||||||||||||||
Loans | 12,597,434 | 11,201,275 | 17,787,888 | 16,342,479 | ||||||||||||
Less: Allowance for loan losses | (121,535 | ) | (118,966 | ) | (148,772 | ) | (136,157 | ) | ||||||||
Unamortized deferred loan fees, net | (3,424 | ) | (4,994 | ) | (5,540 | ) | (4,321 | ) | ||||||||
Loans, net | 12,472,475 | 11,077,315 | 17,633,576 | 16,202,001 | ||||||||||||
Equity securities | 26,785 | 22,319 | ||||||||||||||
Federal Home Loan Bank stock | 30,681 | 17,250 | 17,250 | 17,250 | ||||||||||||
Other real estate owned, net | 18,115 | 20,070 | 4,067 | 4,368 | ||||||||||||
Affordable housing investments and alternative energy partnerships, net | 298,426 | 251,077 | 321,717 | 299,211 | ||||||||||||
Premises and equipment, net | 107,954 | 105,607 | 97,565 | 99,402 | ||||||||||||
Customers’ liability on acceptances | 12,009 | 12,182 | ||||||||||||||
Customers’ liability on acceptances | 12,650 | 8,112 | ||||||||||||||
Accrued interest receivable | 42,190 | 37,299 | 61,939 | 56,994 | ||||||||||||
Goodwill | 372,189 | 372,189 | 375,696 | 372,189 | ||||||||||||
Other intangible assets, net | 9,408 | 2,949 | 7,231 | 4,627 | ||||||||||||
Right-of-use assets - operating leases | 31,883 | 27,834 | ||||||||||||||
Other assets | 255,538 | 117,902 | 256,661 | 195,403 | ||||||||||||
Total assets | $ | 15,728,417 | $ | 14,520,769 | $ | 21,235,553 | $ | 20,886,723 | ||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||
Deposits | ||||||||||||||||
Deposits: | ||||||||||||||||
Non-interest-bearing demand deposits | $ | 2,730,006 | $ | 2,478,107 | $ | 4,433,959 | $ | 4,492,054 | ||||||||
Interest-bearing deposits: | ||||||||||||||||
Demand deposits | 1,379,100 | 1,230,445 | ||||||||||||||
NOW deposits | 2,494,524 | 2,522,442 | ||||||||||||||
Money market deposits | 2,370,724 | 2,198,938 | 5,322,510 | 4,611,579 | ||||||||||||
Savings deposits | 925,312 | 719,949 | 1,178,572 | 915,515 | ||||||||||||
Time deposits | 5,156,553 | 5,047,287 | 4,857,762 | 5,517,252 | ||||||||||||
Total deposits | 12,561,695 | 11,674,726 | 18,287,327 | 18,058,842 | ||||||||||||
Securities sold under agreements to repurchase | 100,000 | 350,000 | ||||||||||||||
Advances from the Federal Home Loan Bank | 595,000 | 350,000 | 95,000 | 20,000 | ||||||||||||
Other borrowings of affordable housing investments | 17,518 | 17,662 | 22,319 | 23,145 | ||||||||||||
Long-term debt | 119,136 | 119,136 | 119,136 | 119,136 | ||||||||||||
Deferred payments from acquisition | 136,056 | - | ||||||||||||||
Acceptances outstanding | 12,009 | 12,182 | 12,650 | 8,112 | ||||||||||||
Lease liabilities - operating leases | 35,171 | 30,694 | ||||||||||||||
Other liabilities | 218,304 | 168,524 | 232,418 | 180,543 | ||||||||||||
Total liabilities | 13,759,718 | 12,692,230 | 18,804,021 | 18,440,472 | ||||||||||||
Commitments and contingencies | - | - | — | — | ||||||||||||
Stockholders’ Equity | ||||||||||||||||
Common stock, $0.01 par value, 100,000,000 shares authorized, 89,027,259 issued and 80,816,616 outstanding at September 30, 2017, and 87,820,920 issued and 79,610,277 outstanding at December 31, 2016 | 890 | 878 | ||||||||||||||
Common stock, $0.01 par value, 100,000,000 shares authorized; 90,997,807 issued and 74,421,884 outstanding at June 30, 2022, and 90,871,860 issued and 75,750,862 outstanding at December 31, 2021 | 910 | 909 | ||||||||||||||
Additional paid-in-capital | 932,521 | 895,480 | 976,547 | 972,474 | ||||||||||||
Accumulated other comprehensive loss, net | (217 | ) | (3,715 | ) | (71,328 | ) | (3,065 | ) | ||||||||
Retained earnings | 1,275,094 | 1,175,485 | 2,098,122 | 1,985,168 | ||||||||||||
Treasury stock, at cost (8,210,643 shares at September 30, 2017, and at December 31, 2016) | (239,589 | ) | (239,589 | ) | ||||||||||||
Treasury stock, at cost (16,575,923 shares at June 30, 2022, and 15,120,998 shares at December 31, 2021) | (572,719 | ) | (509,235 | ) | ||||||||||||
Total equity | 1,968,699 | 1,828,539 | 2,431,532 | 2,446,251 | ||||||||||||
Total liabilities and equity | $ | 15,728,417 | $ | 14,520,769 | $ | 21,235,553 | $ | 20,886,723 | ||||||||
See accompanying |
CATHAY GENERAL BANCORP AND SUBSIDIARIESSUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME
(Unaudited)(Unaudited)
Three months ended September 30, | Nine months ended September 30, | Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||
(In thousands, except share and per share data) | (In thousands, except share and per share data) | |||||||||||||||||||||||||||||||
Interest and Dividend Income | ||||||||||||||||||||||||||||||||
Loans receivable, including loan fees | $ | 146,383 | $ | 118,500 | $ | 401,129 | $ | 349,212 | ||||||||||||||||||||||||
Loans receivable | $ | 181,022 | $ | 161,493 | $ | 347,116 | $ | 321,214 | ||||||||||||||||||||||||
Investment securities | 5,692 | 4,850 | 14,817 | 16,974 | 5,748 | 3,189 | 10,576 | 6,256 | ||||||||||||||||||||||||
Federal Home Loan Bank and FRB stock | 607 | 393 | 1,317 | 1,122 | ||||||||||||||||||||||||||||
Term federal funds sold | 108 | - | 108 | - | ||||||||||||||||||||||||||||
Federal Home Loan Bank stock | 255 | 255 | 516 | 472 | ||||||||||||||||||||||||||||
Deposits with banks | 1,288 | 412 | 3,140 | 1,094 | 2,508 | 438 | 3,271 | 753 | ||||||||||||||||||||||||
Total interest and dividend income | 154,078 | 124,155 | 420,511 | 368,402 | 189,533 | 165,375 | 361,479 | 328,695 | ||||||||||||||||||||||||
Interest Expense | ||||||||||||||||||||||||||||||||
Time deposits | 11,678 | 10,701 | 33,429 | 32,177 | 5,724 | 10,055 | 11,784 | 24,064 | ||||||||||||||||||||||||
Other deposits | 5,101 | 4,212 | 14,245 | 11,783 | 6,895 | 5,465 | 12,023 | 11,059 | ||||||||||||||||||||||||
Securities sold under agreements to repurchase | 874 | 3,828 | 3,489 | 11,696 | ||||||||||||||||||||||||||||
Advances from Federal Home Loan Bank | 872 | 134 | 1,465 | 442 | 312 | 415 | 455 | 890 | ||||||||||||||||||||||||
Long-term debt | 1,456 | 1,456 | 4,320 | 4,336 | 1,439 | 1,439 | 2,863 | 2,863 | ||||||||||||||||||||||||
Deferred payments from acquisition | 901 | - | 901 | - | ||||||||||||||||||||||||||||
Total interest expense | 20,882 | 20,331 | 57,849 | 60,434 | 14,370 | 17,374 | 27,125 | 38,876 | ||||||||||||||||||||||||
Net interest income before reversal for credit losses | 133,196 | 103,824 | 362,662 | 307,968 | ||||||||||||||||||||||||||||
Reversal for loan losses | - | - | (2,500 | ) | (15,650 | ) | ||||||||||||||||||||||||||
Net interest income after reversal for credit losses | 133,196 | 103,824 | 365,162 | 323,618 | ||||||||||||||||||||||||||||
Net interest income before provision/(reversal) for credit losses | 175,163 | 148,001 | 334,354 | 289,819 | ||||||||||||||||||||||||||||
Provision/(reversal) for credit losses | 2,500 | (9,000 | ) | 11,143 | (22,558 | ) | ||||||||||||||||||||||||||
Net interest income after provision/(reversal) for credit losses | 172,663 | 157,001 | 323,211 | 312,377 | ||||||||||||||||||||||||||||
Non-Interest Income | ||||||||||||||||||||||||||||||||
Securities gains/(losses), net | 24 | 1,692 | (439 | ) | 3,141 | |||||||||||||||||||||||||||
Net gains/(losses) from equity securities | (955 | ) | (879 | ) | 5,019 | (3,631 | ) | |||||||||||||||||||||||||
Securities losses, net | 0 | 0 | 0 | 853 | ||||||||||||||||||||||||||||
Letters of credit commissions | 1,302 | 1,212 | 3,618 | 3,698 | 1,602 | 1,782 | 3,158 | 3,472 | ||||||||||||||||||||||||
Depository service fees | 1,407 | 1,401 | 4,259 | 4,109 | 1,632 | 1,343 | 3,303 | 2,706 | ||||||||||||||||||||||||
Gain from acquisition | 5,440 | - | 5,440 | - | ||||||||||||||||||||||||||||
Wealth management fees | 3,956 | 3,939 | 8,310 | 7,496 | ||||||||||||||||||||||||||||
Other operating income | 4,788 | 4,506 | 12,953 | 14,461 | 8,383 | 6,398 | 15,060 | 11,687 | ||||||||||||||||||||||||
Total non-interest income | 12,961 | 8,811 | 25,831 | 25,409 | 14,618 | 12,583 | 34,850 | 22,583 | ||||||||||||||||||||||||
Non-Interest Expense | ||||||||||||||||||||||||||||||||
Salaries and employee benefits | 27,913 | 22,881 | 79,929 | 71,313 | 37,301 | 32,758 | 72,776 | 65,480 | ||||||||||||||||||||||||
Occupancy expense | 5,312 | 4,734 | 14,733 | 13,587 | 5,562 | 4,960 | 11,175 | 10,006 | ||||||||||||||||||||||||
Computer and equipment expense | 2,643 | 2,337 | 7,895 | 7,360 | 3,297 | 3,647 | 6,253 | 6,918 | ||||||||||||||||||||||||
Professional services expense | 4,942 | 4,999 | 14,541 | 13,981 | 7,704 | 5,756 | 14,401 | 10,466 | ||||||||||||||||||||||||
Data processing service expense | 2,918 | 2,279 | 7,846 | 6,556 | 3,420 | 3,243 | 6,329 | 6,898 | ||||||||||||||||||||||||
FDIC and regulatory assessments | 2,552 | 2,288 | 7,261 | 7,640 | 2,194 | 1,440 | 3,996 | 3,365 | ||||||||||||||||||||||||
Marketing expense | 2,103 | 1,516 | 4,833 | 3,314 | 1,740 | 1,443 | 2,687 | 4,325 | ||||||||||||||||||||||||
Other real estate owned expense/(income) | 369 | (176 | ) | 747 | 612 | |||||||||||||||||||||||||||
Other real estate owned (income)/expense | (33 | ) | 191 | 38 | 285 | |||||||||||||||||||||||||||
Amortization of investments in low income housing and alternative energy partnerships | 5,723 | 5,432 | 16,797 | 35,626 | 7,235 | 10,682 | 15,522 | 22,252 | ||||||||||||||||||||||||
Amortization of core deposit intangibles | 281 | 172 | 626 | 517 | 250 | 171 | 474 | 343 | ||||||||||||||||||||||||
Acquisition and integration costs | 3,277 | - | 3,277 | - | ||||||||||||||||||||||||||||
Cost associated with debt redemption | 0 | 0 | 0 | 732 | ||||||||||||||||||||||||||||
Acquisition, integration and restructuring costs | 91 | 0 | 4,027 | 0 | ||||||||||||||||||||||||||||
Other operating expense | 3,215 | 4,275 | 11,307 | 10,681 | 5,362 | 5,416 | 9,142 | 10,040 | ||||||||||||||||||||||||
Total non-interest expense | 61,248 | 50,737 | 169,792 | 171,187 | 74,123 | 69,707 | 146,820 | 141,110 | ||||||||||||||||||||||||
Income before income tax expense | 84,909 | 61,898 | 221,201 | 177,840 | 113,158 | 99,877 | 211,241 | 193,850 | ||||||||||||||||||||||||
Income tax expense | 35,163 | 15,808 | 71,099 | 50,756 | 24,180 | 22,678 | 47,235 | 43,267 | ||||||||||||||||||||||||
Net income | $ | 49,746 | $ | 46,090 | $ | 150,102 | $ | 127,084 | $ | 88,978 | $ | 77,199 | $ | 164,006 | $ | 150,583 | ||||||||||||||||
Other comprehensive income, net of tax | ||||||||||||||||||||||||||||||||
Unrealized holding gain on securities available-for-sale | 1,060 | 938 | 3,338 | 15,748 | ||||||||||||||||||||||||||||
Less: reclassification adjustments for gains/(losses) included in net income | 14 | 981 | (254 | ) | 1,821 | |||||||||||||||||||||||||||
Unrealized holding gain/(loss) on cash flow hedge derivatives | 157 | 804 | (94 | ) | (3,598 | ) | ||||||||||||||||||||||||||
Total other comprehensive gain, net of tax | 1,203 | 761 | 3,498 | 10,329 | ||||||||||||||||||||||||||||
Other Comprehensive Income, net of tax | ||||||||||||||||||||||||||||||||
Unrealized holding (losses)/gains on securities available-for-sale | (26,455 | ) | 247 | (72,421 | ) | (4,039 | ) | |||||||||||||||||||||||||
Unrealized holding gains on cash flow hedge derivatives | 1,104 | 439 | 4,158 | 1,702 | ||||||||||||||||||||||||||||
Less: reclassification adjustments for losses included in net income | 0 | 0 | 0 | 601 | ||||||||||||||||||||||||||||
Total other comprehensive (loss)/income, net of tax | (25,351 | ) | 686 | (68,263 | ) | (2,938 | ) | |||||||||||||||||||||||||
Total other comprehensive income | $ | 63,627 | $ | 77,885 | $ | 95,743 | $ | 147,645 | ||||||||||||||||||||||||
Total other comprehensive income | $ | 50,949 | $ | 46,851 | $ | 153,600 | $ | 137,413 | ||||||||||||||||||||||||
Net income per common share: | ||||||||||||||||||||||||||||||||
Net Income Per Common Share: | ||||||||||||||||||||||||||||||||
Basic | $ | 0.62 | $ | 0.58 | $ | 1.87 | $ | 1.61 | $ | 1.19 | $ | 0.98 | $ | 2.18 | $ | 1.90 | ||||||||||||||||
Diluted | $ | 0.61 | $ | 0.58 | $ | 1.86 | $ | 1.59 | $ | 1.18 | $ | 0.97 | $ | 2.17 | $ | 1.89 | ||||||||||||||||
Cash dividends paid per common share | $ | 0.21 | $ | 0.18 | $ | 0.63 | $ | 0.54 | $ | 0.34 | $ | 0.31 | $ | 0.68 | $ | 0.62 | ||||||||||||||||
Average common shares outstanding | ||||||||||||||||||||||||||||||||
Average Common Shares Outstanding: | ||||||||||||||||||||||||||||||||
Basic | 80,665,398 | 78,865,860 | 80,073,249 | 79,147,839 | 74,958,913 | 79,167,004 | 75,144,414 | 79,347,886 | ||||||||||||||||||||||||
Diluted | 81,404,854 | 79,697,069 | 80,797,179 | 79,902,846 | 75,270,140 | 79,418,668 | 75,493,516 | 79,624,344 | ||||||||||||||||||||||||
See accompanying |
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 March 31, 2022 | 75,078,258 | $ | 909 | $ | 974,748 | $ | (45,977 | ) | $ | 2,034,681 | $ | (542,131 | ) | $ | 2,422,230 | |||||||||||||
Dividend Reinvestment Plan | 21,847 | 0 | 927 | 0 | 0 | 0 | 927 | |||||||||||||||||||||
Restricted stock units vested | 51,997 | 1 | 0 | 0 | 0 | 0 | 1 | |||||||||||||||||||||
Stock issued to directors | 19,780 | 0 | 849 | 0 | 0 | 0 | 849 | |||||||||||||||||||||
Shares withheld related to net share settlement of RSUs | — | 0 | (1,730 | ) | 0 | 0 | 0 | (1,730 | ) | |||||||||||||||||||
Purchases of treasury stock | (749,998 | ) | 0 | 0 | 0 | 0 | (30,588 | ) | (30,588 | ) | ||||||||||||||||||
Stock-based compensation | — | 0 | 1,753 | 0 | 0 | 0 | 1,753 | |||||||||||||||||||||
Cash dividends of $0.34 per share | — | 0 | 0 | 0 | (25,537 | ) | 0 | (25,537 | ) | |||||||||||||||||||
Other comprehensive loss | — | 0 | 0 | (25,351 | ) | 0 | 0 | (25,351 | ) | |||||||||||||||||||
Net income | — | 0 | 0 | 0 | 88,978 | 0 | 88,978 | |||||||||||||||||||||
Balance at June 30, 2022 | 74,421,884 | $ | 910 | $ | 976,547 | $ | (71,328 | ) | $ | 2,098,122 | $ | (572,719 | ) | $ | 2,431,532 | |||||||||||||
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 March 31, 2021 | 79,595,025 | $ | 907 | $ | 965,566 | $ | 1,686 | $ | 1,834,920 | $ | (342,131 | ) | $ | 2,460,948 | ||||||||||||||
Dividend Reinvestment Plan | 20,023 | 1 | 856 | 0 | 0 | 0 | 857 | |||||||||||||||||||||
Restricted stock units vested | 55,198 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||
Shares withheld related to net share settlement of RSUs | — | 0 | (1,315 | ) | 0 | 0 | 0 | (1,315 | ) | |||||||||||||||||||
Stock issued to directors | 20,750 | 0 | 850 | 0 | 0 | 0 | 850 | |||||||||||||||||||||
Purchases of treasury stock | (1,532,406 | ) | 0 | 0 | 0 | 0 | (63,529 | ) | (63,529 | ) | ||||||||||||||||||
Stock-based compensation | — | 0 | 1,209 | 0 | 0 | 0 | 1,209 | |||||||||||||||||||||
Cash dividends of $0.31 per share | — | 0 | 0 | 0 | (24,548 | ) | 0 | (24,548 | ) | |||||||||||||||||||
Other comprehensive income | — | 0 | 0 | 686 | 0 | 0 | 686 | |||||||||||||||||||||
Net income | — | 0 | 0 | 0 | 77,199 | 0 | 77,199 | |||||||||||||||||||||
Balance at June 30, 2021 | 78,158,590 | $ | 908 | $ | 967,166 | $ | 2,372 | $ | 1,887,571 | $ | (405,660 | ) | $ | 2,452,357 | ||||||||||||||
See accompanying Notes to Consolidated Financial Statements. |
CATHAY GENERAL BANCORP AND SUBSIDIARIESSUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
Accumulated | ||||||||||||||||||||||||||||
Common Stock | Additional | Other | Total | |||||||||||||||||||||||||
Number of | Paid-in | Comprehensive | Retained | Treasury | Stockholders' | |||||||||||||||||||||||
Six 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 | 43,262 | 0 | 1,872 | 0 | 0 | 0 | 1,872 | |||||||||||||||||||||
Restricted stock units vested | 62,905 | 1 | 0 | 0 | 0 | 0 | 1 | |||||||||||||||||||||
Stock issued to directors | 19,780 | 0 | 849 | 0 | 0 | 0 | 849 | |||||||||||||||||||||
Shares withheld related to net share settlement of RSUs | — | 0 | (2,015 | ) | 0 | 0 | 0 | (2,015 | ) | |||||||||||||||||||
Purchases of treasury stock | (1,454,925 | ) | 0 | 0 | 0 | 0 | (63,484 | ) | (63,484 | ) | ||||||||||||||||||
Stock-based compensation | — | 0 | 3,367 | 0 | 0 | 0 | 3,367 | |||||||||||||||||||||
Cash dividends of $0.68 per share | — | 0 | 0 | 0 | (51,052 | ) | 0 | (51,052 | ) | |||||||||||||||||||
Other comprehensive loss | — | 0 | 0 | (68,263 | ) | 0 | 0 | (68,263 | ) | |||||||||||||||||||
Net income | — | 0 | 0 | 0 | 164,006 | 0 | 164,006 | |||||||||||||||||||||
Balance at June 30, 2022 | 74,421,884 | $ | 910 | $ | 976,547 | $ | (71,328 | ) | $ | 2,098,122 | $ | (572,719 | ) | $ | 2,431,532 | |||||||||||||
|
| Accumulated |
| |||||||||||||||||||||||||
Common Stock | Additional | Other Comprehensive |
|
|
Total | |||||||||||||||||||||||
Number of Shares | Amount | Paid-in Capital | Income or (loss) | Retained Earnings | Treasury Stock | Stockholders' 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 | — | 0 | 0 | 0 | (3,139 | ) | 0 | (3,139 | ) | |||||||||||||||||||
Dividend Reinvestment Plan | 40,059 | 1 | 1,724 | 0 | 0 | 0 | 1,725 | |||||||||||||||||||||
Restricted stock units vested | 121,922 | 1 | 0 | 0 | 0 | 0 | 1 | |||||||||||||||||||||
Shares withheld related to net share settlement of RSUs | — | 0 | (2,594 | ) | 0 | 0 | 0 | (2,594 | ) | |||||||||||||||||||
Stock issued to directors | 20,750 | 0 | 850 | 0 | 0 | 0 | 850 | |||||||||||||||||||||
Purchases of treasury stock | (1,532,406 | ) | 0 | 0 | 0 | 0 | (63,529 | ) | (63,529 | ) | ||||||||||||||||||
Stock-based compensation | — | 0 | 2,452 | 0 | 0 | 0 | 2,452 | |||||||||||||||||||||
Cash dividends of $0.62 per share | — | 0 | 0 | 0 | (49,198 | ) | 0 | (49,198 | ) | |||||||||||||||||||
Other comprehensive loss | — | 0 | 0 | (2,938 | ) | 0 | 0 | (2,938 | ) | |||||||||||||||||||
Net income | — | 0 | 0 | 0 | 150,583 | 0 | 150,583 | |||||||||||||||||||||
Balance at June 30, 2021 | 78,158,590 | $ | 908 | $ | 967,166 | $ | 2,372 | $ | 1,887,571 | $ | (405,660 | ) | $ | 2,452,357 | ||||||||||||||
See accompanying Notes to Consolidated Financial Statements. |
CATHAY GENERAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)(Unaudited)
Nine months ended September 30 | Six months ended June 30, | ||||||||||||||||
2017 | 2016 | 2022 | 2021 | ||||||||||||||
(In thousands) | (In thousands) | ||||||||||||||||
Cash Flows from Operating Activities | |||||||||||||||||
Net income | $ | 150,102 | $ | 127,084 | $ | 164,006 | $ | 150,583 | |||||||||
Adjustments to reconcile net income to net cash provided by/(used in) operating activities: | |||||||||||||||||
Reversal for loan losses | (2,500 | ) | (15,650 | ) | |||||||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||||||
Provision/(reversal) for credit losses | 11,143 | (22,558 | ) | ||||||||||||||
Provision for losses on other real estate owned | 889 | 176 | 0 | 47 | |||||||||||||
Deferred tax liability | 10,319 | 22,483 | |||||||||||||||
Deferred tax (benefit)/provision | (1,607 | ) | 11,685 | ||||||||||||||
Depreciation and amortization | 5,416 | 5,684 | 4,575 | 4,156 | |||||||||||||
Amortization of right-of-use asset | 5,038 | 4,461 | |||||||||||||||
Change in operating lease liabilities | (1,976 | ) | 710 | ||||||||||||||
Net gains on sale and transfer of other real estate owned | (394 | ) | (476 | ) | (6 | ) | 0 | ||||||||||
Net gains on sale of loans | - | (285 | ) | (1 | ) | (357 | ) | ||||||||||
Proceeds from sales of loans | 7,500 | 13,525 | |||||||||||||||
Originations of loans held-for-sale | - | (12,665 | ) | ||||||||||||||
Proceeds from sales of loan | 33 | 6,345 | |||||||||||||||
Originations of loans held for sale | 0 | (5,988 | ) | ||||||||||||||
Loss on sales or disposal of fixed assets | 25 | 55 | |||||||||||||||
Amortization on alternative energy partnerships, venture capital and other investments | 2,778 | 27,282 | 15,522 | 22,387 | |||||||||||||
Net loss/(gain) on sales and calls of securities | 438 | (3,347 | ) | ||||||||||||||
Net gain on sales and calls of securities | (101 | ) | (853 | ) | |||||||||||||
Amortization/accretion of security premiums/discounts, net | 990 | 5,193 | 2,231 | 4,322 | |||||||||||||
Loss on sales or disposal of fixed assets | - | 19 | |||||||||||||||
Write-down on impaired securities | - | 206 | |||||||||||||||
Stock based compensation and stock issued to officers as compensation | 4,449 | 3,804 | |||||||||||||||
Unrealized (gain)/loss on equity securities | (4,919 | ) | 3,631 | ||||||||||||||
Stock-based compensation and stock issued to officers as compensation | 4,216 | 3,302 | |||||||||||||||
Net change in accrued interest receivable and other assets | (51,776 | ) | 2,101 | (37,613 | ) | (4,966 | ) | ||||||||||
| Gain on acquisition | (5,440 | ) | - | ||||||||||||||
Net change in other liabilities | 828 | (4,537 | ) | 18,538 | (10,585 | ) | |||||||||||
Net cash provided by operating activities | 123,599 | 170,597 | 179,104 | 166,377 | |||||||||||||
Cash Flows from Investing Activities | |||||||||||||||||
Decrease/(increase) in short-term investments | 516,008 | (254,877 | ) | ||||||||||||||
Purchase of investment securities available-for-sale | (450,745 | ) | (690,966 | ) | (304,445 | ) | (244,567 | ) | |||||||||
Proceeds from repayments, maturities and calls of investment securities available-for-sale | 92,789 | 247,508 | |||||||||||||||
Proceeds from sale of investment securities available-for-sale | 99,541 | 415,543 | 553 | 21,102 | |||||||||||||
Proceeds from repayments, maturities and calls of investment securities available-for-sale | 389,829 | 585,285 | |||||||||||||||
Purchase of Federal Home Loan Bank stock | - | (1,650 | ) | ||||||||||||||
Redemptions of Federal Home Loan Bank stock | 6,459 | - | |||||||||||||||
Net increase in loans | (686,225 | ) | (853,453 | ) | (803,082 | ) | (61,195 | ) | |||||||||
Purchase of premises and equipment | (976 | ) | (3,166 | ) | (2,229 | ) | (1,787 | ) | |||||||||
Proceeds from sales of premises and equipment | - | 11 | |||||||||||||||
Proceeds from sales of other real estate owned | 2,186 | 6,713 | 307 | 0 | |||||||||||||
Net increase in investment in affordable housing and alternative energy partnerships | (20,867 | ) | (59,844 | ) | |||||||||||||
Net decrease/(increase) in investment in affordable housing and alternative energy partnerships | 1,467 | (10,618 | ) | ||||||||||||||
Acquisition, net of cash acquired | (14,309 | ) | - | (73,882 | ) | 0 | |||||||||||
Net cash used for investing activities | (159,099 | ) | (856,404 | ) | |||||||||||||
Net cash (used)/provided for investing activities | (1,088,522 | ) | (49,557 | ) | |||||||||||||
Cash Flows from Financing Activities | |||||||||||||||||
Net (decrease)/increase in deposits | 73,120 | 429,976 | (346,646 | ) | 428,291 | ||||||||||||
Net decrease in federal funds purchased and securities sold under agreements to repurchase | (250,000 | ) | (50,000 | ) | |||||||||||||
Advances from Federal Home Loan Bank | 2,608,000 | 2,730,000 | 75,000 | 50,000 | |||||||||||||
Repayment of Federal Home Loan Bank borrowings | (2,393,000 | ) | (2,305,000 | ) | 0 | (180,000 | ) | ||||||||||
Cash dividends paid | (50,491 | ) | (42,570 | ) | (51,052 | ) | (49,198 | ) | |||||||||
Purchases of treasury stock | - | (54,441 | ) | (63,484 | ) | (63,529 | ) | ||||||||||
Proceeds from shares issued under Dividend Reinvestment Plan | 1,849 | 1,643 | 1,873 | 1,725 | |||||||||||||
Proceeds from exercise of stock options | 1,018 | 49 | |||||||||||||||
Taxes paid related to net share settlement of RSUs | (5,127 | ) | (103 | ) | (2,015 | ) | (2,594 | ) | |||||||||
Net cash (used in) provided by financing activities | (14,631 | ) | 709,554 | ||||||||||||||
(Decrease)/increase in cash and cash equivalents | (50,131 | ) | 23,747 | ||||||||||||||
Cash and cash equivalents, beginning of the period | 218,017 | 180,130 | |||||||||||||||
Cash and cash equivalents, end of the period | $ | 167,886 | $ | 203,877 | |||||||||||||
Net cash (used)/provided by financing activities | (386,324 | ) | 184,695 | ||||||||||||||
(Decrease)/Increase in cash, cash equivalents, and restricted cash | (1,295,742 | ) | 301,515 | ||||||||||||||
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 | $ | 1,153,962 | $ | 1,722,593 | |||||||||||||
Supplemental disclosure of cash flow information | |||||||||||||||||
Cash paid during the period: | |||||||||||||||||
Interest | $ | 58,416 | $ | 61,212 | $ | 26,670 | $ | 44,669 | |||||||||
Income taxes paid | $ | 62,296 | $ | 31,717 | $ | 40,181 | $ | 36,791 | |||||||||
Non-cash investing and financing activities: | |||||||||||||||||
Net change in unrealized holding gain on securities available-for-sale, net of tax | $ | 3,592 | $ | 13,927 | |||||||||||||
Net change in unrealized holding loss on cash flow hedge derivatives | $ | (94 | ) | $ | (3,598 | ) | |||||||||||
Transfers to other real estate owned from loans held for investment | $ | 726 | $ | 2,698 | |||||||||||||
Loans transferred from held for sale to held for investment, net | $ | - | $ | 1,351 | |||||||||||||
Loans to facilitate the sale of other real estate owned | $ | - | $ | 2,616 | |||||||||||||
Issuance of stock related to acquisition | $ | - | $ | - | |||||||||||||
Net change in unrealized holding loss on securities available-for-sale, net of tax | $ | (72,421 | ) | $ | (4,639 | ) | |||||||||||
Net change in unrealized holding gain on cash flow hedge derivatives | $ | 4,158 | $ | 1,702 |
| ||||||||||||
Loans transferred from held-for-investment to held-for-sale | $ | (32 | ) | $ | 0 | ||||||||||||
See accompanying |
CATHAY GENERAL BANCORP AND SUBSIDIARSUBSIDIARIESIES
NOTES TO CONDENSED 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”), seven10 limited partnerships investing in affordable housing investments in which thewhich the Bank is the sole limited partner, Asia Realty Corp. 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 SeptemberJune 30, 2017, 2022, the Bank operates 2227 branches in Southern California, 1220 branches in Northern California, 129 branches in New York State, three branches in Illinois, three branches4 in Washington State, two branches2 in Illinois, 2 in Texas, one branch1 in Maryland, Massachusetts, one branch inNevada, and New Jersey, one branch in Maryland, one branch in Nevada, one branch1 in Hong Kong, and a representative office in ShanghaiTaipei, Beijing, and in Taipei.Shanghai. Deposit accounts at the Hong Kong branch are not insured by the Federal Deposit Insurance Corporation (the “FDIC”).
2. Business Combinations
2. Business Combinations
On July 14, 2017, the CompanyThe Company’s subsidiary bank, Cathay Bank completed the acquisitionpurchase of SinoPac Bancorp, the parent of Far EastHSBC Bank USA, National Bank (FENB), pursuant toAssociation’s West Coast mass retail market consumer banking business and retail business banking business on February 7, 2022. As a Stock Purchase Agreement, dated as of July 8, 2016, by and between the Company and Bank SinoPac Co. Ltd. Under the terms of the Stock Purchase Agreement, the Company purchased all of the issued and outstanding share capital of SinoPac Bancorp for an aggregate purchase price of $351.6 million plus additional post closing payments based on the realization of certain assets of FENB. The Company issued 926,192 shares of common stock as consideration and the remainder of the consideration is payable in cash. Pursuant to the Stock Purchase Agreement, (i) $100 million of the purchase price was deferred and will be released within one year based on the timing of the contemplated merger of FENB into Cathay Bank and (ii) 10% of the purchase price was held back and will be released over a period of three years following the closingresult of the acquisition, subject to any indemnity claims. Founded in 1974, FENB offers a wide range of financial services. The acquisition allowed the Company to expand its number of branches in California. As of July 14, 2017, FENB operated nineCathay Bank added 10 retail branches in California and additional loans with principal balance of $646.1 million and deposits with a representative office in Beijing. The acquisition will be accounted for as a business combination, subject to the provisionsbalance of ASC 805-10-50, Business Combinations.$575.2 million.
The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of the July 14, 2017 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 condensed consolidated statementConsolidated Statements of incomeOperations and Comprehensive Income beginning on the acquisition date. The purchase accounting adjustments are preliminary and subject to finalization during the one-yearone-year measurement period from the date of the acquisition.
The fair value of the assets and the liabilities acquired as of July 14, 2017 February 7, 2022 are shown below:
SinoPac Bancorp | ||||
Assets acquired: | ||||
Cash and cash equivalents | $ | 166,932 | ||
Short-term investments | 122,000 | |||
Securities available-for-sale | 107,934 | |||
Loans | 703,787 | |||
Premises and equipment | 6,198 | |||
Cash surrender value of life insurance | 46,083 | |||
Deferred tax assets, net | 40,136 | |||
Core deposit intangible | 7,144 | |||
Accrued interest receivable and other assets | 9,134 | |||
Total assets acquired | 1,209,348 | |||
Liabilities assumed: | ||||
Deposits | 813,888 | |||
Long-term debt | 30,000 | |||
Accrued interest payable and other liabilities | 5,608 | |||
Total liabilities assumed | 849,496 | |||
Net assets acquired | $ | 359,852 | ||
Cash paid | $ | 181,241 | ||
Fair value of common stock issued | 34,862 | |||
Total consideration paid | $ | 216,103 | ||
Purchase price payable to SinoPac | 138,309 | |||
Total consideration | $ | 354,412 | ||
Gains on bargain purchase | $ | 5,440 | ||
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 | ||
3.3. Basis of Presentation and Summary of Significant Accounting Policies
The accompanying unaudited condensed consolidated financial statementsConsolidated Financial Statements have been prepared in accordanceaccordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q10-Q and Article 10 of Regulation S-X.S-X. Accordingly, they do not include all of 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, 2017. 2022. For further information, refer to the audited consolidated financial statementsConsolidated Financial Statements and notesNotes included in the Company’s Annual Report on Form 10-K10-K for the year ended December 31, 2016.2021 filed with the SEC on February 28, 2022 (the “2021 Form 10-K”).
The preparation of the condensed consolidated financial statementsConsolidated Financial Statements in accordance with GAAP requires management of the Company to make a number of estimates and assumptions relating tojudgments that affect the reported amountamounts of assets and liabilities, revenues and the disclosureexpenses, and related disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the period.Consolidated Financial Statements. Actual results could differ from those estimates. The Company expects that the most significant estimatesestimate subject to change areis the allowance for loan losses, goodwill impairment, and other-than-temporary impairment.losses.
For comparability, the Company has adjusted consolidated prior period amounts to conform to the current periods presentation.
4.4. Recent Accounting Pronouncements
Accounting Standards adopted in 2017
In March 2016, 2020, the FASB issued ASU 2016-09, “Compensation Stock CompensationNo.2020-04, “Reference Rate Reform (Topic 718)848): Improvements to Employee Share-Based Payment Accounting.Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” ASU 2016-09 changes aspectsNo.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 share-based payment award transactions, including: (1)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 income taxes; (2) classification of excess tax benefits on the statement of cash flows; (3) forfeitures; (4) minimum statutory tax withholding requirements; and (5) classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes. ASU 2016-09 became effective for interim and annual periods beginning on January 1, 2017. The method of adoption differs for each of the topics coveredderivative contracts affected by the ASU.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 electedwill also continue to apply all topics covered by theassess impacts to our operations, financial models, data and technology as part of our transition plan. The Company adopted ASU2020-04 and ASU 2021-01 on a prospective basis and has elected toon 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 estimate forfeitures expectedtrack the exposure as of each reporting period and to occur in determiningassess the amountimpact as the reference rate transition occurs through the cessation of compensation cost to be recognized each period.
Under ASU 2016-09, all excess tax benefits and tax deficiencies from share based payments are recognized as income tax expense or benefit in the income statement instead of the previous accounting which credited excess tax benefits to additional paid-in capital and tax deficiencies as a charge to income tax expense or as an offset to accumulated excess tax benefits, if any. Excess tax benefits or deficiencies are included in income tax expense as discrete items in the period in which they occur. For diluted earnings per share calculations, excess tax benefits are no longer included in assumed proceeds when determining average diluted shares outstanding under the treasury stock method. ASU 2016-09 resulted in a $2.6 million tax benefit from the distribution of restricted stock units in the nine months ended September 30, 2017.
Other Accounting StandardsLIBOR.
In May 2014, March 2022, the FASB issued ASU 2014-09, Revenue from Contracts with Customers2022-01, “Derivatives and Hedging (Topic 606). The new815): Fair Value Hedging - Portfolio Layer Method.” Under prior guidance, replaces existing revenue recognition guidanceentities 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 contractsa portion of the portfolio that is not expected to provide goods or services to customersbe affected by prepayments, defaults, and amends existing guidance related to recognition of gains and losses onother events affecting the sale of certain nonfinancial assets such as real estate. ASU 2014-09 clarifies the principles for recognizing revenue and replaces nearly all existing revenue recognition guidance in U.S. GAAP. Quantitative and qualitative disclosures regarding the nature, amount, timing and uncertaintyamount of revenue and cash flows arising from contracts with customers areflows. 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 required. ASU 2014-09 as amended by ASU 2015-14, ASU 2016-08, ASU 2016-10 and ASU 2016-12, is effective for interim and annual periods beginning after December 15, 2017 and is applied on either a modified retrospective or full retrospective basis. Our revenue is primarily comprised of net interest income on financial assets and financial liabilities, which is explicitly excluded from the scope of ASU 2014-09, and non-interest income. The Company has completed the assessment phase of implementing this new standard. In the assessment phase, the Company determined which revenue streams are within the scope and those that are excluded from(i) expands the scope of the new standard. Basedportfolio layer method to include non-prepayable financial assets, (ii) specifies eligible hedging instruments in a single-layer hedge, (iii) provides additional guidance on this assessment, the Company concluded that substantially all of the Company's revenues are excluded from the scope of the new standard. For the revenues within the scope of the new standard, the Company concluded that there will not be a material impact under the new standard.
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” This update requires an entity to measure equity investments with readily determinable fair values at fair value with changes in fair value recognized in net income. Equity investment without readily determinable fair values will be measured at fair value either upon the occurrence of an observable price change or upon identification of an impairment and any amount by which the carrying value exceeding the fair value will be recognized as an impairment in net income. This update also requires an entity to disclose fair value of financial instruments measured at amortized cost on the balance sheet to measure that fair value using the exit price option. In addition, this update requires separate presentation in comprehensive income for changes in the fair value of a liability and in the balance sheet by measurement category and form of financial asset. ASU 2016-01 becomes effective for interim and annual periods beginning after December 15, 2017. The Company is currently evaluating the impact on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which is intended to increase transparency and comparability in the accounting for lease transactions. ASU 2016-02 requires lessees to recognize all leases longer than twelve months onand disclosure of hedge basis adjustments under the consolidated balance sheet as lease assetsportfolio layer method and lease liabilities and quantitative and qualitative disclosures regarding key information about leasing arrangements. Lessor accounting is largely unchanged. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years with an option to early adopt. ASU 2016-02 mandates a modified retrospective transition method for all entities. The Company is evaluating the impact of ASU 2016-02 and has determined that the majority of our leases are operating leases. We expect, upon adoption, the Company will record a liability(iv) specifies how hedge basis adjustments should be considered when determining credit losses for the remaining obligation underassets included in the lease agreements and a corresponding right-of-use asset in its consolidated financial statements.closed portfolio. ASU 2016-022022-01 will be effective for us on January 1, 2019 and will require transition using a modified retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This update requires an entity to use a broader range of reasonable and supportable forecasts, in addition to historical experience and current conditions, to develop an expected credit loss estimate for financial assets and net investments that are not accounted for at fair value through net income. Credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses to the amount by which fair value2023 though early adoption is below amortized cost. ASU 2016-13 becomes effective for interim and annual periods beginning after December 15, 2019.permitted. The Company has designated a management team to evaluate ASU 2016-13 and develop an implementation strategy. The Company has not yet determined the effectadoption of ASU 2016-13 on its accounting policies or the impact on the Company’s consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments.” This update provides guidance on eight cash flow issues with the objective of reducing the existing diversity in practice related to debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, distributions received from equity method investees, beneficial interest in securitization transactions, separately identifiable cash flows and application of the predominance principle. The amendments reduce current and potential future diversity in practice. The amendments in this update apply to all entities that are required to present a statement of cash flows under Topic 230. ASU 2016-15 becomes effective for interim and annual periods beginning after December 15, 2017. The Company2022-01 is currently evaluating the impact on its consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16, “Income Taxes – Intra-Entity Transfers of Assets Other Than Inventory.” This update will allow the income tax consequences of intra-entity transfers of assets other than inventory when the transfer occurs. The amendments in this update are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. The Company is currently evaluating the impact on its consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows – Restricted Cash.” This update requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this update do not provide a definition of restricted cash or restricted cash equivalents. The amendments in this update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Adoption of ASU 2016-18 is not expected to have a significant impact on the Company’s consolidatedour financial statements.
In January 2017,March 2022, ASU 2022-02, “Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures.” ASU 2022-02 eliminates the FASB issued ASU 2017-01, “Business Combinations (Topic 805) – Clarifying the Definition of a Business.” This update clarifies the definition of a business with the objective of addingaccounting guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill,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 consolidation. Under the current implementation guidance in Topic 805, there are three elements of a business—inputs, processes, and outputs. While an integrated set of assets and activities (collectively referred to as a “set”) that is a business usually has outputs, outputs are not required to be present. In addition, all the inputs and processes that a seller uses in operating a set are not required if market participants can acquire the set and continue to produce outputs, for example,restructurings by integrating the acquired set with their own inputs and processes. The amendments in this update also provide a screen to determinecreditors when a setborrower is not a business.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 amendments in this update affect all reporting entities that must determine whether they have acquired or sold a business. The amendments in this update are to be applied to annual periods beginning after December 15, 2017. Adoptionadoption of ASU 2017-012022-02 is not expected to have a significant impact on the Company’s consolidatedour financial statements.
In January 2017,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 FASB issuedsale 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 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” This update simplifies how2022-03 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 required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Adoption of this update is on a prospective basis and the amendments in this update are to be applied to annual periods beginning after December 15, 2019. Adoptionpermitted. The adoption of ASU 2017-042022-03 is not expected to have a significant impact on the Company’s consolidatedour financial statements.
5. Cash, Cash Equivalents and Restricted Cash
In February 2017,The Company manages its cash and cash equivalents based upon the FASB issued ASU 2017-05, "Other Income—GainsCompany’s operating, investment, and Lossesfinancing activities. Cash and cash equivalents, including for purposes of reporting cash flows, consist of cash on hand, amounts due from theDerecognitionbanks, and short-term investments with original maturity of Nonfinancial Assets (Subtopic 610-20):Clarifyingthree months or less.
The Company is required to maintain reserves with the ScopeFederal Reserve Bank. On December 7, 2020, the Federal Reserve Bank announced they were reducing the reserve requirement ratio to zero percent across all deposit tiers as of Asset Derecognition GuidanceMarch 26, 2020. There were 0 average reserve balances required as of June 30, 2022 or for the year ended December 31, 2021. The average excess balance with Federal Reserve Bank was $1.4 billion as of June 30, 2022 and Accounting$1.6 billion for Partial Salesthe year ended December 31, 2021. As of Nonfinancial Assets.” This update clarifies that a financial asset is within June 30, 2022 and December 31, 2021, the scope of Subtopic 610-20 if it meets the definition of an in substance nonfinancial asset. The amendments define the term “in substance nonfinancial asset”, in part, as a financial asset promised to a counterpartyCompany had 0 and $24.3 million, respectively, on deposit in a contract if substantially allcash margin account that serves as collateral for interest rate swaps. These amounts included 0 and $5.9 million as of June 30, 2022 and December 31, 2021, respectively, on deposit in a cash margin account that serves as collateral for the fair valueBancorp’s interest rate swaps. As of June 30, 2022 and December 31, 2021, the assets (recognizedCompany held $34.9 million and unrecognized) that are promised to the counterparty$690 thousand, respectively, in the contract is concentrated in nonfinancial assets, then all of the financial assets promised to the counterparty are in substance nonfinancial assetsa restricted escrow account with the scope of Subtopic 610-20. The amendments in this update clarify that an entity should identify each distinct nonfinancial asset or in substance nonfinancial asset promised to a counterparty and derecognize each asset when a counterparty obtains control of it. The amendments also clarify that an entity should allocate consideration to each distinct asset by applying the guidance in Topic 606 on allocating the transaction price to performance obligations. The amendments are effectivemajor bank for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Adoption of ASU 2017-05 is not expected to have a significant impact on the Company’s consolidated financial statements.its alternative energy investments.
In March 2017, the FASB issued ASU 2017-08, “Receivables- Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities.” This update amends the amortization period for certain purchased callable debt securities held at a premium. The amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. This update affects all entities that hold investments in callable debt securities that have an amortized cost basis in excess of the amount that is repayable by the issuer at the earliest call date. This update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently evaluating the impact on its consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, “Compensation –Stock Compensation (Topic 718): Modification Accounting.”The amendments in this update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The amendments in this update affect any entity that changes the terms or conditions of a share-based payment award. The amendments should be applied prospectively to an award modified on or after the adoption date. The amendments in this update are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Adoption of ASU 2017-09 is not expected to have a significant impact on the Company’s consolidated financial statements.
In July 2017, the FASB issued ASU 2017-11, “Earnings per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815)." There are two parts to this update. Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments that result in the strike price being reduced on the basis of the pricing of future equity offerings. Part II of this update addresses the difficulty in navigating topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests. The amendments in this update are effective for fiscal years beginning after December 15, 2020. Early adoption is permitted for all entities, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments in part I of this update should be applied in either of the following ways: (i) Retrospectively to outstanding financial instruments with a down round feature by means of a cumulative-effect adjustment to the statement of financial position as of the beginning of the first fiscal year and interim periods in which the pending content that links to this paragraph is effective; or (ii) Retrospectively to outstanding financial instruments with a down round feature for each prior reporting period presented in accordance with the guidance on accounting changes in paragraphs 250-10-45-5 through 45-10. The amendments to Part II of this update do not require any transition guidance because those amendments do not have an accounting effect. The Company is currently evaluating the impact on its consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815)”, targeted improvements to accounting for hedging activities. The amendments in this update better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. To meet that objective, the amendments expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early application is permitted in any interim period after issuance of the update. The Company is currently evaluating the impact on its consolidated financial statements.
5.6. Earnings per Share
Basic earnings per share excludesexcludes 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. OutstandingRestricted stock optionsunits (“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 June 30, | Six months ended June 30, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
(In thousands, except share and per share data) | ||||||||||||||||
Net income | $ | 88,978 | $ | 77,199 | $ | 164,006 | $ | 150,583 | ||||||||
Weighted-average shares: | ||||||||||||||||
Basic weighted-average number of common shares outstanding | 74,958,913 | 79,167,004 | 75,144,414 | 79,347,886 | ||||||||||||
Dilutive effect of weighted-average outstanding common share equivalents: | ||||||||||||||||
RSUs | 311,227 | 251,664 | 349,102 | 276,458 | ||||||||||||
Diluted weighted-average number of common shares outstanding | 75,270,140 | 79,418,668 | 75,493,516 | 79,624,344 | ||||||||||||
Average restricted stock units with anti-dilutive effect | 108,211 | 19,170 | 65,629 | 44,996 | ||||||||||||
Earnings per common share: | ||||||||||||||||
Basic | $ | 1.19 | $ | 0.98 | $ | 2.18 | $ | 1.90 | ||||||||
Diluted | $ | 1.18 | $ | 0.97 | $ | 2.17 | $ | 1.89 | ||||||||
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
(Dollars in thousands, except share and per share data) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Net income | $ | 49,746 | $ | 46,090 | $ | 150,102 | $ | 127,084 | ||||||||
Weighted-average shares: | ||||||||||||||||
Basic weighted-average number of common shares outstanding | 80,665,398 | 78,865,860 | 80,073,249 | 79,147,839 | ||||||||||||
Dilutive effect of weighted-average outstanding common share equivalents | ||||||||||||||||
Warrants | 399,957 | 569,949 | 409,019 | 520,686 | ||||||||||||
Options | 19,221 | 95,850 | 25,706 | 90,461 | ||||||||||||
Restricted stock units | 320,278 | 165,410 | 289,205 | 143,860 | ||||||||||||
Diluted weighted-average number of common shares outstanding | 81,404,854 | 79,697,069 | 80,797,179 | 79,902,846 | ||||||||||||
Average stock options and warrants with anti-dilutive effect | 0 | 207,183 | 6,561 | 247,974 | ||||||||||||
Earnings per common share: | ||||||||||||||||
Basic | $ | 0.62 | $ | 0.58 | $ | 1.87 | $ | 1.61 | ||||||||
Diluted | $ | 0.61 | $ | 0.58 | $ | 1.86 | $ | 1.59 | ||||||||
6.7. Stock-Based Compensation
UnderPursuant to the Company’s equity2005 Incentive Plan, as amended and restated, the Company may grant incentive plans,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 may beemployees.
RSUs are generally granted incentive or non-statutory stock options and/or restricted stock units, or awarded non-vested stock. As of September 30, 2017, the only options granted by the Company were non-statutory stock options to selected Bank officers and non-employee directors at exercise prices equalno cost to the fair market valuerecipient. RSUs generally vest ratably over three years or cliff vest after one or three years of a sharecontinued 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 common stock onattainment of specified performance goals and consideration of market conditions, the number of shares that vest can be adjusted to a minimum of 0 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. Such options have a maximum ten-year term and vest in 20% annual increments (subject to early termination in certain events). There were no options granted during the first nine months of 2017 or 2016.
Option compensation expense was zero for the three months and for the nine months ended September 30, 2017, and September 30, 2016. Stock-based compensation was fully recognized over the requisite service period for all awards. There were 43,540 and 2,110 stock option shares exercised in the nine months ended September 30, 2017 and 2016, respectively. The Company received $1.0 million from the exercise of stock options which had an aggregate intrinsic value of $607,000 during the nine months ended September 30, 2017 compared to $49,000 from the exercise of stock options which had an aggregate intrinsic value of $9,000 during the nine months ended September 30, 2016. The table below summarizes stock option activity for the periods indicated:
Weighted-average | Aggregate | |||||||||||||||
Weighted-average | Remaining Contractual | Intrinsic | ||||||||||||||
Shares | Exercise Price | Life (in years) | Value (in thousands) | |||||||||||||
Balance, December 31, 2016 | 82,670 | $ | 23.37 | 1.1 | $ | 1,211 | ||||||||||
Exercised | (18,040 | ) | 23.37 | |||||||||||||
Balance, March 31, 2017 | 64,630 | $ | 23.37 | 0.9 | $ | 925 | ||||||||||
Exercised | (19,500 | ) | 23.37 | |||||||||||||
Balance, June 30, 2017 | 45,130 | $ | 23.37 | 0.7 | $ | 658 | ||||||||||
Exercised | (6,000 | ) | 23.37 | |||||||||||||
Balance, September 30, 2017 | 39,130 | $ | 23.37 | 0.4 | $ | 659 | ||||||||||
Exercisable, September 30, 2017 | 39,130 | $ | 23.37 | 0.4 | $ | 659 | ||||||||||
In addition to stock options, the Company also grants restricted stock units to eligible employees that vest subject to continued employment at the vesting dates.
The Company granted restricted stock unitsCompensation costs for 87,781 shares at an average closing price of $38.59 per share in the first nine months of 2017. The Company granted restricted stock units for 88,693 shares at an average closing price of $30.37 per share in 2016.
Starting in December 2013, the Company granted performance share unittime-based awards in which the number of units earned is calculatedare based on the relative total shareholder return (TSR) of the Company’s common stock as compared to the TSR of the KBW Regional Banking Index. In addition, the Company granted performance share unit awards in which the number of units earned is determined by comparison to the targeted earnings per share (EPS) as defined in the award for the 2014 to 2016 period. In December 2016, in addition to TSR and EPS awards, the Company granted performance share unit awards in which the number of units earned is determined by comparison to the targeted return of assets ROA as defined in the award for December 2016. Performance TSR, performance EPS, and performance ROA units awarded are scheduled to vest on December 31 of the third full year from the grant date. The Company granted performance TSR restricted stock units for 30,319 shares in 2016, 61,209 shares in 2015 and 60,456 shares in 2014, performance EPS restricted stock units for 58,241 shares in 2016, 57,409 shares in 2015 and 57,642 shares in 2014, and performance ROA restricted stock units for 29,119 shares in 2016, to its seven executive officers. In February 2017, after approval by the Company’s Compensation Committee, 297,171 sharesquoted market price of the Company’s stock were distributed underat the TSR and EPS grants awarded in December 2013 under the terms of the awards, including 76,623 shares granted and distributedgrant date. Compensation costs associated with performance-based RSUs are based on higher than target actualgrant date fair value, which considers both market and performance conditions. Compensation costs of both time-based and for cash dividends duringperformance-based awards are recognized on a straight-line basis from the performance period.grant date until the vesting date of each grant.
The following table presents restricted stock unitRSU activity during the ninesix months ended SeptemberJune 30, 2017:2022:
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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 | (18,380 | ) | 45.80 | (81,934 | ) | 44.52 | ||||||||||
Forfeited | (9,879 | ) | 33.42 | 0 | 0 | |||||||||||
Balance at June 30, 2022 | 273,074 | $ | 34.90 | 362,965 | $ | 31.56 | ||||||||||
The compensationcompensation expense recorded for restricted stock unitsRSUs was $1.3$1.8 million and $1.2 million for the three months ended SeptemberJune 30, 2017, compared to $1.2 million in the same period a year ago.2022, and 2021, respectively. For the ninesix months ended SeptemberJune 30, 2017 2022 and 2016,2021, the compensation expense recorded related to the restricted stock unitsfor RSUs was $3.9$3.4 million and $3.3$2.5 million, respectively. Unrecognized stock-based compensation expense related to restricted stock unitsRSUs was $9.1$12.8 million and $7.8 million as of SeptemberJune 30, 2017, 2022 and is2021, respectively. As of June 30, 2022, these costs are expected to be recognized over the next 2.0 years.2.1 years for time-based and performance-based RSUs.
As of SeptemberJune 30, 2017, 3,465,4112022, 1,658,192 shares were available for future grants under the Company’s 2005 Incentive Plan, (as Amendedas amended and Restated) for future grants.restated.
Tax benefit from share-based payment arrangements of $2.6 million reduced income tax expense in the first nine months of 2017 compared to a tax short-fall of $3.4 million that was charged to income tax expense in the first nine months of 2016.
8. Investment Securities
7. Investment Securities
Investment securities were $1.4 billion as of September 30, 2017, compared to $1.3 billion as of December 31, 2016. The following tables reflectset forth the amortized cost, gross unrealized gains, gross unrealized losses, and fair value of investment securities available-for-sale as of SeptemberJune 30, 2017, 2022, and December 31, 2016:2021:
September 30, 2017 | June 30, 2022 | |||||||||||||||||||||||||||||||
Gross | Gross | Gross | Gross | |||||||||||||||||||||||||||||
Amortized | Unrealized | Unrealized | Amortized | Unrealized | Unrealized | |||||||||||||||||||||||||||
Cost | Gains | Losses | Fair Value | Cost | Gains | Losses | Fair Value | |||||||||||||||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||||||||||||||||
Securities Available-for-Sale | ||||||||||||||||||||||||||||||||
U.S. treasury securities | $ | 399,741 | $ | - | $ | 305 | $ | 399,436 | $ | 119,823 | $ | 0 | $ | 825 | $ | 118,998 | ||||||||||||||||
U.S. government agency entities | 9,679 | 27 | 6 | 9,700 | 75,781 | 1,285 | 125 | 76,941 | ||||||||||||||||||||||||
U.S. government sponsored entities | 400,000 | - | 6,278 | 393,722 | ||||||||||||||||||||||||||||
State and municipal securities | 1,943 | - | 12 | 1,931 | ||||||||||||||||||||||||||||
Mortgage-backed securities | 447,959 | 468 | 2,362 | 446,065 | 932,753 | 108 | 88,398 | 844,463 | ||||||||||||||||||||||||
Collateralized mortgage obligations | 1,715 | - | 5 | 1,710 | 23,949 | 0 | 1,369 | 22,580 | ||||||||||||||||||||||||
Corporate debt securities | 80,007 | 904 | 5 | 80,906 | 183,987 | 0 | 12,398 | 171,589 | ||||||||||||||||||||||||
Mutual funds | 6,500 | - | 229 | 6,271 | ||||||||||||||||||||||||||||
Preferred stock of government sponsored entities | 4,117 | 3,970 | - | 8,087 | ||||||||||||||||||||||||||||
Other equity securities | 13,294 | 7,463 | 98 | 20,659 | ||||||||||||||||||||||||||||
Total | $ | 1,364,955 | $ | 12,832 | $ | 9,300 | $ | 1,368,487 | $ | 1,336,293 | $ | 1,393 | $ | 103,115 | $ | 1,234,571 | ||||||||||||||||
December 31, 2016 | December 31, 2021 | |||||||||||||||||||||||||||||||
Gross | Gross | Gross | Gross | |||||||||||||||||||||||||||||
Amortized | Unrealized | Unrealized | Amortized | Unrealized | Unrealized | |||||||||||||||||||||||||||
Cost | Gains | Losses | Fair Value | Cost | Gains | Losses | Fair Value | |||||||||||||||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||||||||||||||||
Securities Available-for-Sale | ||||||||||||||||||||||||||||||||
U.S. treasury securities | $ | 489,839 | $ | 35 | $ | 857 | $ | 489,017 | ||||||||||||||||||||||||
U.S. government sponsored entities | 400,000 | - | 9,669 | 390,331 | ||||||||||||||||||||||||||||
U.S. government agency entities | 86,475 | 1,169 | 135 | 87,509 | ||||||||||||||||||||||||||||
Mortgage-backed securities | 339,241 | 309 | 3,290 | 336,260 | 886,614 | 9,465 | 7,414 | 888,665 | ||||||||||||||||||||||||
Collateralized mortgage obligations | 48 | - | 20 | 28 | 9,547 | 0 | 430 | 9,117 | ||||||||||||||||||||||||
Corporate debt securities | 74,965 | 247 | 862 | 74,350 | 144,231 | 441 | 2,654 | 142,018 | ||||||||||||||||||||||||
Mutual funds | 6,500 | - | 270 | 6,230 | ||||||||||||||||||||||||||||
Preferred stock of government sponsored entities | 2,811 | 4,497 | - | 7,308 | ||||||||||||||||||||||||||||
Other equity securities | 3,608 | 7,213 | - | 10,821 | ||||||||||||||||||||||||||||
Total | $ | 1,317,012 | $ | 12,301 | $ | 14,968 | $ | 1,314,345 | $ | 1,126,867 | $ | 11,075 | $ | 10,633 | $ | 1,127,309 | ||||||||||||||||
As of June 30, 2022, the amortized cost of AFS debt securities excluded accrued interest receivables of $3.1 million, which are included in “accrued interest receivables” 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 investment securities asavailable-for-sale as of SeptemberJune 30, 2017, 2022, by contractual maturities, are shownset 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.
June 30, 2022 | ||||||||||||||||
Securities Available-For-Sale | ||||||||||||||||
Securities Available-For-Sale | Amortized Cost | Fair Value | ||||||||||||||
Amortized cost | Fair value | (In thousands) | ||||||||||||||
(In thousands) | ||||||||||||||||
Due in one year or less | $ | 415,782 | $ | 415,555 | $ | 139,838 | $ | 138,315 | ||||||||
Due after one year through five years | 465,328 | 459,924 | 146,693 | 135,240 | ||||||||||||
Due after five years through ten years | 8,658 | 8,647 | 147,294 | 144,903 | ||||||||||||
Due after ten years (1) | 475,187 | 484,361 | ||||||||||||||
Due after ten years | 902,468 | 816,113 | ||||||||||||||
Total | $ | 1,364,955 | $ | 1,368,487 | $ | 1,336,293 | $ | 1,234,571 | ||||||||
| |||
There were no sales transactionsEquity Securities - The Company recognized a net loss of mortgage-backed securities during the first nine months of 2017. Proceeds of $415.3 million were received from the sales transactions of mortgage-backed securities during the first nine months of 2016. Proceeds from repayments, maturities and calls of mortgage-backed securities were $48.5 million and $125.3$1.0 million for the ninethree months ended SeptemberJune 30, 2017 and 2016, respectively. Proceeds of $99.5 million were received from2022, due to the sale of other investment securitiesdecrease in fair value during the ninequarter of equity investments with readily determinable fair values compared to a net loss of $0.9 million for the three months ended SeptemberJune 30, 2017. There were no sales transactions2021. The Company recognized a net gain of other investment securities during$4.9 million for the ninesix months ended SeptemberJune 30, 2016. Proceeds from maturities and calls2022 due to the increase in fair value of otherequity investment with readily determinable fair value compared to a net loss of $3.6 million for the six months ended June 30, 2021. Equity securities were $341.3$26.8 million during the nine months ended Septemberand $22.3 million as of June 30, 2017 compared to $460.0 million during the same period a year ago. During the nine months ended September 30, 2017, $439,000 of losses were realized on sales of investment securities. Other than temporary impairment write-downs of zero 2022, and $206,000 were recorded during the first nine months of 2017 and 2016, December 31, 2021, respectively.
The tables below show the fair value and unrealized losses of the temporarily impaired securities in our investment securities portfolio as of September 30, 2017, and December 31, 2016:
September 30, 2017 | ||||||||||||||||||||||||
Temporarily impaired securities | ||||||||||||||||||||||||
Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Securities Available-for-Sale | ||||||||||||||||||||||||
U.S. treasury securities | $ | 339,707 | $ | 46 | $ | 49,729 | $ | 259 | $ | 389,436 | $ | 305 | ||||||||||||
U.S. government sponsored entities | 395,774 | 6,284 | - | - | 395,774 | 6,284 | ||||||||||||||||||
State and municipal securities | 1,931 | 12 | - | - | 1,931 | 12 | ||||||||||||||||||
Mortgage-backed securities | 359,112 | 2,359 | 122 | 3 | 359,234 | 2,362 | ||||||||||||||||||
Collateralized mortgage obligations | 1,710 | 5 | - | - | 1,710 | 5 | ||||||||||||||||||
Corporate debt securities | 5,029 | 5 | - | - | 5,029 | 5 | ||||||||||||||||||
Mutual funds | - | - | 6,271 | 229 | 6,271 | 229 | ||||||||||||||||||
Other equity securities | 4,680 | 98 | - | - | 4,680 | 98 | ||||||||||||||||||
Total | $ | 1,107,943 | $ | 8,809 | $ | 56,122 | $ | 491 | $ | 1,164,065 | $ | 9,300 | ||||||||||||
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 June 30,2022, and December 31,2021:
December 31, 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||
Temporarily impaired securities | ||||||||||||||||||||||||||||||||||||||||||||||||
June 30, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||
Less than 12 months | 12 months or longer | Total | Less than 12 Months | 12 Months or Longer | Total | |||||||||||||||||||||||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | Gross | Gross | Gross | ||||||||||||||||||||||||||||||||||||||||
Value | Losses | Value | Losses | Value | Losses | Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||||||||||||||||||||
(In thousands) | Value | Losses | Value | Losses | Value | Losses | ||||||||||||||||||||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||
Securities Available-for-Sale | ||||||||||||||||||||||||||||||||||||||||||||||||
U.S. treasury securities | $ | 299,088 | $ | 857 | $ | - | $ | - | $ | 299,088 | $ | 857 | $ | 118,998 | $ | 825 | $ | 0 | $ | 0 | $ | 118,998 | $ | 825 | ||||||||||||||||||||||||
U.S. government sponsored entities | 390,331 | 9,669 | - | - | 390,331 | 9,669 | ||||||||||||||||||||||||||||||||||||||||||
U.S. government agency entities | 0 | 0 | 2,184 | 125 | 2,184 | 125 | ||||||||||||||||||||||||||||||||||||||||||
Mortgage-backed securities | 328,236 | 3,288 | 62 | 2 | 328,298 | 3,290 | 705,908 | 65,450 | 132,913 | 22,948 | 838,821 | 88,398 | ||||||||||||||||||||||||||||||||||||
Collateralized mortgage obligations | - | - | 28 | 20 | 28 | 20 | 14,793 | 163 | 7,787 | 1,206 | 22,580 | 1,369 | ||||||||||||||||||||||||||||||||||||
Corporate debt securities | - | - | 29,138 | 862 | 29,138 | 862 | 134,070 | 9,243 | 37,520 | 3,155 | 171,590 | 12,398 | ||||||||||||||||||||||||||||||||||||
Mutual funds | - | - | 6,230 | 270 | 6,230 | 270 | ||||||||||||||||||||||||||||||||||||||||||
Total | $ | 1,017,655 | $ | 13,814 | $ | 35,458 | $ | 1,154 | $ | 1,053,113 | $ | 14,968 | $ | 973,769 | $ | 75,681 | $ | 180,404 | $ | 27,434 | $ | 1,154,173 | $ | 103,115 | ||||||||||||||||||||||||
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 | 0 | 0 | 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
As of SeptemberJune 30, 2017, 2022, the Company had a total of 175 AFS debt securities in a gross unrealized loss position with no credit impairment, consisting primarily of 149 U.S. government-sponsored mortgage-backed securities, and 16 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 June 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 on available-for-sale securities of $9.3 million. The unrealized losses on these securities 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. Management believes the impairment was temporary and, accordingly, no impairment loss on these securities has been recognized in our condensed consolidated statements of operations. The Company expects to recover the amortized cost basis of its debt securities and has no present intent to sell and will not be required to sell available-for-sale debt securities that have declined below their cost before their anticipated recovery. Accordingly, no allowance for credit losses was recorded as of June 30, 2022, against these securities, and there was 0 provision for credit losses recognized for the three months ended June 30, 2022. For the three months ended June 30, 2021, there was 0 credit loss recognized.
Investment securitiesSecurities available-for-sale having a carrying value of $291.4$102.9 million and $30.5 million as of SeptemberJune 30, 2017, 2022, and $649.1 million as of December 31, 2016,2021, respectively, were pledged to secure public deposits, other borrowings, treasury tax and loan, and securities sold under agreements to repurchase. loan.
89. Loans.Loans
Most of the Company’sCompany’s business activities are with customers located in the predominatelyhigh-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, andNevada. 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. Loans areThe Company generally expectedexpects 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 condensed consolidated balance sheetsConsolidated Balance Sheets as of SeptemberJune 30, 2017, 2022 and December 31, 2016, 2021, were as follows:
June 30, 2022 | December 31, 2021 | |||||||||||||||
September 30, 2017 | December 31, 2016 | (In thousands) | ||||||||||||||
(In thousands) | ||||||||||||||||
Commercial loans | $ | 2,419,891 | $ | 2,248,187 | $ | 3,194,509 | $ | 2,982,399 | ||||||||
Real estate construction loans | 602,052 | 611,031 | ||||||||||||||
Commercial mortgage loans | 8,563,001 | 8,143,272 | ||||||||||||||
Residential mortgage loans | 2,922,537 | 2,444,048 | 5,045,383 | 4,182,006 | ||||||||||||
Commercial mortgage loans | 6,377,047 | 5,785,248 | ||||||||||||||
Real estate construction loans | 691,486 | 548,088 | ||||||||||||||
Equity lines | 181,751 | 171,711 | 377,009 | 419,487 | ||||||||||||
Installment & other loans | 4,722 | 3,993 | ||||||||||||||
Installment and other loans | 5,934 | 4,284 | ||||||||||||||
Gross loans | $ | 12,597,434 | $ | 11,201,275 | $ | 17,787,888 | $ | 16,342,479 | ||||||||
Allowance for loan losses | (121,535 | ) | (118,966 | ) | (148,772 | ) | (136,157 | ) | ||||||||
Unamortized deferred loan fees | (3,424 | ) | (4,994 | ) | ||||||||||||
Unamortized deferred loan fees, net | (5,540 | ) | (4,321 | ) | ||||||||||||
Total loans, net | $ | 12,472,475 | $ | 11,077,315 | $ | 17,633,576 | $ | 16,202,001 | ||||||||
Loans held for sale | $ | - | $ | 7,500 | ||||||||||||
AsAs of SeptemberJune 30, 2017, 2022, recorded investment in impaired loans totaled $127.7 million and was comprised of non-accrual loans excluding loans held for sale, of $65.3 million and accruing troubled debt restructured loans (TDRs) of $62.4was $60.7 million. As of December 31, 2016, 2021, recorded investment in impairednon-accrual loans totaled $115.1 million and was comprised of non-accrual loans, excluding loans held for sale, of $49.7 million and accruing TDRs of $65.4$65.8 million. For impairednon-accrual loans, the amounts previously charged off represent 7.1% as of September 30, 2017,2.6% and 8.4% as of December 31, 2016,10.7% of the contractual balances for impaired loans.non-accrual loans as of June 30, 2022 and December 31, 2021.
The following table presents the average balance and interest income recognized related to impaired loans for the periods indicated:
Impaired Loans | ||||||||||||||||||||||||||||||||
Average Recorded Investment | Interest Income Recognized | |||||||||||||||||||||||||||||||
Three months ended | Nine months ended | Three months ended | Nine months ended | |||||||||||||||||||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2017 | 2016 | 2017 | 2016 | |||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||
Commercial loans | $ | 24,987 | $ | 28,091 | $ | 22,572 | $ | 18,602 | $ | 678 | $ | 170 | $ | 760 | $ | 488 | ||||||||||||||||
Real estate construction loans | 29,780 | 5,869 | 29,868 | 12,005 | 99 | 66 | 287 | 196 | ||||||||||||||||||||||||
Commercial mortgage loans | 58,555 | 81,005 | 60,074 | 86,456 | 391 | 776 | 1,015 | 2,124 | ||||||||||||||||||||||||
Residential mortgage loans and equity lines | 13,937 | 18,256 | 15,208 | 17,456 | 96 | 148 | 287 | 401 | ||||||||||||||||||||||||
Total impaired loans | $ | 127,259 | $ | 133,221 | $ | 127,722 | $ | 134,519 | $ | 1,264 | $ | 1,160 | $ | 2,349 | $ | 3,209 | ||||||||||||||||
The following tables present the average recorded investment and interest income recognized on non-accrual loans for the period indicated:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, 2022 | June 30, 2022 | |||||||||||||||
Average Recorded | Interest Income | Average Recorded | Interest Income Recognized | |||||||||||||
(In thousands) | ||||||||||||||||
Commercial loans | $ | 31,919 | $ | 0 | $ | 29,648 | $ | 0 | ||||||||
Real estate construction loans | 0 | 0 | 0 | 0 | ||||||||||||
Commercial mortgage loans | 30,073 | 126 | 33,969 | 317 | ||||||||||||
Residential mortgage loans and equity lines | 15,284 | 7 | 13,870 | 14 | ||||||||||||
Installment and other loans | 43 | 0 | 22 | 0 | ||||||||||||
Total non-accrual loans | $ | 77,319 | $ | 133 | $ | 77,509 | $ | 331 | ||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, 2021 | June 30, 2021 | |||||||||||||||
Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | |||||||||||||
(In thousands) | ||||||||||||||||
Commercial loans | $ | 24,450 | $ | 31 | $ | 26,348 | $ | 43 | ||||||||
Real estate construction loans | 4,149 | 73 | 4,189 | 170 | ||||||||||||
Commercial mortgage loans | 36,792 | 100 | 38,445 | 157 | ||||||||||||
Residential mortgage loans and equity lines | 8,653 | 8 | 8,541 | 16 | ||||||||||||
Total impaired loans | $ | 74,044 | $ | 212 | $ | 77,523 | $ | 386 | ||||||||
The following table presents impairedpresents non-accrual loans and the related allowance for loan losses as of the dates indicated:June 30, 2022 and December 31, 2021:
Impaired Loans | ||||||||||||||||||||||||||||||||||||
September 30, 2017 | December 31, 2016 | |||||||||||||||||||||||||||||||||||
June 30, 2022 | ||||||||||||||||||||||||||||||||||||
Unpaid Principal Balance | Recorded Investment | Allowance | Unpaid Principal Balance | Recorded Investment | Allowance | Unpaid Principal Balance | Recorded Investment | Allowance | ||||||||||||||||||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||||||||||||||||||||
With no allocated allowance | ||||||||||||||||||||||||||||||||||||
Commercial loans | $ | 23,953 | $ | 23,373 | $ | - | $ | 24,037 | $ | 23,121 | $ | - | $ | 12,349 | $ | 8,934 | $ | — | ||||||||||||||||||
Real estate construction loans | 22,309 | 21,748 | - | 5,776 | 5,458 | - | ||||||||||||||||||||||||||||||
Commercial mortgage loans | 39,154 | 32,370 | - | 60,522 | 54,453 | - | 15,884 | 12,756 | — | |||||||||||||||||||||||||||
Residential mortgage loans and equity lines | 2,264 | 2,264 | - | 5,472 | 5,310 | - | 9,704 | 9,493 | — | |||||||||||||||||||||||||||
Installment and other loans | 79 | 79 | — | |||||||||||||||||||||||||||||||||
Subtotal | $ | 87,680 | $ | 79,755 | $ | - | $ | 95,807 | $ | 88,342 | $ | - | $ | 38,016 | $ | 31,262 | $ | — | ||||||||||||||||||
With allocated allowance | ||||||||||||||||||||||||||||||||||||
Commercial loans | $ | 14,082 | $ | 13,985 | $ | 1,461 | $ | 5,216 | $ | 4,640 | $ | 1,827 | $ | 28,268 | $ | 18,916 | $ | 6,813 | ||||||||||||||||||
Commercial mortgage loans | 23,061 | 22,820 | 823 | 10,158 | 10,017 | 573 | 2,426 | 2,384 | 133 | |||||||||||||||||||||||||||
Residential mortgage loans and equity lines | 12,461 | 11,111 | 322 | 13,263 | 12,075 | 396 | 8,742 | 8,090 | 38 | |||||||||||||||||||||||||||
Installment and other loans | 0 | 0 | — | |||||||||||||||||||||||||||||||||
Subtotal | $ | 49,604 | $ | 47,916 | $ | 2,606 | $ | 28,637 | $ | 26,732 | $ | 2,796 | $ | 39,436 | $ | 29,390 | $ | 6,984 | ||||||||||||||||||
Total impaired loans | $ | 137,284 | $ | 127,671 | $ | 2,606 | $ | 124,444 | $ | 115,074 | $ | 2,796 | ||||||||||||||||||||||||
Total non-accrual loans | $ | 77,452 | $ | 60,652 | $ | 6,984 | ||||||||||||||||||||||||||||||
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 | ||||||
The following tablestables present the aging of the loan portfolio by type as of SeptemberJune 30, 2017, 2022, and as of December 31, 2016:2021:
June 30, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
September 30, 2017 | 30-59 Days | 60-89 Days | 90 Days or Due | Non-accrual | Total Past | Loans Not Past Due | Total | |||||||||||||||||||||||||||||||||||||||||||||||||
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: | (In thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial loans | $ | 8,412 | $ | 14,855 | $ | 3,900 | $ | 15,942 | $ | 43,109 | $ | 2,376,782 | $ | 2,419,891 | $ | 7,347 | $ | 534 | $ | 1,372 | $ | 27,849 | $ | 37,102 | $ | 3,157,407 | $ | 3,194,509 | ||||||||||||||||||||||||||||
Real estate construction loans | - | - | - | 14,267 | 14,267 | 677,219 | 691,486 | 0 | 0 | 0 | 0 | 0 | 602,052 | 602,052 | ||||||||||||||||||||||||||||||||||||||||||
Commercial mortgage loans | - | - | - | 28,379 | 28,379 | 6,348,668 | 6,377,047 | 1,616 | 4,536 | 0 | 15,141 | 21,293 | 8,541,708 | 8,563,001 | ||||||||||||||||||||||||||||||||||||||||||
Residential mortgage loans and equity lines | - | 89 | - | 6,725 | 6,814 | 3,097,474 | 3,104,288 | 391 | 5,980 | 355 | 17,583 | 24,309 | 5,398,083 | 5,422,392 | ||||||||||||||||||||||||||||||||||||||||||
Installment and other loans | - | - | - | - | - | 4,722 | 4,722 | 22 | 0 | 10 | 79 | 111 | 5,823 | 5,934 | ||||||||||||||||||||||||||||||||||||||||||
Total loans | $ | 8,412 | $ | 14,944 | $ | 3,900 | $ | 65,313 | $ | 92,569 | $ | 12,504,865 | $ | 12,597,434 | $ | 9,376 | $ | 11,050 | $ | 1,737 | $ | 60,652 | $ | 82,815 | $ | 17,705,073 | $ | 17,787,888 | ||||||||||||||||||||||||||||
December 31, 2016 | ||||||||||||||||||||||||||||
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 | ||||||||||||||||||||||
Type of Loans: | (In thousands) | |||||||||||||||||||||||||||
Commercial loans | $ | 22,753 | $ | 27,190 | $ | - | $ | 15,710 | $ | 65,653 | $ | 2,182,534 | $ | 2,248,187 | ||||||||||||||
Real estate construction loans | 10,390 | 5,835 | - | 5,458 | 21,683 | 526,405 | 548,088 | |||||||||||||||||||||
Commercial mortgage loans | 5,886 | 700 | - | 20,078 | 26,664 | 5,758,584 | 5,785,248 | |||||||||||||||||||||
Residential mortgage loans and equity lines | 4,390 | - | - | 8,436 | 12,826 | 2,602,933 | 2,615,759 | |||||||||||||||||||||
Installment and other loans | - | - | - | - | - | 3,993 | 3,993 | |||||||||||||||||||||
Total loans | $ | 43,419 | $ | 33,725 | $ | - | $ | 49,682 | $ | 126,826 | $ | 11,074,449 | $ | 11,201,275 | ||||||||||||||
The determination of the amount of the allowance for loan losses for impaired loans is based on management’s current judgment about the credit quality of the loan portfolio and takes into consideration known relevant internal and external factors that affect collectability when determining the appropriate level for the allowance for loan losses. The nature of the process by which the Bank determines the appropriate allowance for loan losses requires the exercise of considerable judgment. This allowance evaluation process is also applied to troubled debt restructurings since they are considered to be impaired loans.
December 31, 2021 | ||||||||||||||||||||||||||||
30-59 Days | 60-89 Days | 90 Days or Due | Non-accrual | Total Past | 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 | 0 | 0 | 0 | 0 | 0 | 611,031 | 611,031 | |||||||||||||||||||||
Commercial mortgage loans | 8,389 | 0 | 0 | 38,173 | 46,562 | 8,096,710 | 8,143,272 | |||||||||||||||||||||
Residential mortgage loans and equity lines | 20,129 | 3,138 | 0 | 11,115 | 34,382 | 4,567,111 | 4,601,493 | |||||||||||||||||||||
Installment and other loans | 0 | 0 | 0 | 0 | 0 | 4,284 | 4,284 | |||||||||||||||||||||
Total loans | $ | 32,812 | $ | 13,015 | $ | 1,439 | $ | 65,846 | $ | 113,112 | $ | 16,229,367 | $ | 16,342,479 | ||||||||||||||
A troubled debt restructuringTDR is a formal modification of the terms of a loan when the lender, for economiceconomic 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 that causes significant delay in payment.
TDRs on accrual statusdate. Although these loan modifications are comprised of theconsidered 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 before beingare 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.
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 SeptemberJune 30, 2017, 2022, accruing TDRs were $62.4$12.7 million and non-accrual TDRs were $33.7$6.6 million compared to accruing TDRs of $65.4$12.8 million and non-accrual TDRs of $29.7$8.2 million as of December 31, 2016. 2021. The Company allocated specific$33 thousand in reserves of $1.1 million to accruing TDRs and $143,000$794 thousand to non-accrual TDRs as of SeptemberJune 30, 2017, and $1.3 million2022, compared to seven thousand to accruing TDRs and $1.1 millionthree thousand to non-accrual TDRs as of December 31, 2016. 2021.
The following tables presentset forth TDRs that were modified during the three months and ninesix months ended SeptemberJune 30, 2017 2022 and 2016,2021, their specific reserves as of SeptemberJune 30, 2017 2022, and 2016,2021, and charge-offs for the three months and ninesix months ended SeptemberJune 30, 2017 2022, and 2016:2021:
Three months ended September 30, 2017 | September 30, 2017 | Three Months Ended June 30, 2022 | June 30, 2022 | |||||||||||||||||||||||||||||||||||||
No. of Contracts | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | Charge-offs | Specific Reserve | No. of | Pre-Modification | Post-Modification Outstanding | Charge-offs | Specific Reserve | |||||||||||||||||||||||||||||||
(Dollars in thousands) | (In thousands) | |||||||||||||||||||||||||||||||||||||||
Commercial loans | 8 | $ | 18,873 | $ | 18,873 | $ | - | $ | 636 | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||||||||||||||
Commercial mortgage loans | 5 | 4,123 | 3,818 | 305 | 10 | |||||||||||||||||||||||||||||||||||
Residential mortgage loans and equity lines | 1 | 483 | 483 | - | 32 | 1 | 374 | 374 | 0 | 3 | ||||||||||||||||||||||||||||||
Total | 14 | $ | 23,479 | $ | 23,174 | $ | 305 | $ | 678 | 1 | $ | 374 | $ | 374 | $ | 0 | $ | 3 | ||||||||||||||||||||||
Three months ended September 30, 2016 | September 30, 2016 | Three Months Ended June 30, 2021 | June 30, 2021 | |||||||||||||||||||||||||||||||||||||
No. of Contracts | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | Charge-offs | Specific Reserve | No. of | Pre-Modification | Post-Modification Outstanding | Charge-offs | Specific Reserve | |||||||||||||||||||||||||||||||
(Dollars in thousands) | (In thousands) | |||||||||||||||||||||||||||||||||||||||
Commercial loans | 7 | $ | 18,258 | $ | 18,258 | $ | - | $ | 208 | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||||||||||||||
Commercial mortgage loans | 1 | 738 | 738 | - | - | |||||||||||||||||||||||||||||||||||
Residential mortgage loans and equity lines | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||||||||||
Total | 8 | $ | 18,996 | $ | 18,996 | $ | - | $ | 208 | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||||||||||||||
Six Months Ended June 30, 2022 | June 30, 2022 | |||||||||||||||||||
No. of | Pre-Modification | Post-Modification Outstanding | Charge-offs | Specific Reserve | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Commercial loans | 4 | $ | 6,115 | $ | 6,115 | $ | 0 | $ | 2,566 | |||||||||||
Residential mortgage loans and equity lines | 4 | 720 | 720 | 0 | 4 | |||||||||||||||
Total | 8 | $ | 6,835 | $ | 6,835 | $ | 0 | $ | 2,570 | |||||||||||
Six Months Ended June 30, 2021 | June 30, 2021 | |||||||||||||||||||
No. of | Pre-Modification | Post-Modification Outstanding | Charge-offs | Specific Reserve | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Commercial loans | 1 | $ | 686 | $ | 686 | $ | 0 | $ | 0 | |||||||||||
Residential mortgage loans and equity lines | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Total | 1 | $ | 686 | $ | 686 | $ | 0 | $ | 0 | |||||||||||
Nine months ended September 30, 2017 | September 30, 2017 | |||||||||||||||||||
No. of Contracts | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | Charge-offs | Specific Reserve | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Commercial loans | 13 | $ | 19,543 | $ | 19,543 | $ | - | $ | 641 | |||||||||||
Real estate construction loans | 2 | 28,489 | 28,489 | - | - | |||||||||||||||
Commercial mortgage loans | 5 | 4,123 | 3,818 | 305 | 10 | |||||||||||||||
Residential mortgage loans and equity lines | 1 | 483 | 483 | - | 32 | |||||||||||||||
Total | 21 | $ | 52,638 | $ | 52,333 | $ | 305 | $ | 683 | |||||||||||
Nine months ended September 30, 2016 | September 30, 2016 | |||||||||||||||||||
No. of Contracts | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | Charge-offs | Specific Reserve | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Commercial loans | 11 | $ | 23,102 | $ | 23,102 | $ | - | $ | 222 | |||||||||||
Commercial mortgage loans | 1 | 738 | 738 | - | - | |||||||||||||||
Residential mortgage loans and equity lines | 2 | 367 | 367 | - | - | |||||||||||||||
Total | 14 | $ | 24,207 | $ | 24,207 | $ | - | $ | 222 | |||||||||||
Modifications of the loan terms duringin the first ninethree and six months of 2017 ended June 30, 2022, were in the form of extensions of maturity dates. The length of time fordates, which modifications involving extensions of maturity dates ranged generally from three to twelve months from the modification date.
We expect that the TDRsTDRs on accruing status as of SeptemberJune 30, 2017, 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 SeptemberJune 30, 2017, 2022, and December 31, 2016, 2021, is shownset forth in the table below:
June 30, 2022 | ||||||||||||||||
Payment | Rate | Rate Reduction | Total | |||||||||||||
(In thousands) | ||||||||||||||||
Accruing TDRs | ||||||||||||||||
Commercial loans | $ | 3,014 | $ | 0 | $ | 0 | $ | 3,014 | ||||||||
Commercial mortgage loans | 0 | 5,463 | 600 | 6,063 | ||||||||||||
Residential mortgage loans | 1,780 | 231 | 1,587 | 3,598 | ||||||||||||
Total accruing TDRs | $ | 4,794 | $ | 5,694 | $ | 2,187 | $ | 12,675 | ||||||||
September 30, 2017 | ||||||||||||||||
Accruing TDRs | Payment Deferral | Rate Reduction |
Rate Reduction and Payment Deferral | Total | ||||||||||||
(In thousands) | ||||||||||||||||
Commercial loans | $ | 21,416 | $ | - | $ | - | $ | 21,416 | ||||||||
Real estate construction loans | 7,480 | - | - | 7,480 | ||||||||||||
Commercial mortgage loans | 16,130 | 5,895 | 4,787 | 26,812 | ||||||||||||
Residential mortgage loans | 3,516 | 337 | 2,797 | 6,650 | ||||||||||||
Total accruing TDRs | $ | 48,542 | $ | 6,232 | $ | 7,584 | $ | 62,358 | ||||||||
June 30, 2022 | ||||||||||||||||||||||||||||||||
Payment | Rate | Rate Reduction | Total | |||||||||||||||||||||||||||||
September 30, 2017 | (In thousands) | |||||||||||||||||||||||||||||||
Non-accrual TDRs | Payment Deferral | Rate Reduction |
Rate Reduction and Payment Deferral | Total | ||||||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||
Commercial loans | $ | 13,259 | $ | - | $ | - | $ | 13,259 | $ | 6,007 | $ | 0 | $ | 0 | $ | 6,007 | ||||||||||||||||
Commercial mortgage loans | 1,347 | 1,706 | 16,508 | 19,561 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||
Residential mortgage loans | 714 | - | 157 | 871 | 604 | 0 | 0 | 604 | ||||||||||||||||||||||||
Total non-accrual TDRs | $ | 15,320 | $ | 1,706 | $ | 16,665 | $ | 33,691 | $ | 6,611 | $ | 0 | $ | 0 | $ | 6,611 | ||||||||||||||||
December 31, 2021 | ||||||||||||||||
Payment | Rate | Rate Reduction | Total | |||||||||||||
(In thousands) | ||||||||||||||||
Accruing TDRs | ||||||||||||||||
Commercial loans | $ | 3,368 | $ | 0 | $ | 0 | $ | 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, 2016 | ||||||||||||||||
Accruing TDRs | Payment Deferral | Rate Reduction |
Rate Reduction and Payment Deferral | Total | ||||||||||||
(In thousands) | ||||||||||||||||
Commercial loans | $ | 7,971 | $ | - | $ | 4,081 | $ | 12,052 | ||||||||
Commercial mortgage loans | 25,979 | 5,961 | 12,452 | 44,392 | ||||||||||||
Residential mortgage loans | 5,104 | 789 | 3,056 | 8,949 | ||||||||||||
Total accruing TDRs | $ | 39,054 | $ | 6,750 | $ | 19,589 | $ | 65,393 | ||||||||
December 31, 2016 | ||||||||||||||||
Non-accrual TDRs | Payment Deferral | Rate Reduction |
Rate Reduction and Payment Deferral | Total | ||||||||||||
(In thousands) | ||||||||||||||||
Commercial loans | $ | 14,565 | $ | - | $ | - | $ | 14,565 | ||||||||
Commercial mortgage loans | 2,510 | 1,795 | 10,328 | 14,633 | ||||||||||||
Residential mortgage loans | 356 | - | 168 | 524 | ||||||||||||
Total non-accrual TDRs | $ | 17,431 | $ | 1,795 | $ | 10,496 | $ | 29,722 | ||||||||
The activity within our TDRs for the periods indicated is shown below:
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
Accruing TDRs | 2017 | 2016 | 2017 | 2016 | ||||||||||||
(In thousands) | ||||||||||||||||
Beginning balance | $ | 79,819 | $ | 74,708 | $ | 65,393 | $ | 81,680 | ||||||||
New restructurings | 21,790 | 18,347 | 49,973 | 20,412 | ||||||||||||
Restructured loans restored to accrual status | - | - | - | 10,303 | ||||||||||||
Payments | (35,677 | ) | (6,500 | ) | (41,372 | ) | (9,816 | ) | ||||||||
Restructured loans placed on non-accrual status | (3,574 | ) | - | (9,396 | ) | (1,138 | ) | |||||||||
Expiration of loan concession upon renewal | - | - | (2,240 | ) | (14,886 | ) | ||||||||||
Ending balance | $ | 62,358 | $ | 86,555 | $ | 62,358 | $ | 86,555 | ||||||||
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
Non-accrual TDRs | 2017 | 2016 | 2017 | 2016 | ||||||||||||
(In thousands) | ||||||||||||||||
Beginning balance | $ | 30,045 | $ | 25,442 | $ | 29,722 | $ | 39,923 | ||||||||
New restructurings | 2,360 | 649 | 2,360 | 3,794 | ||||||||||||
Restructured loans placed on non-accrual status | 3,574 | - | 9,396 | 1,138 | ||||||||||||
Charge-offs | (355 | ) | (3,407 | ) | (1,901 | ) | (4,352 | ) | ||||||||
Payments | (1,933 | ) | (1,814 | ) | (5,160 | ) | (9,330 | ) | ||||||||
Foreclosures | - | - | (726 | ) | - | |||||||||||
Restructured loans restored to accrual status | - | - | - | (10,303 | ) | |||||||||||
Ending balance | $ | 33,691 | $ | 20,870 | $ | 33,691 | $ | 20,870 | ||||||||
December 31, 2021 | ||||||||||||||||
Payment | Rate | Rate Reduction | Total | |||||||||||||
(In thousands) | ||||||||||||||||
Non-accrual TDRs | ||||||||||||||||
Commercial loans | $ | 7,717 | $ | 0 | $ | 0 | $ | 7,717 | ||||||||
Commercial mortgage loans | 0 | 0 | 0 | 0 | ||||||||||||
Residential mortgage loans | 458 | 0 | 0 | 458 | ||||||||||||
Total non-accrual TDRs | $ | 8,175 | $ | 0 | $ | 0 | $ | 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. One commercial loan of $50,000 with charge-offs of $2.1 million had payment defaults withinThe Company did not have any loans that were modified as a TDR during the previous twelve months ended Septemberand which had subsequently defaulted as of June 30, 2017.2022.
Under the Company’sCompany’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 SeptemberJune 30, 2017, 2022, there were no0 commitments to lend additional funds to those borrowers whose loans had been restructured, were considered impaired,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.
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. |
The following tables present the loan portfolio by risk rating as of September 30, 2017, and as of December 31, 2016:
September 30, 2017 | ||||||||||||||||||||
Pass/Watch | Special Mention | Substandard | Doubtful | Total | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Commercial loans | $ | 2,216,816 | $ | 146,479 | $ | 56,565 | $ | 31 | $ | 2,419,891 | ||||||||||
Real estate construction loans | 604,363 | 65,375 | 21,748 | - | 691,486 | |||||||||||||||
Commercial mortgage loans | 5,904,023 | 305,927 | 167,097 | - | 6,377,047 | |||||||||||||||
Residential mortgage loans and equity lines | 3,064,118 | 31,858 | 8,312 | - | 3,104,288 | |||||||||||||||
Installment and other loans | 4,722 | - | - | - | 4,722 | |||||||||||||||
Total gross loans | $ | 11,794,042 | $ | 549,639 | $ | 253,722 | $ | 31 | $ | 12,597,434 | ||||||||||
Loans held for sale | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
December 31, 2016 | ||||||||||||||||||||
Pass/Watch | Special Mention | Substandard | Doubtful | Total | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Commercial loans | $ | 2,023,114 | $ | 140,682 | $ | 84,293 | $ | 98 | $ | 2,248,187 | ||||||||||
Real estate construction loans | 469,909 | 44,129 | 34,050 | - | 548,088 | |||||||||||||||
Commercial mortgage loans | 5,410,623 | 250,221 | 124,404 | - | 5,785,248 | |||||||||||||||
Residential mortgage loans and equity lines | 2,605,834 | - | 9,925 | - | 2,615,759 | |||||||||||||||
Installment and other loans | 3,993 | - | - | - | 3,993 | |||||||||||||||
Total gross loans | $ | 10,513,473 | $ | 435,032 | $ | 252,672 | $ | 98 | $ | 11,201,275 | ||||||||||
Loans held for sale | $ | - | $ | - | $ | 7,500 | $ | - | $ | 7,500 | ||||||||||
The following table summarizes the Company’s loan held for investment as of June 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 | ||||||||||||||||||||||||||||||||||||
June 30, 2022 | 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Revolving | Revolving | Total | |||||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||||||
Commercial loans | ||||||||||||||||||||||||||||||||||||
Pass/Watch | $ | 239,233 | $ | 569,171 | $ | 241,222 | $ | 128,835 | $ | 123,501 | $ | 157,146 | $ | 1,604,498 | $ | 8,567 | $ | 3,072,173 | ||||||||||||||||||
Special Mention | 0 | 299 | 450 | 1,475 | 335 | 3,024 | 39,543 | 0 | 45,126 | |||||||||||||||||||||||||||
Substandard | 0 | 2,154 | 4,947 | 24,090 | 12,656 | 5,590 | 26,647 | 133 | 76,217 | |||||||||||||||||||||||||||
Doubtful | 0 | 0 | 0 | 836 | 0 | 0 | 232 | 0 | 1,068 | |||||||||||||||||||||||||||
Total | $ | 239,233 | $ | 571,624 | $ | 246,619 | $ | 155,236 | $ | 136,492 | $ | 165,760 | $ | 1,670,920 | $ | 8,700 | $ | 3,194,584 | ||||||||||||||||||
YTD period charge-offs | $ | 0 | $ | 50 | $ | 120 | $ | 25 | $ | 0 | $ | 0 | $ | 76 | $ | 0 | $ | 271 | ||||||||||||||||||
YTD period recoveries | (5 | ) | 0 | (27 | ) | 0 | (100 | ) | (202 | ) | (200 | ) | 0 | (534 | ) | |||||||||||||||||||||
Net charge-offs/(recoveries) | $ | (5 | ) | $ | 50 | $ | 93 | $ | 25 | $ | (100 | ) | $ | (202 | ) | $ | (124 | ) | $ | 0 | $ | (263 | ) | |||||||||||||
Real estate construction loans | ||||||||||||||||||||||||||||||||||||
Pass/Watch | $ | 56,141 | $ | 242,104 | $ | 149,165 | $ | 76,395 | $ | 24,543 | $ | 0 | $ | 0 | $ | 0 | $ | 548,348 | ||||||||||||||||||
Special Mention | 0 | 0 | 0 | 38,995 | 0 | 0 | 0 | 0 | 38,995 | |||||||||||||||||||||||||||
Substandard | 0 | 0 | 0 | 2,005 | 9,394 | 0 | 0 | 0 | 11,399 | |||||||||||||||||||||||||||
Total | $ | 56,141 | $ | 242,104 | $ | 149,165 | $ | 117,395 | $ | 33,937 | $ | 0 | $ | 0 | $ | 0 | $ | 598,742 | ||||||||||||||||||
YTD period charge-offs | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||||||||||
YTD period recoveries | 0 | 0 | 0 | 0 | 0 | (6 | ) | 0 | 0 | (6 | ) | |||||||||||||||||||||||||
Net charge-offs/(recoveries) | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | (6 | ) | $ | 0 | $ | 0 | $ | (6 | ) | ||||||||||||||||
Commercial mortgage loans | ||||||||||||||||||||||||||||||||||||
Pass/Watch | $ | 1,111,347 | $ | 1,865,855 | $ | 1,148,723 | $ | 1,188,757 | $ | 946,583 | $ | 1,731,097 | $ | 230,138 | $ | 0 | $ | 8,222,500 | ||||||||||||||||||
Special Mention | 13,174 | 25,245 | 7,669 | 33,722 | 63,323 | 63,981 | 0 | 0 | 207,114 | |||||||||||||||||||||||||||
Substandard | 0 | 7,308 | 0 | 12,450 | 27,975 | 77,684 | 3,358 | 0 | 128,775 | |||||||||||||||||||||||||||
Total | $ | 1,124,521 | $ | 1,898,408 | $ | 1,156,392 | $ | 1,234,929 | $ | 1,037,881 | $ | 1,872,762 | $ | 233,496 | $ | 0 | $ | 8,558,389 | ||||||||||||||||||
YTD period charge-offs | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||||||||||
YTD period recoveries | 0 | 0 | 0 | (120 | ) | 0 | (7 | ) | (56 | ) | 0 | (183 | ) | |||||||||||||||||||||||
Net charge-offs/(recoveries) | $ | 0 | $ | 0 | $ | 0 | $ | (120 | ) | $ | 0 | $ | (7 | ) | $ | (56 | ) | $ | 0 | $ | (183 | ) | ||||||||||||||
Residential mortgage loans | ||||||||||||||||||||||||||||||||||||
Pass/Watch | $ | 752,241 | $ | 996,764 | $ | 613,888 | $ | 634,297 | $ | 454,178 | $ | 1,568,294 | $ | 0 | $ | 0 | $ | 5,019,662 | ||||||||||||||||||
Special Mention | 0 | 0 | 33 | 1,560 | 759 | 917 | 0 | 0 | 3,269 | |||||||||||||||||||||||||||
Substandard | 0 | 790 | 2,649 | 5,280 | 3,381 | 11,614 | 0 | 0 | 23,714 | |||||||||||||||||||||||||||
Total | $ | 752,241 | $ | 997,554 | $ | 616,570 | $ | 641,137 | $ | 458,318 | $ | 1,580,825 | $ | 0 | $ | 0 | $ | 5,046,645 | ||||||||||||||||||
YTD period charge-offs | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||||||||||
YTD period recoveries | 0 | 0 | 0 | 0 | 0 | (45 | ) | 0 | 0 | (45 | ) | |||||||||||||||||||||||||
Net charge-offs/(recoveries) | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | (45 | ) | $ | 0 | $ | 0 | $ | (45 | ) | ||||||||||||||||
Equity lines | ||||||||||||||||||||||||||||||||||||
Pass/Watch | $ | 1,035 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 2 | $ | 350,762 | $ | 24,954 | $ | 376,753 | ||||||||||||||||||
Special Mention | 26 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 26 | |||||||||||||||||||||||||||
Substandard | 132 | 0 | 0 | 0 | 0 | 0 | 2,082 | 251 | 2,465 | |||||||||||||||||||||||||||
Total | $ | 1,193 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 2 | $ | 352,844 | $ | 25,205 | $ | 379,244 | ||||||||||||||||||
YTD period charge-offs | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||||||||||
YTD period recoveries | 0 | 0 | 0 | 0 | 0 | 0 | (5 | ) | (7 | ) | (12 | ) | ||||||||||||||||||||||||
Net charge-offs/(recoveries) | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | (5 | ) | $ | (7 | ) | $ | (12 | ) | |||||||||||||||
Installment and other loans | ||||||||||||||||||||||||||||||||||||
Pass/Watch | $ | 851 | $ | 3,813 | $ | 80 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 4,744 | ||||||||||||||||||
Total | $ | 851 | $ | 3,813 | $ | 80 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 4,744 | ||||||||||||||||||
YTD period charge-offs | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 1 | $ | 0 | $ | 1 | ||||||||||||||||||
YTD period recoveries | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||
Net charge-offs/(recoveries) | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 1 | $ | 0 | $ | 1 | ||||||||||||||||||
Total loans | $ | 2,174,180 | $ | 3,713,503 | $ | 2,168,826 | $ | 2,148,697 | $ | 1,666,628 | $ | 3,619,349 | $ | 2,257,260 | $ | 33,905 | $ | 17,782,348 | ||||||||||||||||||
Net charge-offs/(recoveries) | $ | (5 | ) | $ | 50 | $ | 93 | $ | (95 | ) | $ | (100 | ) | $ | (260 | ) | $ | (184 | ) | $ | (7 | ) | $ | (508 | ) | |||||||||||
Loans Amortized Cost Basis by Origination Year | ||||||||||||||||||||||||||||||||||||
December 31, 2021 | 2021 | 2020 | 2019 | 2018 | 2017 | Prior | Revolving | Revolving | 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 | 0 | 40,761 | 49 | 47,925 | |||||||||||||||||||||||||||
Substandard | 450 | 5,879 | 22,513 | 16,423 | 14,309 | 5,221 | 34,713 | 5,716 | 105,224 | |||||||||||||||||||||||||||
Doubtful | 0 | 0 | 0 | 0 | 0 | 0 | 900 | 0 | 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 | $ | 0 | $ | 1,478 | $ | 507 | $ | 366 | $ | 0 | $ | 50 | $ | 17,650 | $ | 0 | $ | 20,051 | ||||||||||||||||||
YTD period recoveries | 0 | (1 | ) | (29 | ) | (124 | ) | 0 | (191 | ) | (1,361 | ) | 0 | (1,706 | ) | |||||||||||||||||||||
Net | $ | 0 | $ | 1,477 | $ | 478 | $ | 242 | $ | 0 | $ | (141 | ) | $ | 16,289 | $ | 0 | $ | 18,345 | |||||||||||||||||
Real estate construction loans | ||||||||||||||||||||||||||||||||||||
Pass/Watch | $ | 199,188 | $ | 188,782 | $ | 125,316 | $ | 24,548 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 537,834 | ||||||||||||||||||
Special Mention | 0 | 23,107 | 27,672 | 17,374 | 0 | 0 | 0 | 0 | 68,153 | |||||||||||||||||||||||||||
Substandard | 0 | 0 | 1,919 | 0 | 0 | 0 | 0 | 0 | 1,919 | |||||||||||||||||||||||||||
Total | $ | 199,188 | $ | 211,889 | $ | 154,907 | $ | 41,922 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 607,906 | ||||||||||||||||||
YTD period charge-offs | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||||||||||
YTD period recoveries | 0 | 0 | 0 | 0 | 0 | (76 | ) | 0 | 0 | (76 | ) | |||||||||||||||||||||||||
Net | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | (76 | ) | $ | 0 | $ | 0 | $ | (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 | $ | 0 | $ | 7,621,038 | ||||||||||||||||||
Special Mention | 45,719 | 59,182 | 49,796 | 103,101 | 61,105 | 60,448 | 750 | 0 | 380,101 | |||||||||||||||||||||||||||
Substandard | 1,110 | 0 | 13,483 | 42,803 | 1,580 | 76,906 | 3,297 | 0 | 139,179 | |||||||||||||||||||||||||||
Total | $ | 1,940,636 | $ | 1,261,007 | $ | 1,316,827 | $ | 1,177,095 | $ | 790,601 | $ | 1,451,236 | $ | 202,916 | $ | 0 | $ | 8,140,318 | ||||||||||||||||||
YTD period charge-offs | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||||||||||
YTD period recoveries | 0 | 0 | (240 | ) | 0 | 0 | (28 | ) | (111 | ) | 0 | (379 | ) | |||||||||||||||||||||||
Net | $ | 0 | $ | 0 | $ | (240 | ) | $ | 0 | $ | 0 | $ | (28 | ) | $ | (111 | ) | $ | 0 | $ | (379 | ) | ||||||||||||||
Residential mortgage loans | ||||||||||||||||||||||||||||||||||||
Pass/Watch | $ | 978,375 | $ | 622,999 | $ | 678,775 | $ | 502,325 | $ | 453,992 | $ | 929,846 | $ | 0 | $ | 0 | $ | 4,166,312 | ||||||||||||||||||
Special Mention | 0 | 46 | 1,576 | 1,064 | 836 | 438 | 0 | 0 | 3,960 | |||||||||||||||||||||||||||
Substandard | 1,684 | 147 | 2,698 | 2,574 | 862 | 5,255 | 0 | 0 | 13,220 | |||||||||||||||||||||||||||
Total | $ | 980,059 | $ | 623,192 | $ | 683,049 | $ | 505,963 | $ | 455,690 | $ | 935,539 | $ | 0 | $ | 0 | $ | 4,183,492 | ||||||||||||||||||
YTD period charge-offs | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 3 | $ | 0 | $ | 0 | $ | 0 | $ | 3 | ||||||||||||||||||
YTD period recoveries | 0 | 0 | 0 | 0 | 0 | (208 | ) | 0 | 0 | (208 | ) | |||||||||||||||||||||||||
Net | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 3 | $ | (208 | ) | $ | 0 | $ | 0 | $ | (205 | ) | ||||||||||||||||
Equity lines | ||||||||||||||||||||||||||||||||||||
Pass/Watch | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 5 | $ | 389,069 | $ | 30,025 | $ | 419,099 | ||||||||||||||||||
Substandard | 0 | 0 | 0 | 0 | 0 | 0 | 1,230 | 273 | 1,503 | |||||||||||||||||||||||||||
Total | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 5 | $ | 390,299 | $ | 30,298 | $ | 420,602 | ||||||||||||||||||
YTD period charge-offs | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||||||||||
YTD period recoveries | 0 | 0 | 0 | 0 | 0 | 0 | (10 | ) | (64 | ) | (74 | ) | ||||||||||||||||||||||||
Net | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | (10 | ) | $ | (64 | ) | $ | (74 | ) | |||||||||||||||
Installment and other loans | ||||||||||||||||||||||||||||||||||||
Pass/Watch | $ | 4,117 | $ | 168 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 4,285 | ||||||||||||||||||
Total | $ | 4,117 | $ | 168 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 4,285 | ||||||||||||||||||
YTD period charge-offs | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||||||||||
YTD period recoveries | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||
Net | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||||||||||
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) | $ | 0 | $ | 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.
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 off-balance sheetunfunded 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 commitments are significantlosses" 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 can and do changevary 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 management’s processa 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 analyzingcurrent 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 second 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.
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 firsteight 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 on management’s assumptions about specific borrowers,the higher risk characteristics of purchased syndicated loans. Current and forecasted economic trends and underlying market values for collateral and applicable economic and environmental conditions, among other factors.dependent loans also are considered within the econometric models described above.
The following table presentsCompany’s CECL methodology requires a significant amount of management judgment in determining the balanceappropriate 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 |
● | 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 by portfolio segmenton an individual loan basis. The allowance for loan losses for individually evaluated loans is measured as the difference between the recorded value of the loans and based on impairment method astheir fair value. For loans evaluated individually, the Company uses one of September 30, 2017,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 as(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 December 31, 2016: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.
Real Estate | Commercial | Residential | ||||||||||||||||||||||
Commercial | Construction | Mortgage | Mortgage Loans | Installment and | ||||||||||||||||||||
Loans | Loans | Loans | and Equity Lines | Other Loans | Total | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
September 30, 2017 | ||||||||||||||||||||||||
Loans individually evaluated for impairment | ||||||||||||||||||||||||
Allowance | $ | 1,461 | $ | - | $ | 823 | $ | 322 | $ | - | $ | 2,606 | ||||||||||||
Balance | $ | 37,358 | $ | 21,748 | $ | 55,190 | $ | 13,376 | $ | - | $ | 127,672 | ||||||||||||
Loans collectively evaluated for impairment | ||||||||||||||||||||||||
Allowance | $ | 49,578 | $ | 22,008 | $ | 36,579 | $ | 10,740 | $ | 24 | $ | 118,929 | ||||||||||||
Balance | $ | 2,382,533 | $ | 669,738 | $ | 6,321,857 | $ | 3,090,912 | $ | 4,722 | $ | 12,469,762 | ||||||||||||
Total allowance | $ | 51,039 | $ | 22,008 | $ | 37,402 | $ | 11,062 | $ | 24 | $ | 121,535 | ||||||||||||
Total balance | $ | 2,419,891 | $ | 691,486 | $ | 6,377,047 | $ | 3,104,288 | $ | 4,722 | $ | 12,597,434 | ||||||||||||
December 31, 2016 | ||||||||||||||||||||||||
Loans individually evaluated for impairment | ||||||||||||||||||||||||
Allowance | $ | 1,827 | $ | - | $ | 573 | $ | 396 | $ | - | $ | 2,796 | ||||||||||||
Balance | $ | 27,761 | $ | 5,458 | $ | 64,470 | $ | 17,385 | $ | - | $ | 115,074 | ||||||||||||
Loans collectively evaluated for impairment | ||||||||||||||||||||||||
Allowance | $ | 47,376 | $ | 23,268 | $ | 34,291 | $ | 11,224 | $ | 11 | $ | 116,170 | ||||||||||||
Balance | $ | 2,220,426 | $ | 542,630 | $ | 5,720,778 | $ | 2,598,374 | $ | 3,993 | $ | 11,086,201 | ||||||||||||
Total allowance | $ | 49,203 | $ | 23,268 | $ | 34,864 | $ | 11,620 | $ | 11 | $ | 118,966 | ||||||||||||
Total balance | $ | 2,248,187 | $ | 548,088 | $ | 5,785,248 | $ | 2,615,759 | $ | 3,993 | $ | 11,201,275 | ||||||||||||
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 Condensed 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 Condensed Consolidated Balance Sheets. Changes in the allowance for unfunded commitments are included in the provision for loan losses.
The following tables detailtables set forth activity in the allowance for loan losses by portfolio segment for the three months and ninesix months ended SeptemberJune 30, 2017, 2022, and SeptemberJune 30, 2016. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.2021.
Three months ended June 30, 2022 and 2021 | ||||||||||||||||||||||||
Residential | ||||||||||||||||||||||||
Real Estate | Commercial | Mortgage Loans | Installment | |||||||||||||||||||||
Commercial | Construction | Mortgage | and | and Other | ||||||||||||||||||||
Loans | Loans | Loans | Equity Lines | Loans | Total | |||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Allowance for Loan Losses: | ||||||||||||||||||||||||
March 31, 2022 Ending Balance | $ | 44,738 | $ | 7,436 | $ | 63,878 | $ | 29,630 | $ | 104 | $ | 145,786 | ||||||||||||
Provision/(reversal) for possible credit losses | 4,208 | (160 | ) | 4,634 | (5,945 | ) | 31 | 2,768 | ||||||||||||||||
Charge-offs | (50 | ) | 0 | 0 | 0 | (1 | ) | (51 | ) | |||||||||||||||
Recoveries | 175 | 0 | 88 | 6 | 0 | 269 | ||||||||||||||||||
Net (charge-offs)/recoveries | 125 | 0 | 88 | 6 | (1 | ) | 218 | |||||||||||||||||
June 30, 2022 Ending Balance | $ | 49,071 | $ | 7,276 | $ | 68,600 | $ | 23,691 | $ | 134 | $ | 148,772 | ||||||||||||
Allowance for unfunded credit commitments: | ||||||||||||||||||||||||
March 31, 2022 Ending Balance | $ | 3,177 | $ | 3,227 | $ | 0 | $ | 0 | $ | 0 | $ | 6,404 | ||||||||||||
Provision/(reversal) for possible credit losses | (373 | ) | 79 | 26 | 0 | 0 | (268 | ) | ||||||||||||||||
June 30, 2022 Ending Balance | $ | 2,804 | $ | 3,306 | $ | 26 | $ | 0 | $ | 0 | $ | 6,136 | ||||||||||||
Three months ended September 30, 2017 and 2016 | ||||||||||||||||||||||||
Real Estate | Commercial | Residential | Installment | |||||||||||||||||||||
Commercial | Construction | Mortgage | Mortgage Loans | and Other | ||||||||||||||||||||
Loans | Loans | Loans | and Equity Lines | Loans | Total | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
June 30, 2017 Ending Balance | $ | 46,744 | $ | 17,844 | $ | 36,840 | $ | 14,364 | $ | 17 | 115,809 | |||||||||||||
Provision/(credit) for possible credit losses | 3,800 | 4,117 | (4,615 | ) | (3,309 | ) | 7 | - | ||||||||||||||||
Charge-offs | (80 | ) | - | (305 | ) | - | - | (385 | ) | |||||||||||||||
Recoveries | 575 | 47 | 5,482 | 7 | - | 6,111 | ||||||||||||||||||
Net (charge-offs)/recoveries | 495 | 47 | 5,177 | 7 | - | 5,726 | ||||||||||||||||||
September 30, 2017 Ending Balance | $ | 51,039 | $ | 22,008 | $ | 37,402 | $ | 11,062 | $ | 24 | $ | 121,535 | ||||||||||||
June 30, 2016 Ending Balance | $ | 50,590 | $ | 10,753 | $ | 46,090 | $ | 15,503 | $ | 12 | $ | 122,948 | ||||||||||||
Provision/(credit) for possible credit losses | 4,380 | (2,056 | ) | 3,132 | (5,452 | ) | (4 | ) | - | |||||||||||||||
Charge-offs | (3,277 | ) | - | (4,626 | ) | - | - | (7,903 | ) | |||||||||||||||
Recoveries | 2,006 | 548 | 337 | 6 | - | 2,897 | ||||||||||||||||||
Net (charge-offs)/recoveries | (1,271 | ) | 548 | (4,289 | ) | 6 | - | (5,006 | ) | |||||||||||||||
September 30, 2016 Ending Balance | $ | 53,699 | $ | 9,245 | $ | 44,933 | $ | 10,057 | $ | 8 | $ | 117,942 | ||||||||||||
Nine months ended September 30, 2017 and 2016 | ||||||||||||||||||||||||
Real Estate | Commercial | Residential | Installment | |||||||||||||||||||||
Commercial | Construction | Mortgage | Mortgage Loans | and Other | ||||||||||||||||||||
Loans | Loans | Loans | and Equity Lines | Loans | Total | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
2017 Beginning Balance | $ | 49,203 | $ | 23,268 | $ | 34,864 | $ | 11,620 | $ | 11 | $ | 118,966 | ||||||||||||
Provision/(credit) for possible credit losses | 2,245 | (1,403 | ) | (2,775 | ) | (580 | ) | 13 | (2,500 | ) | ||||||||||||||
Charge-offs | (1,810 | ) | - | (860 | ) | - | - | (2,670 | ) | |||||||||||||||
Recoveries | 1,401 | 143 | 6,173 | 22 | - | 7,739 | ||||||||||||||||||
Net (charge-offs)/recoveries | (409 | ) | 143 | 5,313 | 22 | - | 5,069 | |||||||||||||||||
September 30, 2017 Ending Balance | $ | 51,039 | $ | 22,008 | $ | 37,402 | $ | 11,062 | $ | 24 | $ | 121,535 | ||||||||||||
Reserve for impaired loans | $ | 1,461 | $ | - | $ | 823 | $ | 322 | $ | - | $ | 2,606 | ||||||||||||
Reserve for non-impaired loans | $ | 49,578 | $ | 22,008 | $ | 36,579 | $ | 10,740 | $ | 24 | $ | 118,929 | ||||||||||||
Reserve for off-balance sheet credit commitments | $ | 2,760 | $ | 1,206 | $ | 109 | $ | 175 | $ | 4 | $ | 4,254 | ||||||||||||
2016 Beginning Balance | $ | 56,199 | $ | 22,170 | $ | 49,440 | $ | 11,145 | $ | 9 | $ | 138,963 | ||||||||||||
Provision/(credit) for possible credit losses | 5,815 | (20,796 | ) | 295 | (963 | ) | (1 | ) | (15,650 | ) | ||||||||||||||
Charge-offs | (12,035 | ) | - | (5,681 | ) | (149 | ) | - | (17,865 | ) | ||||||||||||||
Recoveries | 3,720 | 7,871 | 879 | 24 | - | 12,494 | ||||||||||||||||||
Net (charge-offs)/recoveries | (8,315 | ) | 7,871 | (4,802 | ) | (125 | ) | - | (5,371 | ) | ||||||||||||||
September 30, 2016 Ending Balance | $ | 53,699 | $ | 9,245 | $ | 44,933 | $ | 10,057 | $ | 8 | $ | 117,942 | ||||||||||||
Reserve for impaired loans | $ | 1,320 | $ | - | $ | 1,248 | $ | 375 | $ | - | $ | 2,943 | ||||||||||||
Reserve for non-impaired loans | $ | 52,379 | $ | 9,245 | $ | 43,685 | $ | 9,682 | $ | 8 | $ | 114,999 | ||||||||||||
Reserve for off-balance sheet credit commitments | $ | 2,112 | $ | - | $ | 35 | $ | 80 | $ | 2 | $ | 2,229 | ||||||||||||
Residential | ||||||||||||||||||||||||
Real Estate | Commercial | Mortgage Loans | Installment | |||||||||||||||||||||
Commercial | Construction | Mortgage | and | and Other | ||||||||||||||||||||
Loans | Loans | Loans | Equity Lines | Loans | Total | |||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Allowance for Loan Losses: | ||||||||||||||||||||||||
March 31, 2021 Ending Balance | $ | 42,034 | $ | 6,992 | $ | 65,347 | $ | 30,734 | $ | 3 | $ | 145,110 | ||||||||||||
Provision/(reversal) for possible credit losses | 5,590 | (873 | ) | (7,416 | ) | (3,899 | ) | (2 | ) | (6,600 | ) | |||||||||||||
Charge-offs | (7,712 | ) | 0 | 0 | 0 | 0 | (7,712 | ) | ||||||||||||||||
Recoveries | 155 | 0 | 95 | 208 | 0 | 458 | ||||||||||||||||||
Net (charge-offs)/recoveries | (7,557 | ) | 0 | 95 | 208 | 0 | (7,254 | ) | ||||||||||||||||
June 30, 2021 Ending Balance | $ | 40,067 | $ | 6,119 | $ | 58,026 | $ | 27,043 | $ | 1 | $ | 131,256 | ||||||||||||
Allowance for unfunded credit commitments: | ||||||||||||||||||||||||
March 31, 2021 Ending Balance | $ | 8,163 | $ | 2,251 | $ | 36 | $ | 0 | $ | 0 | $ | 10,450 | ||||||||||||
Provision/(reversal) for possible credit losses | (3,775 | ) | 1,330 | 45 | 0 | 0 | (2,400 | ) | ||||||||||||||||
June 30, 2021 Ending Balance | $ | 4,388 | $ | 3,581 | $ | 81 | $ | 0 | $ | 0 | $ | 8,050 | ||||||||||||
Six months ended June 30, 2022 and 2021 | ||||||||||||||||||||||||
Residential | ||||||||||||||||||||||||
Real Estate | Commercial | Mortgage Loans | Installment | |||||||||||||||||||||
Commercial | Construction | Mortgage | and | and Other | ||||||||||||||||||||
Loans | Loans | Loans | Equity Lines | Loans | Total | |||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Allowance for Loan Losses: | ||||||||||||||||||||||||
December 31, 2021 Ending Balance | $ | 43,394 | $ | 6,302 | $ | 61,081 | $ | 25,379 | $ | 1 | $ | 136,157 | ||||||||||||
Provision/(reversal) for possible credit losses | 5,414 | 968 | 7,336 | (1,745 | ) | 134 | 12,107 | |||||||||||||||||
Charge-offs | (271 | ) | 0 | 0 | 0 | (1 | ) | (272 | ) | |||||||||||||||
Recoveries | 534 | 6 | 183 | 57 | 0 | 780 | ||||||||||||||||||
Net (charge-offs)/recoveries | 263 | 6 | 183 | 57 | (1 | ) | 508 | |||||||||||||||||
June 30, 2022 Ending Balance | $ | 49,071 | $ | 7,276 | $ | 68,600 | $ | 23,691 | $ | 134 | $ | 148,772 | ||||||||||||
Allowance for unfunded credit commitments: | ||||||||||||||||||||||||
December 31, 2021 Ending Balance | $ | 3,725 | $ | 3,375 | $ | 0 | $ | 0 | $ | 0 | $ | 7,100 | ||||||||||||
Provision/(reversal) for possible credit losses | (921 | ) | (69 | ) | 26 | 0 | 0 | (964 | ) | |||||||||||||||
June 30, 2022 Ending Balance | $ | 2,804 | $ | 3,306 | $ | 26 | $ | 0 | $ | 0 | $ | 6,136 | ||||||||||||
Residential | ||||||||||||||||||||||||
Real Estate | Commercial | Mortgage Loans | Installment | |||||||||||||||||||||
Commercial | Construction | Mortgage | and | and Other | ||||||||||||||||||||
Loans | Loans | Loans | Equity Lines | Loans | Total | |||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Allowance for Loan Losses: | ||||||||||||||||||||||||
December 31, 2020 Ending Balance | $ | 68,742 | $ | 30,854 | $ | 49,205 | $ | 17,737 | $ | 0 | $ | 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 | 18,216 | (428 | ) | (26,362 | ) | (10,128 | ) | (8 | ) | (18,710 | ) | |||||||||||||
Charge-offs | (16,850 | ) | 0 | 0 | 0 | 0 | (16,850 | ) | ||||||||||||||||
Recoveries | 1,425 | 0 | 190 | 223 | 0 | 1,838 | ||||||||||||||||||
Net (charge-offs)/recoveries | (15,425 | ) | 0 | 190 | 223 | 0 | (15,012 | ) | ||||||||||||||||
June 30, 2021 Ending Balance | $ | 40,067 | $ | 6,119 | $ | 58,026 | $ | 27,043 | $ | 1 | $ | 131,256 | ||||||||||||
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 | 0 | 0 | 11,898 | ||||||||||||||||||
Provision/(reversal) for possible credit losses | (3,650 | ) | (244 | ) | 46 | 0 | 0 | (3,848 | ) | |||||||||||||||
June 30, 2021 Ending Balance | $ | 4,388 | $ | 3,581 | $ | 81 | $ | 0 | $ | 0 | $ | 8,050 | ||||||||||||
9.10. Commitments and Contingencies
The Company is involved in variousFrom time to time, Bancorp and its subsidiaries are parties to litigation concerning transactions entered intothat arise in the normalordinary course of business. Management, after consultationbusiness 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 legal counsel, does not believemanagement presently believes that the resolution ofliability relating to such litigation, willif any, would not be expected to have a material effect upon itsadverse 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.
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 condensed consolidated balance sheets.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 $140.8 million and $107.7 million as of June 30, 2022, and December 31, 2021, respectively.
11. Borrowed Funds
10. Borrowed FundsBorrowings from the Federal Home Loan Bank (“FHLB”) – There were 0 over-night borrowings from the FHLB as of June 30, 2022, and December 31, 2021. Advances from the FHLB were $95.0 million at a weighted average rate of 1.92% as of June 30, 2022, and $20.0 million at a weighted average rate of 2.89% as of December 31, 2021. As of June 30, 2022, FHLB advances of $20.0 million will mature in May 2023 and $75.0 million will mature in July 2022.
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.
Securities Sold Under Agreements
At June 30, 2022, Junior Subordinated Notes totaled $119.1 million with a weighted average interest rate of 4.12%, compared to Repurchase. Securities sold under agreements to repurchase were $100$119.1 million with a weighted average rate of 2.86% as of September 30, 2017, compared to $350 million with a weighted average rate of 4.06% as of 2.38% at December 31, 2016. Final2021. The Junior Subordinated Notes have a stated maturity for the two fixed rate non-callable securities sold under agreements to repurchase was $50.0 million in June 2018 and $50.0 million in July 2018.
These transactions are accounted for as collateralized financing transactions and recorded at the amounts at which the securities were sold. The Company may have to provide additional collateral for the repurchase agreements, as necessary. The underlying collateral pledged for the repurchase agreements consiststerm of U.S. Treasury securities and mortgage-backed securities with a fair value of $108 million as of September 30 2017, and $372 million as of December 31, 2016.
Borrowing from the FHLB. As of September 30, 2017, over-night borrowings from the FHLB were $450 million at a rate of 1.16% compared to $275 million at a rate of 0.55% as of December 31, 2016. As of September 30, 2017, the advances from the FHLB were $145 million at a rate of 1.35%. As of September 30, 2017, FHLB advances of $490 million will mature in October 2017, $55 million in 2018 and $50 million in December 2019.years.
11.12. Income Taxes
The effective tax rate for the third quarterfirstsix months of 20172022 was 41.4%22.4% compared to 25.5%22.3% for the third quarterfirstsix months of 2016.2021. The third quarter 2017 effective tax rate includes the impact of 41.4% reflected additional tax expense to increase the full year effective tax rate to 34% compared to the 29% effective tax rate forecasted at June 30, 2017. This adjustment in the third quarter was the result of lower tax credits from the slow deployment oflow-income housing and alternative energy investments. Incomeinvestment tax expense for the first quarter of 2017 was also reduced by $2.6 million in benefits from the distribution of restricted stock units and exercises of stock options.
As of September 30, 2017 and December 31, 2016, the Company had income tax refunds receivable of $19.4 million and $14.6 million, respectively. These income tax receivables are included in other assets in the accompanying condensed consolidated balance sheets.credits.
The Company’sCompany’s tax returns are open for audit by the Internal Revenue Service back to 20142018 and by the California Franchise Tax Board back to 2012. As the Company is presently under audit by a number of tax authorities, it2017.
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.
12.13. Fair Value Measurements and Fair Value of Financial InstrumentsMeasurements
The Company adopteduses 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 on January 1, 2008, and determinedASC Topic 825, as amended by ASU 2016-01 and ASU 2018-03, to estimate the fair valuesvalue of our financial instrumentsnot 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 following:lowest level of input that is significant to their fair value measurements.
Level 1 - Quoted prices in active markets for identicalFinancial assets or liabilities.
Level 2 - Observable prices in active markets for similar assets or liabilities; prices for identical or similar assets orand 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 basedmeasured at fair value on the Company’s own judgment about the assumptions that a market participant would use.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 SaleAvailable-for-Sale.and Equity Securities - For certain actively traded agency preferred stock,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”), commercial MBS, collateralized mortgage obligations asset-backed securities,and corporate bonds and trust preferred securities.bonds.
Warrants. - The Company measures the fair value of warrants based on unobservable inputs based on assumptions and management judgment, a Level 3 measurement.
Foreign Exchange ContractsInterest Rate Swaps. – The Company measures the fair value of foreign exchange contracts based on dealer quotes, a Level 2 measurement.
Interest Rate Swaps. Fair value of interest rate swaps is derived from using third party models with observable market data, a Level 2 measurement.
The valuation techniques for the assets and liabilities valued on a nonrecurring basis are as follows:
Impaired Loans.Currency Option Contracts and Foreign Exchange Contracts - The Company does not record loans at fair value on a recurring basis. However, from time to time, nonrecurring fair value adjustments to collateral dependent impaired loans are recorded based on either the current appraised value of the collateral, a Level 2 measurement, or management’s judgment and estimation of value reported on older appraisals that are then adjusted based on recent market trends, a Level 3 measurement.
Goodwill. The Company first assesses qualitative factors to determine whether it is more likely than not thatmeasures the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in ASC Topic 350. The two-step impairment testing process, if needed, begins by assigning net assetscurrency option contracts and goodwill to the two reporting units—Commercial Lending and Retail Banking. The Company then completes “step one” of the impairment test by comparing the fair value of each reporting unit (as determinedforeign exchange contracts based on the discussion below) with the recorded book value (or “carrying amount”) of its net assets, with goodwill included in the computation of the carrying amount. If the fair value ofobservable market rates on a reporting unit exceeds its carrying amount, goodwill of that reporting unit is not considered impaired, and “step two” of the impairment test is not necessary. If the carrying amount of a reporting unit exceeds its fair value, step two of the impairment test is performed to determine the amount of impairment. Step two of the impairment test compares the carrying amount of the reporting unit’s goodwill to the “implied fair value” of that goodwill. The implied fair value of goodwill is computed by assuming that all assets and liabilities of the reporting unit would be adjusted to the current fair value, with the offset as an adjustment to goodwill. This adjusted goodwill balance is the implied fair value used in step two. An impairment charge is recognized for the amount by which the carrying amount of goodwill exceeds its implied fair value. In connection with the determination of fair value, certain data and information is utilized, including earnings forecasts at the reporting unit level for the next four years. Other key assumptions include terminal values based on future growth rates and discount rates for valuing the cash flows, which have inputs for the risk-free rate, market risk premium, and adjustments to reflect inherent risk and required market returns. Because of the significance of unobservable inputs in the valuation of goodwill impairment, goodwill subject to nonrecurring fair value adjustments is classified asrecurring basis, a Level 32 measurement.
Core Deposit Intangibles. Core deposit intangibles is initially recorded at fair value based on a valuation of the core deposits acquired and is amortized over its estimated useful life, which range from 4 to 10 years, to its residual value in proportion to the economic benefits consumed. The Company assesses the recoverability of this intangible asset on a nonrecurring basis using the core deposits remaining at the assessment date and the fair value of cash flows expected to be generated from the core deposits, a Level 3 measurement.
Other Real Estate Owned. Real estate acquired in the settlement of loans is initially recorded at fair value based on the appraised value of the property on the date of transfer, less estimated costs to sell, a Level 2 measurement. From time to time, nonrecurring fair value adjustments are made to other real estate owned based on the current updated appraised value of the property, also a Level 2 measurement, or management’s judgment and estimation of value reported on older appraisals that are then adjusted based on recent market trends, a Level 3 measurement.
Investments in Venture Capital. The Company periodically reviews its investments in venture capital for other-than-temporary impairment on a nonrecurring basis. Investments in venture capital were written down to their fair value based on available financial reports from venture capital partnerships and management’s judgment and estimation, a Level 3 measurement.
Equity Investments. The Company records equity investments at fair value on a nonrecurring basis based on quoted market prices in active exchange markets at the reporting date, a Level 1 measurement.
The following tablestables present the Company’s hierarchy for itsfinancial assets and liabilities that are measured at fair value on a recurring basis as of SeptemberJune 30, 2017, 2022 and December 31, 2016:2021:
September 30, 2017 | Fair Value Measurements Using | Total at | ||||||||||||||||||||||||||||||
June 30, 2022 | ||||||||||||||||||||||||||||||||
Fair Value Measurements Using | Total Fair Value | |||||||||||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Fair Value | Level 1 | Level 2 | Level 3 | Measurements | |||||||||||||||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||||||||
Securities available-for-sale | ||||||||||||||||||||||||||||||||
U.S. Treasury securities | $ | 399,436 | $ | - | $ | - | $ | 399,436 | $ | 118,998 | $ | 0 | $ | 0 | $ | 118,998 | ||||||||||||||||
U.S. government agencies | - | 9,700 | - | 9,700 | ||||||||||||||||||||||||||||
U.S. government sponsored entities | - | 393,722 | - | 393,722 | ||||||||||||||||||||||||||||
State and municipal securities | - | 1,931 | - | 1,931 | ||||||||||||||||||||||||||||
U.S. government agency entities | 0 | 76,941 | 0 | 76,941 | ||||||||||||||||||||||||||||
Mortgage-backed securities | - | 446,065 | - | 446,065 | 0 | 844,463 | 0 | 844,463 | ||||||||||||||||||||||||
Collateralized mortgage obligations | - | 1,710 | - | 1,710 | 0 | 22,580 | 0 | 22,580 | ||||||||||||||||||||||||
Corporate debt securities | - | 80,906 | - | 80,906 | 0 | 171,589 | 0 | 171,589 | ||||||||||||||||||||||||
Total securities available-for-sale | 118,998 | 1,115,573 | 0 | 1,234,571 | ||||||||||||||||||||||||||||
Equity securities | ||||||||||||||||||||||||||||||||
Mutual funds | 6,271 | - | - | 6,271 | 2,081 | 0 | 0 | 2,081 | ||||||||||||||||||||||||
Preferred stock of government sponsored entities | 8,087 | - | - | 8,087 | 5,739 | 0 | 0 | 5,739 | ||||||||||||||||||||||||
Other equity securities | 20,659 | - | - | 20,659 | 18,965 | 0 | 0 | 18,965 | ||||||||||||||||||||||||
Total securities available-for-sale | 434,453 | 934,034 | - | 1,368,487 | ||||||||||||||||||||||||||||
Total equity securities | 26,785 | 0 | 0 | 26,785 | ||||||||||||||||||||||||||||
Warrants | - | - | 97 | 97 | 0 | 0 | 30 | 30 | ||||||||||||||||||||||||
Interest rate swaps | 0 | 58,335 | 0 | 58,335 | ||||||||||||||||||||||||||||
Foreign exchange contracts | - | 1,725 | - | 1,725 | 0 | 344 | 0 | 344 | ||||||||||||||||||||||||
Interest rate swaps | - | 2,314 | - | 2,314 | ||||||||||||||||||||||||||||
Total assets | $ | 434,453 | $ | 938,073 | $ | 97 | $ | 1,372,623 | $ | 145,783 | $ | 1,174,252 | $ | 30 | $ | 1,320,065 | ||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||
Option contracts | $ | - | $ | 234 | $ | - | $ | 234 | ||||||||||||||||||||||||
Interest rate swaps | $ | 0 | $ | 33,706 | $ | 0 | $ | 33,706 | ||||||||||||||||||||||||
Foreign exchange contracts | - | 1,083 | - | 1,083 | 0 | 914 | 0 | 914 | ||||||||||||||||||||||||
Interest rate swaps | - | 5,049 | - | 5,049 | ||||||||||||||||||||||||||||
Total liabilities | $ | - | $ | 6,366 | $ | - | $ | 6,366 | $ | 0 | $ | 34,620 | $ | 0 | $ | 34,620 | ||||||||||||||||
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 | $ | 0 | $ | 87,509 | $ | 0 | $ | 87,509 | ||||||||
Mortgage-backed securities | 0 | 888,665 | 0 | 888,665 | ||||||||||||
Collateralized mortgage obligations | 0 | 9,117 | 0 | 9,117 | ||||||||||||
Corporate debt securities | 0 | 142,018 | 0 | 142,018 | ||||||||||||
Total securities available-for-sale | 0 | 1,127,309 | 0 | 1,127,309 | ||||||||||||
Equity securities | ||||||||||||||||
Mutual funds | 6,230 | 0 | 0 | 6,230 | ||||||||||||
Preferred stock of government sponsored entities | 1,811 | 0 | 0 | 1,811 | ||||||||||||
Other equity securities | 14,278 | 0 | 0 | 14,278 | ||||||||||||
Total equity securities | 22,319 | 0 | 0 | 22,319 | ||||||||||||
Warrants | 0 | 0 | 23 | 23 | ||||||||||||
Interest rate swaps | 0 | 10,090 | 0 | 10,090 | ||||||||||||
Foreign exchange contracts | 0 | 1,113 | 0 | 1,113 | ||||||||||||
Total assets | $ | 22,319 | $ | 1,138,512 | $ | 23 | $ | 1,160,854 | ||||||||
Liabilities | ||||||||||||||||
Interest rate swaps | $ | 0 | $ | 12,642 | $ | 0 | $ | 12,642 | ||||||||
Foreign exchange contracts | 0 | 327 | 0 | 327 | ||||||||||||
Total liabilities | $ | 0 | $ | 12,969 | $ | 0 | $ | 12,969 | ||||||||
December 31, 2016 | Fair Value Measurements Using | Total at | ||||||||||||||
Level 1 | Level 2 | Level 3 | Fair Value | |||||||||||||
(In thousands) | ||||||||||||||||
| Assets | ||||||||||||||||
Securities available-for-sale | ||||||||||||||||
U.S. Treasury securities | $ | 489,017 | $ | - | $ | - | $ | 489,017 | ||||||||
U.S. government sponsored entities | - | 390,331 | - | 390,331 | ||||||||||||
Mortgage-backed securities | - | 336,260 | - | 336,260 | ||||||||||||
Collateralized mortgage obligations | - | 28 | - | 28 | ||||||||||||
Corporate debt securities | - | 74,350 | - | 74,350 | ||||||||||||
Mutual funds | 6,230 | - | - | 6,230 | ||||||||||||
Preferred stock of government sponsored entities | 7,308 | - | - | 7,308 | ||||||||||||
Other equity securities | 10,821 | - | - | 10,821 | ||||||||||||
Total securities available-for-sale | 513,376 | 800,969 | - | 1,314,345 | ||||||||||||
Warrants | - | - | 79 | 79 | ||||||||||||
Interest rate swaps | - | 938 | - | 938 | ||||||||||||
Foreign exchange contracts | - | 1,302 | - | 1,302 | ||||||||||||
Total assets | $ | 513,376 | $ | 803,209 | $ | 79 | $ | 1,316,664 | ||||||||
Liabilities | ||||||||||||||||
Option contracts | $ | - | $ | 121 | $ | - | $ | 121 | ||||||||
Interest rate swaps | - | 3,744 | - | 3,744 | ||||||||||||
Foreign exchange contracts | - | 3,132 | - | 3,132 | ||||||||||||
Total liabilities | $ | - | $ | 6,997 | $ | - | $ | 6,997 | ||||||||
Financial assets and liabilities measured at estimated fair value on a non-recurring basis:
The CompanyCertain assets or liabilities are required to be measured theat estimated fair value of its warrants on a recurringnonrecurring basis using significant unobservable inputs. Thesubsequent 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 of warrants was $97,000 as of Septemberwere due to declines in market conditions versus instrument specific credit risk. For the periods ended June 30, 2017, compared to $79,000 as of 2022, and December 31, 2016. The2021, there were no material adjustments to fair value adjustment of warrants was included in other operating income in the third quarter of 2017. The significant unobservable inputs in the Black-Scholes option pricing model for the Company’s assets and liabilities measured at fair value of warrants are their expected life ranging from 1 to 6 years, risk-free interest rate from 1.51% to 2.28%, and stock volatility from 5.05% to 12.6%.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 condensed consolidated balance sheetConsolidated Balance Sheets as of SeptemberJune 30, 2017, 2022, the following tables provideset forth the level of valuation assumptions used to determine each adjustment, the carrying value of the related individual assets as of SeptemberJune 30, 2017, 2022, and December 31, 2016, 2021, and the total losses for the periods indicated:
September 30, 2017 | Total (Gains)/Losses | As of June 30, 2022 | Total Losses | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fair Value Measurements Using | Total at | Three Months Ended | Nine Months Ended | Fair Value Measurements Using | Total Fair Value | For the Three Months Ended | For the Six Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Fair Value | September 30, 2017 | September 30, 2016 | September 30, 2017 | September 30, 2016 | Level 1 | Level 2 | Level 3 | Measurements | June 30, 2022 | June 30, 2021 | June 30, 2022 | June 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Impaired loans by type: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Non accrual loans by type: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial loans | $ | - | $ | - | $ | 12,525 | $ | 12,525 | $ | - | $ | - | $ | 25 | $ | - | $ | 0 | $ | 0 | $ | 12,103 | $ | 12,103 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||||||||||||||||||||||||
Commercial mortgage loans | - | - | 21,997 | 21,997 | - | - | - | - | 0 | 0 | 2,281 | 2,281 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||||||||||||||||||
Residential mortgage loans and equity lines | - | - | 10,790 | 10,790 | - | - | - | - | 0 | 0 | 8,055 | 8,055 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||||||||||||||||||
Total impaired loans | - | - | 45,312 | 45,312 | - | - | 25 | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total non accrual loans | 0 | 0 | 22,439 | 22,439 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other real estate owned (1) | - | 6,317 | 4,322 | 10,639 | 405 | (206 | ) | 654 | 9 | 0 | 0 | 4,269 | 4,269 | 0 | 47 | 0 | 47 | |||||||||||||||||||||||||||||||||||||||||||||||
Investments in venture capital and private company stock | - | - | 3,023 | 3,023 | 12 | 187 | 365 | 419 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Investments in venture capital | 0 | 0 | 837 | 837 | 0 | 64 | 0 | 135 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total assets | $ | - | $ | 6,317 | $ | 52,657 | $ | 58,974 | $ | 417 | $ | (19 | ) | $ | 1,044 | $ | 428 | $ | 0 | $ | 0 | $ | 27,545 | $ | 27,545 | $ | 0 | $ | 111 | $ | 0 | $ | 182 | |||||||||||||||||||||||||||||||
|
December 31, 2016 | Total Losses | As of December 31, 2021 | Total Losses | |||||||||||||||||||||||||||||||||||||||||||||
Fair Value Measurements Using | Total at | Twelve Months Ended | Fair Value Measurements Using | Total Fair Value | For the Twelve Months Ended | |||||||||||||||||||||||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Fair Value | December 31, 2016 | December 31, 2015 | Level 1 | Level 2 | Level 3 | Measurements | December 31, 2021 | December 31, 2020 | |||||||||||||||||||||||||||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||||||||||||||||
Impaired loans by type: | ||||||||||||||||||||||||||||||||||||||||||||||||
Non accrual loans by type: | ||||||||||||||||||||||||||||||||||||||||||||||||
Commercial loans | $ | - | $ | - | $ | 2,813 | $ | 2,813 | $ | 322 | $ | 806 | $ | 0 | $ | 0 | $ | 4,327 | $ | 4,327 | $ | 1,012 | $ | 7,012 | ||||||||||||||||||||||||
Commercial mortgage loans | - | - | 9,444 | 9,444 | - | 598 | 0 | 0 | 13,335 | 13,335 | 0 | 0 | ||||||||||||||||||||||||||||||||||||
Residential mortgage loans and equity lines | - | - | 11,679 | 11,679 | - | 146 | 0 | 0 | 5,243 | 5,243 | 0 | 0 | ||||||||||||||||||||||||||||||||||||
Total impaired loans | - | - | 23,936 | 23,936 | 322 | 1,550 | ||||||||||||||||||||||||||||||||||||||||||
Total non accrual loans | 0 | 0 | 22,905 | 22,905 | 1,012 | 7,012 | ||||||||||||||||||||||||||||||||||||||||||
Other real estate owned (1) | - | 6,006 | 4,372 | 10,378 | 9 | 404 | 0 | 0 | 4,589 | 4,589 | 17 | 717 | ||||||||||||||||||||||||||||||||||||
Investments in venture capital and private company stock | - | - | 3,667 | 3,667 | 976 | 553 | ||||||||||||||||||||||||||||||||||||||||||
Investments in venture capital | 0 | 0 | 952 | 952 | 143 | 107 | ||||||||||||||||||||||||||||||||||||||||||
Total assets | $ | - | $ | 6,006 | $ | 31,975 | $ | 37,981 | $ | 1,307 | $ | 2,507 | $ | 0 | $ | 0 | $ | 28,446 | $ | 28,446 | $ | 1,172 | $ | 7,836 | ||||||||||||||||||||||||
|
The significant unobservable (Level 3)3) inputs used in the fair value measurement of collateral for collateral-dependent impairedcollateral-dependent individually evaluated loans wasare primarily based on the appraised value of collateral adjusted by estimated sales cost and commissions. The Company generally obtains new appraisal reports every nine months.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. DuringIn the reported periods,current year, the Company used borrower specific collateral discounts rangedwith various discount levels.
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 55% inloans 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 casecurrent appraised value of accounts receivablethe collateral, to 65% in the casea Level 2 measurement, or management’s judgment and estimation of inventory collateral.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 used in the fair value measurement of loans held for sale was primarily based on the quoted price or sale price adjusted by estimated sales cost and commissions.
The significant unobservable inputs(Level 3) used in the fair value measurement of other real estate owned (“OREO”) wasare 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 impairedindividually evaluated loans, quoted price, or loan sale price of loans held for sale, and appraised value of OREO.
13. Fair Value of Financial Instruments
The Company usessignificant unobservable inputs in the following methods and assumptions to estimateBlack-Scholes option pricing model for the fair value of each class of financial instruments.
Cash and Cash Equivalents. For cash and cash equivalents, the carrying amount was assumedwarrants are their expected life ranging from one to be a reasonable estimate of fair value, a Level 1 measurement.
Short-term Investments. For short-term investments, the carrying amount was assumed to be a reasonable estimate of fair value, a Level 1 measurement.
Securities Purchased under Agreements to Resell. The fair value of securities purchased under agreements to resell is based on dealer quotes, a Level 2 measurement.
Securities. For securities, including securities held-to-maturity, available-for-sale, and for trading, fair values were based on quoted market prices at the reporting date. If a quoted market price was not available, fair value was estimated using quoted market prices for similar securities or dealer quotes. For certain actively traded agency preferred stock, 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, state and municipal securities, mortgage-backed securities (“MBS”), commercial MBS, collateralized mortgage obligations, asset-backed securities, and corporate bonds.
Loans Held for Sale. The Company records loans held for sale at fair value based on quoted prices from third party sources, or appraisal reports adjusted by sales commission assumptions.
Loans. Fair values were estimated for portfolios of loans with similar financial characteristics. Each loan category was further segmented into fixed and adjustable rate interest terms and by performing and non-performing categories.
The fair value of performing loans was calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit andfive years, risk-free interest rate risk inherent in the loan, a Level 3 measurement.
The fair value of impaired loans was 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 adjustments0.41% to collateral dependent impaired loans are recorded based on the current appraised value or adjusted appraised value of the collateral, a Level 2 or Level 3 measurement.
Deposit Liabilities. The fair value of demand deposits, savings accounts,3.27%, and certain money market deposits was assumedstock volatility from 9.03% to be the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit was estimated using the rates currently offered for deposits with similar remaining maturities, a Level 3 measurement.
Securities Sold under Agreements to Repurchase. The fair value of securities sold under agreements to repurchase is based on dealer quotes, a Level 2 measurement.
Advances from Federal Home Loan Bank(“FHLB”)20.82%.The fair value of the advances is based on quotes from the FHLB to settle the advances, a Level 2 measurement.
Other Borrowings. This category includes borrowings from other financial institutions. The fair value of other borrowings is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk, a Level 3 measurement.
Long-term Debt. The fair value of long-term debt is estimated based on the quoted market prices or dealer quotes, a Level 2 measurement.
Currency Option and Foreign Exchange Contracts. The Company measures the fair value of currency option and foreign exchange contracts based on dealer quotes, a Level 2 measurement.
Interest Rate Swaps. Fair value of interest rate swaps is derived from third party models with observable market data, a Level 2 measurement.
Off-Balance-Sheet Financial Instruments. The fair value of commitments to extend credit, standby letters of credit, and financial guarantees written were estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. The fair value of guarantees and letters of credit was based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. The fair value of off-balance-sheet financial instruments was based on the assumptions that a market participant would use, a Level 3 measurement.
Fair value wasis estimated in accordance with ASC Topic 825. Fair value estimates wereare 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’sBank’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 wereare based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates wereare subjective in nature and involvedinvolve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
The following table presentssets forth the carrying and notional amounts and estimated fair value of financial instruments as of SeptemberJune 30, 2017, 2022, and as of December 31, 2016:2021:
September 30, 2017 | December 31, 2016 | June 30, 2022 | December 31, 2021 | |||||||||||||||||||||||||||||
Carrying | Carrying | Carrying | Carrying | |||||||||||||||||||||||||||||
Amount | Fair Value | Amount | Fair Value | Amount | Fair Value | Amount | Fair Value | |||||||||||||||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||||||||||||||||
Financial Assets | ||||||||||||||||||||||||||||||||
Cash and due from banks | $ | 167,886 | $ | 167,886 | $ | 218,017 | $ | 218,017 | $ | 141,734 | $ | 141,734 | $ | 134,141 | $ | 134,141 | ||||||||||||||||
Short-term investments | 573,059 | 573,059 | 967,067 | 967,067 | 1,012,228 | 1,012,228 | 2,315,563 | 2,315,563 | ||||||||||||||||||||||||
Securities available-for-sale | 1,368,487 | 1,368,487 | 1,314,345 | 1,314,345 | 1,234,571 | 1,234,571 | 1,127,309 | 1,127,309 | ||||||||||||||||||||||||
Loans held for sale | - | - | 7,500 | 7,500 | ||||||||||||||||||||||||||||
Loans, net | 12,472,475 | 12,403,100 | 11,077,315 | 11,006,344 | 17,633,576 | 17,440,309 | 16,202,001 | 16,499,869 | ||||||||||||||||||||||||
Equity securities | 26,785 | 26,785 | 22,319 | 22,319 | ||||||||||||||||||||||||||||
Investment in Federal Home Loan Bank stock | 21,948 | 21,948 | 17,250 | 17,250 | 17,250 | 17,250 | 17,250 | 17,250 | ||||||||||||||||||||||||
Investment in Federal Reserve Bank stock | 8,733 | 8,733 | - | - | ||||||||||||||||||||||||||||
Warrants | 97 | 97 | 79 | 79 | 30 | 30 | 23 | 23 | ||||||||||||||||||||||||
Notional | Notional | |||||||||||||||
Amount | Fair Value | Amount | Fair Value | |||||||||||||
Foreign exchange contracts | $ | 69,278 | $ | 1,725 | $ | 82,439 | $ | 1,302 | ||||||||
Interest rate swaps | 155,671 | 2,314 | 361,526 | 938 | ||||||||||||
Carrying | Carrying | |||||||||||||||
Amount | Fair Value | Amount | Fair Value | |||||||||||||
Financial Liabilities | ||||||||||||||||
Deposits | $ | 12,561,695 | $ | 12,573,127 | $ | 11,674,726 | $ | 11,680,017 | ||||||||
Securities sold under agreements to repurchase | 100,000 | 100,549 | 350,000 | 351,989 | ||||||||||||
Advances from Federal Home Loan Bank | 595,000 | 595,037 | 350,000 | 350,062 | ||||||||||||
Other borrowings | 153,574 | 151,643 | 17,662 | 15,944 | ||||||||||||
Long-term debt | 119,136 | 68,056 | 119,136 | 63,169 | ||||||||||||
Notional | Notional | |||||||||||||||
Amount | Fair Value | Amount | Fair Value | |||||||||||||
Option contracts | $ | 12,307 | $ | 234 | $ | 12,117 | $ | 121 | ||||||||
Foreign exchange contracts | 86,625 | 1,083 | 89,545 | 3,132 | ||||||||||||
Interest rate swaps | 510,841 | 5,049 | 119,136 | 3,744 | ||||||||||||
Notional | Notional | |||||||||||||||
Amount | Fair Value | Amount | Fair Value | |||||||||||||
Off-Balance Sheet Financial Instruments | ||||||||||||||||
Commitments to extend credit | $ | 2,287,498 | $ | (6,924 | ) | $ | 2,062,241 | $ | (6,025 | ) | ||||||
Standby letters of credit | 140,682 | (1,699 | ) | 75,396 | (668 | ) | ||||||||||
Other letters of credit | 41,868 | (218 | ) | 37,283 | (16 | ) | ||||||||||
Bill of lading guarantees | 24 | - | 75 | - | ||||||||||||
Notional | Notional | |||||||||||||||
Amount | Fair Value | Amount | Fair Value | |||||||||||||
Foreign exchange contracts | $ | 134,895 | $ | 344 | $ | 181,997 | $ | 1,113 | ||||||||
Interest rate swaps | 1,454,544 | 58,335 | 904,635 | 10,090 | ||||||||||||
Carrying | Carrying | |||||||||||||||
Amount | Fair Value | Amount | Fair Value | |||||||||||||
Financial Liabilities | ||||||||||||||||
Deposits | $ | 18,287,327 | $ | 18,266,740 | $ | 18,058,842 | $ | 18,051,720 | ||||||||
Advances from Federal Home Loan Bank | 95,000 | 94,969 | 20,000 | 21,279 | ||||||||||||
Other borrowings | 22,319 | 15,667 | 23,145 | 18,945 | ||||||||||||
Long-term debt | 119,136 | 55,126 | 119,136 | 62,274 | ||||||||||||
Notional | Notional | |||||||||||||||
Amount | Fair Value | Amount | Fair Value | |||||||||||||
Option contracts | $ | 202 | $ | 2 | $ | 676 | $ | 3 | ||||||||
Foreign exchange contracts | 105,824 | 914 | 51,782 | 327 | ||||||||||||
Interest rate swaps | 727,649 | 33,706 | 872,400 | 12,642 | ||||||||||||
Notional | Notional | |||||||||||||||
Amount | Fair Value | Amount | Fair Value | |||||||||||||
Off-Balance Sheet Financial Instruments | ||||||||||||||||
Commitments to extend credit | $ | 3,395,976 | $ | (13,504 | ) | $ | 3,297,362 | $ | (12,594 | ) | ||||||
Standby letters of credit | 303,882 | (2,664 | ) | 266,490 | (2,640 | ) | ||||||||||
Other letters of credit | 28,789 | (21 | ) | 16,652 | (13 | ) | ||||||||||
The following tables presenttables set forth the level in the fair value hierarchy for the estimated fair values of financial instruments as of SeptemberJune 30, 2017, 2022, and December 31, 2016.2021.
September 30, 2017 | As of June 30, 2022 | |||||||||||||||||||||||||||||||
Estimated | Estimated | |||||||||||||||||||||||||||||||
Fair Value | Fair Value | |||||||||||||||||||||||||||||||
Measurements | Level 1 | Level 2 | Level 3 | Measurements | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||||||||||||||||
Financial Assets | ||||||||||||||||||||||||||||||||
Cash and due from banks | $ | 167,886 | $ | 167,886 | $ | - | $ | - | $ | 141,734 | $ | 141,734 | $ | 0 | $ | 0 | ||||||||||||||||
Short-term investments | 573,059 | 573,059 | - | - | 1,012,228 | 1,012,228 | 0 | 0 | ||||||||||||||||||||||||
Securities available-for-sale | 1,368,487 | 434,453 | 934,034 | - | 1,234,571 | 118,998 | 1,115,573 | 0 | ||||||||||||||||||||||||
Loans held-for-sale | - | - | - | - | ||||||||||||||||||||||||||||
Loans, net | 12,403,100 | - | - | 12,403,100 | 17,440,309 | 0 | 0 | 17,440,309 | ||||||||||||||||||||||||
Equity securities | 26,785 | 26,785 | 0 | 0 | ||||||||||||||||||||||||||||
Investment in Federal Home Loan Bank stock | 21,948 | - | 21,948 | - | 17,250 | 0 | 17,250 | 0 | ||||||||||||||||||||||||
Investment in Federal Reserve Bank stock | 8,733 | - | 8,733 | - | ||||||||||||||||||||||||||||
Warrants | 97 | - | - | 97 | 30 | 0 | 0 | 30 | ||||||||||||||||||||||||
Financial Liabilities | ||||||||||||||||||||||||||||||||
Deposits | 12,573,127 | - | - | 12,573,127 | 18,266,740 | 0 | 0 | 18,266,740 | ||||||||||||||||||||||||
Securities sold under agreements to repurchase | 100,549 | - | 100,549 | - | ||||||||||||||||||||||||||||
Advances from Federal Home Loan Bank | 595,037 | - | 595,037 | - | 94,969 | 0 | 94,969 | 0 | ||||||||||||||||||||||||
Other borrowings | 151,643 | - | - | 151,643 | 15,667 | 0 | 0 | 15,667 | ||||||||||||||||||||||||
Long-term debt | 68,056 | - | 68,056 | - | 55,126 | 0 | 55,126 | 0 | ||||||||||||||||||||||||
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 | $ | 0 | $ | 0 | ||||||||
Short-term investments | 2,315,563 | 2,315,563 | 0 | 0 | ||||||||||||
Securities available-for-sale | 1,127,309 | 0 | 1,127,309 | 0 | ||||||||||||
Loans, net | 16,499,869 | 0 | 0 | 16,499,869 | ||||||||||||
Equity securities | 22,319 | 22,319 | 0 | 0 | ||||||||||||
Investment in Federal Home Loan Bank stock | 17,250 | 0 | 17,250 | 0 | ||||||||||||
Warrants | 23 | 0 | 0 | 23 | ||||||||||||
Financial Liabilities | ||||||||||||||||
Deposits | 18,051,720 | 0 | 0 | 18,051,720 | ||||||||||||
Advances from Federal Home Loan Bank | 21,279 | 0 | 21,279 | 0 | ||||||||||||
Other borrowings | 18,945 | 0 | 0 | 18,945 | ||||||||||||
Long-term debt | 62,274 | 0 | 62,274 | 0 | ||||||||||||
December 31, 2016 | ||||||||||||||||
Estimated | ||||||||||||||||
Fair Value | ||||||||||||||||
Measurements | Level 1 | Level 2 | Level 3 | |||||||||||||
(In thousands) | ||||||||||||||||
Financial Assets | ||||||||||||||||
Cash and due from banks | $ | 218,017 | $ | 218,017 | $ | - | $ | - | ||||||||
Short-term investments | 967,067 | 967,067 | - | - | ||||||||||||
Securities available-for-sale | 1,314,345 | 513,376 | 800,969 | - | ||||||||||||
Loans held-for-sale | 7,500 | - | - | 7,500 | ||||||||||||
Loans, net | 11,006,344 | - | - | 11,006,344 | ||||||||||||
Investment in Federal Home Loan Bank stock | 17,250 | - | 17,250 | - | ||||||||||||
Warrants | 79 | - | - | 79 | ||||||||||||
Financial Liabilities | ||||||||||||||||
Deposits | 11,680,017 | - | - | 11,680,017 | ||||||||||||
Securities sold under agreements to repurchase | 351,989 | - | 351,989 | - | ||||||||||||
Advances from Federal Home Loan Bank | 350,062 | - | 350,062 | - | ||||||||||||
Other borrowings | 15,944 | - | - | 15,944 | ||||||||||||
Long-term debt | 63,169 | - | 63,169 | - | ||||||||||||
14.14. Goodwill and Goodwill Impairment
Total goodwill was $375.7 million as of June 30, 2022 compared with $372.2 million as of December 31, 2021. The Company’sincrease 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.
The Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in ASC Topic 350. The two-step impairment testing process, if needed, begins by assigning net assets and goodwill to our two reporting units—Commercial Lending and Retail Banking. The Company then completes “step one” of the impairment test by comparing the fair value of each reporting unit (as determined based on the discussion below) with the recorded book value (or “carrying amount”) of its net assets, with goodwill included in the computation of the carrying amount. If the fair value of a reporting unit exceeds its carrying amount, goodwill of that reporting unit is not considered impaired, and “step two” of the impairment test is not necessary. If the carrying amount of a reporting unit exceeds its fair value, step two of the impairment test is performed to determine the amount of impairment. Step two of the impairment test compares the carrying amount of the reporting unit’s goodwill to the “implied fair value” of that goodwill. The implied fair value of goodwill is computed by assuming that all assets and liabilities of the reporting unit would be adjusted to the current fair value, with the offset as an adjustment to goodwill. This adjusted goodwill balance is the implied fair value used in step two. An impairment charge is recognized for the amount by which the carrying amount of goodwill exceeds its implied fair value.
As of September 30, 2017, the Company’s market capitalization was above book value and there was no triggering event that required the Company to assess goodwill for impairment as of an interim date.
15. Financial Derivatives
15. Financial Derivatives
It is theour policy of the Company not to speculate on the future direction of interest rates. However, the Company entersfrom time to time, we may enter into financial derivatives in order to seek mitigation of exposure to interest rate risks relatedrelated 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 the Company’sour assets or liabilities and against risk in specific transactions. In such instances, the Company 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 sheetConsolidated 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-partythird-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.Consolidated Financial Statements.
In 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, with the quarterly interest payments throughout the ten-yearten-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-monththree-month LIBOR interest rate. Bancorp pays a weighted average fixed interest rate of 2.61% and receives a variable interest rate of the three-month LIBOR at a weighted average rate of 1.32%. As of SeptemberJune 30, 2017,2022, and 2021, the notional amountineffective portion of cash flowthese interest rate swaps was $119.1 millionnot significant. The notional amount and theirnet unrealized loss of $2.3 million, netthe Company’s cash flow derivative financial instruments as of taxes, was included in other comprehensive income. The amount of periodic net settlement of interest rate swaps included in interest expense was $407,000 for the three months ended SeptemberJune 30, 2017 compared to $588,000 for the same quarter a year ago. For the nine months ended September 30, 2017, the periodic net settlement of interest rate swaps included in interest expense was $1.3 million compared to $1.8 million for the same period in 2016.2022, and December 31, 2021, were as follows:
June 30, 2022 | December 31, 2021 | |||||||
| (In thousands) | ||||||||
Cash flow swap hedges: | ||||||||
Notional | $ | 119,136 | $ | 119,136 | ||||
Weighted average fixed rate-pay | 2.61 | % | 2.61 | % | ||||
Weighted average variable rate-receive | 1.40 | % | 0.16 | % | ||||
Unrealized gain/(loss), net of taxes (1) | $ | 882 | $ | (3,276 | ) | |||
Three months ended | Six months ended | |||||||||||||||
June 30, 2022 | June 30, 2021 | June 30, 2022 | June 30, 2021 | |||||||||||||
Periodic net settlement of swaps (2) | $ | 484 | $ | 731 | $ | 1,172 | $ | 1,442 | ||||||||
(1) Included in other comprehensive income. |
(2) the amount of periodic net settlement of interest rate swaps was included in interest expense. |
As of September 30, 2017, the
The Bank has entered into interest rate swap contracts with various terms from four to eight years. These interest rate swap contractsthat are matched to individual fixed-rate commercial real estateCRE 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 loanCRE loans due to changes in interest rates. As of June 30, 2022, the Bank’s outstanding interest rate swap contracts had a notional amount of $901.4 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. The Bank pays a weighted average fixed rate of 4.55% and receives a variable rate at the one month LIBOR rate plus a weighted average spread of 293 basis points, or at a weighted average rate of 4.16%. As of SeptemberJune 30, 2017, the notional amount of fair value interest rate swaps was $510.6 million 2022 and their unrealized gain of $1.9 million was included in other non-interest income. The amount of periodic net settlement of interest rate swaps reducing interest income was $514,000 for the three months ended September 30, 2017, compared to $879,000 for the same quarter a year ago. The amount of periodic net settlement of interest rate swaps reducing interest income was $1.9 million for the nine months ended September 30, 2017, compared to $2.8 million for the same period a year ago. As of September 30, 2017,2021, the ineffective portion of these interest rate swaps was not significant.
The Company has designated as a partial-term hedging election $670.8 million notional as last-of-layer hedge on pools of loans with a notational value of $1.3 billion as of June 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 $670.8 million portion of $1.3 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 June 30, 2022, the last-of-layer loan tranche had a fair value basis adjustment of $20.0 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 derivativesderivative clearing organization and daily margin is indirectly maintained with the derivativesderivative clearing organization. CashThere was 0 cash collateral deposit posted as collateral by Bancorp related to derivative contracts totaled $6.3as of June 30, 2022 and $5.9 million as of SeptemberDecember 31, 2021.
The notional amount and net unrealized loss of the Company’s fair value derivative financial instruments as of June 30, 2017.2022, and December 31, 2021, were as follows:
June 30, 2022 | December 31, 2021 | |||||||
| (In thousands) | |||||||
| Fair value swap hedges: | ||||||||
Notional | $ | 901,388 | $ | 729,280 | ||||
Weighted average fixed rate-pay | 2.01 | % | 2.65 | % | ||||
Weighted average variable rate spread | 0.67 | % | 1.31 | % | ||||
Weighted average variable rate-receive | 1.54 | % | 1.43 | % | ||||
Unrealized gain/(loss), net of taxes (1) | $ | 23,375 | $ | (1,013 | ) | |||
Three months ended | Six months ended | |||||||||||||||
June 30, 2022 | June 30, 2021 | June 30, 2022 | June 30, 2021 | |||||||||||||
Periodic net settlement of swaps (2) | $ | (1,328 | ) | $ | (2,387 | ) | $ | (3,089 | ) | $ | (4,774 | ) | ||||
(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 condensed consolidated balance sheets.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. As of September 30, 2017, the
The notional amount of option contracts totaled $12.3 million with a net negativeand fair value of $234,000. As of September 30, 2017, spot, forward, and swap contracts with a total notional amount of $69.3 million had a positive fair value of $1.7 million. Spot, forward, and swap contracts with a total notional amount of $86.6 million had a negative fair value of $1.1 millionthe Company’s derivative financial instruments not designated as hedging instruments as of SeptemberJune 30, 2017. As of 2022, and December 31, 2016, the notional amount of option contracts totaled $12.1 million with a net negative fair value of $121,000. As of December 31, 2016, spot, forward, and swap contracts with a total notional amount of $82.4 million had a positive fair value of $1.3 million. Spot, forward, and swap contracts with a total notional amount of $89.5 million had a negative fair value of $3.1 million2021, were as of December 31, 2016.follows:
| June 30, 2022 | December 31, 2021 | ||||||
| (In thousands) | |||||||
| Derivative financial instruments not designated as hedging instruments: | ||||||||
Notional amounts: | ||||||||
Option contracts | $ | 202 | $ | 676 | ||||
Spot, forward, and swap contracts with positive fair value | $ | 134,895 | $ | 181,997 | ||||
Spot, forward, and swap contracts with negative fair value | $ | 105,824 | $ | 51,782 | ||||
Fair value: | ||||||||
Option contracts | $ | 2 | $ | 3 | ||||
Spot, forward, and swap contracts with positive fair value | $ | 344 | $ | 1,113 | ||||
Spot, forward, and swap contracts with negative fair value | $ | (914 | ) | $ | (327 | ) | ||
16.16. Balance Sheet Offsetting
Certain financial instruments, including resell and repurchase agreements, securities lending arrangements and derivatives, may be eligible for offset in the condensed consolidated balance sheetsConsolidated 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 condensed consolidated balance sheets, Consolidated Balance Sheets, as of SeptemberJune 30, 2017, 2022, and December 31, 2016, 2021, are presentedset forth in the following table:
Gross Amounts Not Offset in the Balance Sheet | 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 | Gross | Gross Amounts | Net Amounts | Financial | Collateral | Net Amount | |||||||||||||||||||||||||||||||||||||
September 30, 2017 | (In thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||||||||||||||||||
Derivatives | $ | 2,314 | $ | - | $ | 2,314 | $ | - | $ | - | $ | 2,314 | ||||||||||||||||||||||||||||||||||||
Liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||
Securities sold under agreements to repurchase | $ | 100,000 | $ | - | $ | 100,000 | $ | - | $ | (100,000 | ) | $ | - | |||||||||||||||||||||||||||||||||||
Derivatives | $ | 5,049 | $ | - | $ | 5,049 | $ | - | $ | (5,049 | ) | $ | - | |||||||||||||||||||||||||||||||||||
December 31, 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||
| June 30, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||||||||||||||||||
Derivatives | $ | 938 | $ | - | $ | 938 | $ | - | $ | - | $ | 938 | $ | 58,335 | $ | — | $ | 58,335 | $ | — | $ | — | $ | 58,335 | ||||||||||||||||||||||||
Liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||
Securities sold under agreements to repurchase | $ | 350,000 | $ | - | $ | 350,000 | $ | - | $ | (350,000 | ) | $ | - | |||||||||||||||||||||||||||||||||||
Derivatives | $ | 3,744 | $ | - | $ | 3,744 | $ | - | $ | (3,744 | ) | $ | - | $ | 33,706 | $ | — | $ | 33,706 | $ | — | $ | — | $ | 33,706 | |||||||||||||||||||||||
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 June 30, | Six months Ended June 30, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
(In thousands) | ||||||||||||||||
Non-interest income, in-scope: | ||||||||||||||||
Fees and service charges on deposit accounts | $ | 2,349 | $ | 2,144 | $ | 4,758 | $ | 4,256 | ||||||||
Wealth management fees | 3,956 | 3,939 | 8,310 | 7,496 | ||||||||||||
Other service fees(1) | 4,203 | 3,883 | 8,272 | 7,374 | ||||||||||||
Total noninterest income | 10,508 | 9,966 | 21,340 | 19,126 | ||||||||||||
Noninterest income, not in-scope(2) | 4,110 | 2,617 | 13,510 | 3,457 | ||||||||||||
Total noninterest income | $ | 14,618 | $ | 12,583 | $ | 34,850 | $ | 22,583 | ||||||||
(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. |
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.
118. Stockholders’7 Equity. Stockholders’ Equity
Total equity was $2.0$2.43 billion as of SeptemberJune 30, 2017, an increase2022, a decrease of $140.2$14.7 million, from $1.8$2.45 billion as of December 31, 2016, 2021, primarily due to net income of $150.1$164.0 million, stock-based compensation of $3.4 million, proceeds from dividend reinvestment of $1.9 million, and equity consideration for the acquisitionstock issued to directors of SinoPac Bancorp$0.8 million offset by other comprehensive loss of $34.9$68.3 million, partially offset bypurchases of treasury stock of $63.5 million, common stock cash dividends of $50.5$51.0 million and shares withheld related to net share settlement of RSUs of $5.1$2.0 million.
The U.S. Treasury received warrants to purchase common stock
Activity in accumulated other comprehensive income,income/(loss), net of tax, and reclassification out of accumulated other comprehensive incomeincome/(loss) for the three months and ninesix months ended SeptemberJune 30, 2017, 2022, and SeptemberJune 30, 2016, 2021, was as follows:
Three months ended September 30, 2017 | Three months ended September 30, 2016 | Three months ended June 30, 2022 | Three months ended June 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||
Pre-tax | Tax expense/ (benefit) | Net-of-tax | Pre-tax | Tax expense/ (benefit) | Net-of-tax | Pre-tax | Tax expense/ | Net-of-tax | Pre-tax | Tax expense/ | Net-of-tax | |||||||||||||||||||||||||||||||||||||
| (In thousands) | (In thousands) | ||||||||||||||||||||||||||||||||||||||||||||||
Beginning balance, loss, net of tax | ||||||||||||||||||||||||||||||||||||||||||||||||
| Beginning balance, gain/(loss), net of tax | Beginning balance, gain/(loss), net of tax | |||||||||||||||||||||||||||||||||||||||||||||||
Securities available-for-sale | $ | 1,001 | $ | 8,539 | Securities available-for-sale | $ | (45,755 | ) | $ | 7,313 | ||||||||||||||||||||||||||||||||||||||
Cash flow hedge derivatives | (2,421 | ) | (7,397 | ) | Cash flow hedge derivatives | (222 | ) | (5,627 | ) | |||||||||||||||||||||||||||||||||||||||
Total | $ | (1,420 | ) | $ | 1,142 | $ | (45,977 | ) | $ | 1,686 | ||||||||||||||||||||||||||||||||||||||
Net unrealized (losses)/gains arising during the period | ||||||||||||||||||||||||||||||||||||||||||||||||
Net unrealized gains/(losses) arising during the period | ||||||||||||||||||||||||||||||||||||||||||||||||
Securities available-for-sale | $ | 1,829 | $ | 769 | $ | 1,060 | $ | 1,618 | $ | 680 | $ | 938 | $ | (37,557 | ) | $ | (11,102 | ) | $ | (26,455 | ) | $ | 351 | $ | 104 | $ | 247 | |||||||||||||||||||||
Cash flow hedge derivatives | 271 | 114 | 157 | 1,387 | 583 | 804 | 1,567 | 463 | 1,104 | 623 | 184 | 439 | ||||||||||||||||||||||||||||||||||||
Total | 2,100 | 883 | 1,217 | 3,005 | 1,263 | $ | 1,742 | $ | (35,990 | ) | $ | (10,639 | ) | $ | (25,351 | ) | $ | 974 | $ | 288 | $ | 686 | ||||||||||||||||||||||||||
Reclassification adjustment for net losses in net income | ||||||||||||||||||||||||||||||||||||||||||||||||
Securities available-for-sale | (24 | ) | (10 | ) | (14 | ) | (1,692 | ) | (711 | ) | (981 | ) | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||
Cash flow hedge derivatives | - | - | - | - | - | - | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||||||
Total | (24 | ) | (10 | ) | (14 | ) | (1,692 | ) | (711 | ) | (981 | ) | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||
Total other comprehensive (loss)/income | ||||||||||||||||||||||||||||||||||||||||||||||||
Total other comprehensive income/(loss) | ||||||||||||||||||||||||||||||||||||||||||||||||
Securities available-for-sale | 1,805 | 759 | 1,046 | (74 | ) | (31 | ) | (43 | ) | $ | (37,557 | ) | $ | (11,102 | ) | $ | (26,455 | ) | $ | 351 | $ | 104 | $ | 247 | ||||||||||||||||||||||||
Cash flow hedge derivatives | 271 | 114 | 157 | 1,387 | 583 | 804 | 1,567 | 463 | 1,104 | 623 | 184 | 439 | ||||||||||||||||||||||||||||||||||||
Total | $ | 2,076 | $ | 873 | $ | 1,203 | $ | 1,313 | $ | 552 | $ | 761 | $ | (35,990 | ) | $ | (10,639 | ) | $ | (25,351 | ) | $ | 974 | $ | 288 | $ | 686 | |||||||||||||||||||||
Ending balance, (loss)/gain, net of tax | ||||||||||||||||||||||||||||||||||||||||||||||||
Ending balance, gain/(loss), net of tax | ||||||||||||||||||||||||||||||||||||||||||||||||
Securities available-for-sale | $ | 2,047 | $ | 8,496 | Securities available-for-sale | $ | (72,210 | ) | $ | 7,560 | ||||||||||||||||||||||||||||||||||||||
Cash flow hedge derivatives | (2,264 | ) | (6,593 | ) | Cash flow hedge derivatives | 882 | (5,188 | ) | ||||||||||||||||||||||||||||||||||||||||
Total | $ | (217 | ) | $ | 1,903 | $ | (71,328 | ) | $ | 2,372 | ||||||||||||||||||||||||||||||||||||||
Six months ended June 30, 2022 | Six months ended June 30, 2021 | |||||||||||||||||||||||
Pre-tax | Tax expense/ | Net-of-tax | Pre-tax | Tax expense/ | Net-of-tax | |||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Beginning balance, gain/(loss), net of tax | ||||||||||||||||||||||||
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 | $ | (102,812 | ) | $ | (30,391 | ) | $ | (72,421 | ) | $ | (5,734 | ) | $ | (1,695 | ) | $ | (4,039 | ) | ||||||
Cash flow hedge derivatives | 5,903 | 1,745 | 4,158 | 2,416 | 714 | 1,702 | ||||||||||||||||||
Total | $ | (96,909 | ) | $ | (28,646 | ) | $ | (68,263 | ) | $ | (3,318 | ) | $ | (981 | ) | $ | (2,337 | ) | ||||||
Reclassification adjustment for net losses in net income | ||||||||||||||||||||||||
Securities available-for-sale | 0 | 0 | 0 | (853 | ) | (252 | ) | (601 | ) | |||||||||||||||
Cash flow hedge derivatives | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Total | 0 | 0 | 0 | (853 | ) | (252 | ) | (601 | ) | |||||||||||||||
Total other comprehensive income/(loss) | ||||||||||||||||||||||||
Securities available-for-sale | $ | (102,812 | ) | $ | (30,391 | ) | $ | (72,421 | ) | $ | (6,587 | ) | $ | (1,947 | ) | $ | (4,640 | ) | ||||||
Cash flow hedge derivatives | 5,903 | 1,745 | 4,158 | 2,416 | 714 | 1,702 | ||||||||||||||||||
Total | $ | (96,909 | ) | $ | (28,646 | ) | $ | (68,263 | ) | $ | (4,171 | ) | $ | (1,233 | ) | $ | (2,938 | ) | ||||||
Ending balance, gain/(loss), net of tax | ||||||||||||||||||||||||
Securities available-for-sale | $ | (72,210 | ) | $ | 7,560 | |||||||||||||||||||
| Cash flow hedge derivatives | 882 | (5,188 | ) | |||||||||||||||||||||
| Total | $ | (71,328 | ) | $ | 2,372 | |||||||||||||||||||
Nine months ended September 30, 2017 | Nine months ended September 30, 2016 | |||||||||||||||||||||||
Pre-tax | Tax expense/ (benefit) | Net-of-tax | Pre-tax | Tax expense/ (benefit) | Net-of-tax | |||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
Beginning balance, loss, net of tax | ||||||||||||||||||||||||
Securities available-for sale | $ | (1,545 | ) | $ | (5,431 | ) | ||||||||||||||||||
Cash flow hedge derivatives | (2,170 | ) | (2,995 | ) | ||||||||||||||||||||
Total | $ | (3,715 | ) | $ | (8,426 | ) | ||||||||||||||||||
Net unrealized gains/(losses) arising during the period | ||||||||||||||||||||||||
Securities available-for sale | $ | 5,759 | $ | 2,421 | $ | 3,338 | $ | 27,170 | $ | 11,422 | $ | 15,748 | ||||||||||||
Cash flow hedge derivatives | (162 | ) | (68 | ) | (94 | ) | (6,208 | ) | (2,610 | ) | (3,598 | ) | ||||||||||||
Total | 5,597 | 2,353 | 3,244 | 20,962 | 8,812 | $ | 12,150 | |||||||||||||||||
Reclassification adjustment for net (gains)/losses in net income | ||||||||||||||||||||||||
Securities available-for sale | 439 | 185 | 254 | (3,141 | ) | (1,320 | ) | (1,821 | ) | |||||||||||||||
Cash flow hedge derivatives | - | - | - | - | - | - | ||||||||||||||||||
Total | 439 | 185 | 254 | (3,141 | ) | (1,320 | ) | (1,821 | ) | |||||||||||||||
Total other comprehensive income/(loss) | ||||||||||||||||||||||||
Securities available-for sale | 6,198 | 2,606 | 3,592 | 24,029 | 10,102 | 13,927 | ||||||||||||||||||
Cash flow hedge derivatives | (162 | ) | (68 | ) | (94 | ) | (6,208 | ) | (2,610 | ) | (3,598 | ) | ||||||||||||
Total | $ | 6,036 | $ | 2,538 | $ | 3,498 | $ | 17,821 | $ | 7,492 | $ | 10,329 | ||||||||||||
Ending balance, gain/(loss), net of tax | ||||||||||||||||||||||||
Securities available-for sale | $ | 2,047 | $ | 8,496 | ||||||||||||||||||||
Cash flow hedge derivatives | (2,264 | ) | (6,593 | ) | ||||||||||||||||||||
Total | $ | (217 | ) | $ | 1,903 | |||||||||||||||||||
18.19. Stock Repurchase Program
On February 1, 2016, May 26, 2022, theCompany’s Board of Directors approved a new stock repurchase program to buy back up to $45.0$125.0 million of ourthe Company’s common stock. In 2016, theThe Company repurchased 1,380,578749,998 shares for $37.5$30.6 million, or $27.13at an average cost of $40.78 per share underduring the February 2016 repurchase program. The Company did not repurchase any shares under the February 2016 repurchase program for the ninethree months ended SeptemberJune 30, 2017. As of September 30, 2017 and December 31, 2016, the Company may repurchase up to $7.5 million of its common stock under the February 2016 repurchase program.2022.
120. Subsequent Events9. Subsequent Events
The Company has evaluated the effect of the following events that have occurred subsequent to the quarter ended SeptemberJune 30, 2017 2022, through the date of issuance of the accompanying condensed consolidated financial statements.
The Bank received final regulatory approvalCondensed Consolidated Financial Statements, and, based on such evaluation, the merger of Far East National Bank into Cathay Bank was completed on October 27, 2017. Each of the nine former FENB branches in California and its representative office in Beijing became a branch and representative office of Cathay Bank as a result of the merger. As of the filing date of this report, Cathay Bank operates 43 branches in California, 12 branches in New York State, threeCompany believes that there have been no material events during such period that would require recognition in the Chicago, Illinois area, threeCondensed Consolidated Financial Statements or disclosure in Washington State, two in Texas, one in Maryland, one in Massachusetts, one in Nevada, one in New Jersey, one in Hong Kong, and a representative office in Taipei, Shanghai, and Beijing.the Notes to the Condensed Consolidated Financial Statements.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSOPERATIONS..
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, 2016.2021.
Critical Accounting Policies
The discussion and analysis of the Company’s financial condition and results of operations are based upon its unaudited condensed consolidated financial statements,Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these condensed consolidated financial statementsConsolidated 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 our financial statements.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 Annual Report on Form 10-K for the year ended December 31, 2016.unaudited Consolidated Financial Statements.
Accounting for investment securities involves significant judgments and assumptions by management, which have a material impact on the carrying value of securities and the recognition of any “other-than-temporary” impairment to our investment securities. The judgments and assumptions used by management are described in “Investment Securities” under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
Accounting for income taxes involves significant judgments and assumptions by management, which have a material impact on the amount of taxes currently payable and the income tax expense recorded in the financial statements. The judgments and assumptions used by management are described in “Income Taxes” under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
Accounting for goodwill and goodwill impairment involves significant judgments and assumptions by management, which have a material impact on the amount of goodwill and noninterest expense recorded in the financial statements. The judgments and assumptions used by management are described in “Goodwill and Goodwill Impairment” under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
HighlightsHighlights
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● | Total loans |
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Quarterly Statement of Operations Review
Net Income
Net income for the quarter ended SeptemberJune 30, 2017,2022, was $49.7$89.0 million, an increase of $3.6$11.8 million, or 7.8%15.3%, compared to net income of $46.1$77.2 million for the same quarter a year ago. Diluted earnings per share for the quarter ended SeptemberJune 30, 2017,2022, was $0.61$1.18 per share compared to $0.58$0.97 per share for the same quarter a year ago.
Return on average stockholders’stockholders’ equity was 9.77%14.62% and return on average assets was 1.29%1.69% for the quarter ended SeptemberJune 30, 2017,2022, compared to a return on average stockholders’ equity of 10.30%12.53% and a return on average assets of 1.38%1.60% for the same quarter a year ago.
Financial
Financial Performance
Three months ended | Three months ended | |||||||||||||||
September 30, 2017 | September 30, 2016 | June 30, 2022 | June 30, 2021 | |||||||||||||
Net income | $ | 49.7 million | $ | 46.1 million | $ | 89.0 million | $ | 77.2 million | ||||||||
Basic earnings per common share | $ | 0.62 | $ | 0.58 | $ | 1.19 | $ | 0.98 | ||||||||
Diluted earnings per common share | $ | 0.61 | $ | 0.58 | $ | 1.18 | $ | 0.97 | ||||||||
Return on average assets | 1.29 | % | 1.38 | % | 1.69 | % | 1.60 | % | ||||||||
Return on average total stockholders' equity | 9.77 | % | 10.30 | % | 14.62 | % | 12.53 | % | ||||||||
Efficiency ratio | 41.91 | % | 45.05 | % | 39.06 | % | 43.41 | % | ||||||||
Net Interest Income Before Provision for Credit Losses
NetNet interest income before provision for credit losses increased $29.4$27.2 million, or 28.3%18.4%, to $133.2$175.1 million during the thirdsecond quarter of 20172022, compared to $103.8$148.0 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 securities sold under agreements to repurchase.deposits.
The net interest margin was 3.75% for the third quarter of 2017 compared to 3.36% for the third quarter of 2016 and 3.63%3.52% for the second quarter of 2017. The increase from2022 compared to 3.24% for the second quarter of 2017 was primarily2021 and 3.26% for the resultfirst quarter of interest recoveries and prepayment penalties of $5.6 million.2022.
For the thirdsecond quarter of 2017, 2022, the yield on average interest-earning assets was 4.34%3.81%, the cost of funds on average interest-bearing liabilities was 0.81%0.41%, and the cost of interest-bearing deposits was 0.68%0.37%. In comparison, for the thirdsecond quarter of 2016,2021, the yield on average interest-earning assets was 4.02%3.62%, the cost of funds on average interest-bearing liabilities was 0.89%0.53%, and the cost of average interest-bearing deposits was 0.70%0.48%. The increase in the yield on average interest earninginterest-earning assets was a result ofresulted mainly from higher interest rates, interest income collected from nonaccrual loans and loan prepayment penalties.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 3.53%3.40% for the quarter ended SeptemberJune 30, 2017,2022 compared to 3.13%3.09% 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 SeptemberJune 30, 2017,2022, and 2016.2021. Average outstanding amounts included in the table are daily averages.
Interest-Earning Assets and Interest-Bearing Liabilities | ||||||||||||||||||||||||||||||||||||||||||||||||
Three months ended September 30, | Interest-Earning Assets and Interest-Bearing Liabilities | |||||||||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | Three months ended June 30, | ||||||||||||||||||||||||||||||||||||||||||||||
Interest | Average | Interest | Average | 2022 | 2021 | |||||||||||||||||||||||||||||||||||||||||||
Average | Income/ | Yield/ | Average | Income/ | Yield/ | Interest | Average | Interest | Average | |||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Balance | Expense | Rate (1)(2) | Balance | Expense | Rate (1)(2) | ||||||||||||||||||||||||||||||||||||||||||
Interest earning assets: | ||||||||||||||||||||||||||||||||||||||||||||||||
Total loans and leases (1) | $ | 12,317,721 | $ | 146,383 | 4.71 | % | 10,670,253 | 118,500 | 4.42 | |||||||||||||||||||||||||||||||||||||||
Average | Income/ | Yield/ | Average | Income/ | Yield/ | |||||||||||||||||||||||||||||||||||||||||||
Balance | Expense | Rate (1)(2) | Balance | Expense | Rate (1)(2) | |||||||||||||||||||||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||||||||||||||||||||||||||
Total loans (1) | $ | 17,530,650 | $ | 181,022 | 4.14 | % | $ | 15,684,329 | $ | 161,493 | 4.13 | % | ||||||||||||||||||||||||||||||||||||
Investment securities | 1,396,859 | 5,692 | 1.62 | 1,303,598 | 4,850 | 1.48 | 1,249,679 | 5,748 | 1.84 | 976,593 | 3,189 | 1.31 | ||||||||||||||||||||||||||||||||||||
Federal Home Loan Bank and FRB stock | 32,369 | 607 | 7.44 | 17,268 | 393 | 9.05 | ||||||||||||||||||||||||||||||||||||||||||
Interest bearing deposits | 292,595 | 1,288 | 1.75 | 294,292 | 412 | 0.56 | ||||||||||||||||||||||||||||||||||||||||||
Federal funds sold and securities purchased under agreements to resell | 35,707 | 108 | 1.20 | - | ||||||||||||||||||||||||||||||||||||||||||||
Federal Home Loan Bank stock | 17,250 | 255 | 5.93 | 17,250 | 255 | 5.93 | ||||||||||||||||||||||||||||||||||||||||||
Deposits with banks | 1,173,702 | 2,508 | 0.86 | 1,633,686 | 438 | 0.11 | ||||||||||||||||||||||||||||||||||||||||||
Total interest-earning assets | 14,075,251 | 154,078 | 4.34 | 12,285,411 | 124,155 | 4.02 | 19,971,281 | 189,533 | 3.81 | 18,311,858 | 165,375 | 3.62 | ||||||||||||||||||||||||||||||||||||
Non-interest earning assets: | ||||||||||||||||||||||||||||||||||||||||||||||||
Cash and due from banks | 294,466 | 223,925 | 171,047 | 153,217 | ||||||||||||||||||||||||||||||||||||||||||||
Other non-earning assets | 1,094,648 | 884,006 | 1,088,515 | 1,033,441 | ||||||||||||||||||||||||||||||||||||||||||||
Total non-interest earning assets | 1,389,114 | 1,107,931 | 1,259,562 | 1,186,658 | ||||||||||||||||||||||||||||||||||||||||||||
Less: Allowance for loan losses | (105,390 | ) | (123,609 | ) | (146,087 | ) | (143,493 | ) | ||||||||||||||||||||||||||||||||||||||||
Deferred loan fees | (4,852 | ) | (6,348 | ) | (5,122 | ) | (7,136 | ) | ||||||||||||||||||||||||||||||||||||||||
Total assets | $ | 15,354,123 | $ | 13,263,385 | $ | 21,079,634 | $ | 19,347,887 | ||||||||||||||||||||||||||||||||||||||||
Interest bearing liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||
Interest bearing demand accounts | $ | 1,349,508 | $ | 588 | 0.17 | $ | 1,060,065 | $ | 441 | 0.17 | ||||||||||||||||||||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||
Interest-bearing demand accounts | $ | 2,459,940 | $ | 810 | 0.13 | $ | 1,967,069 | $ | 631 | 0.13 | % | |||||||||||||||||||||||||||||||||||||
Money market accounts | 2,496,548 | 3,944 | 0.63 | 2,117,831 | 3,511 | 0.66 | 5,291,824 | 5,879 | 0.45 | 3,951,549 | 4,626 | 0.47 | ||||||||||||||||||||||||||||||||||||
Savings accounts | 942,452 | 569 | 0.24 | 627,912 | 260 | 0.16 | 1,183,821 | 206 | 0.07 | 896,747 | 208 | 0.09 | ||||||||||||||||||||||||||||||||||||
Time deposits | 4,939,189 | 11,678 | 0.94 | 4,651,593 | 10,701 | 0.92 | 4,881,365 | 5,724 | 0.47 | 6,035,219 | 10,055 | 0.67 | ||||||||||||||||||||||||||||||||||||
Total interest-bearing deposits | 9,727,697 | 16,779 | 0.68 | 8,457,401 | 14,913 | 0.70 | 13,816,950 | 12,619 | 0.37 | 12,850,584 | 15,520 | 0.48 | ||||||||||||||||||||||||||||||||||||
Securities sold under agreements to repurchase | 109,239 | 874 | 3.17 | 378,261 | 3,828 | 4.03 | ||||||||||||||||||||||||||||||||||||||||||
Other borrowings | 324,581 | 1,773 | 2.17 | 107,203 | 134 | 0.50 | 82,660 | 312 | 1.51 | 93,442 | 415 | 1.78 | ||||||||||||||||||||||||||||||||||||
Long-term debt | 119,136 | 1,456 | 4.85 | 119,136 | 1,456 | 4.86 | 119,136 | 1,439 | 4.85 | 119,136 | 1,439 | 4.84 | ||||||||||||||||||||||||||||||||||||
Total interest-bearing liabilities | 10,280,653 | 20,882 | 0.81 | 9,062,001 | 20,331 | 0.89 | 14,018,746 | 14,370 | 0.41 | 13,063,162 | 17,374 | 0.53 | ||||||||||||||||||||||||||||||||||||
Non-interest bearing liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||
Demand deposits | 2,714,244 | 2,254,123 | 4,391,925 | 3,597,475 | ||||||||||||||||||||||||||||||||||||||||||||
Other liabilities | 339,001 | 167,409 | 227,835 | 215,862 | ||||||||||||||||||||||||||||||||||||||||||||
Total equity | 2,020,224 | 1,779,852 | 2,441,128 | 2,471,388 | ||||||||||||||||||||||||||||||||||||||||||||
Total liabilities and equity | $ | 15,354,122 | $ | 13,263,385 | $ | 21,079,634 | $ | 19,347,887 | ||||||||||||||||||||||||||||||||||||||||
Net interest spread | 3.53 | % | 3.13 | % | 3.40 | % | 3.09 | % | ||||||||||||||||||||||||||||||||||||||||
Net interest income | $ | 133,196 | $ | 103,824 | $ | 175,163 | $ | 148,001 | ||||||||||||||||||||||||||||||||||||||||
Net interest margin | 3.75 | % | 3.36 | % | 3.52 | % | 3.24 | % | ||||||||||||||||||||||||||||||||||||||||
(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 followingfollowing table summarizes the changes in interest income and interest expense attributable to changes in volume and changes in interest rates:rates for the three months ended June 30, 2022 and 2021:
| Taxable-Equivalent Net Interest Income — Changes Due to Volume and Rate(1) | ||||||||||||||||||||||||
| Taxable-Equivalent Net Interest Income - Changes Due to Volume and Rate (1) | Taxable-Equivalent Net Interest Income - Changes Due to Volume and Rate (1) | |||||||||||||||||||||||
Three months ended September 30, | Three months ended June 30, | |||||||||||||||||||||||
2017-2016 | 2022-2021 | |||||||||||||||||||||||
Increase (Decrease) in | Increase/(Decrease) in | |||||||||||||||||||||||
Net Interest Income Due to: | Net Interest Income Due to: | |||||||||||||||||||||||
(In thousands) | Changes in Volume | Changes in Rate | Total Change | |||||||||||||||||||||
| Changes in | Changes in | Total Change | ||||||||||||||||||||||
| Volume | Rate | |||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Loans and leases | $ | 19,431 | $ | 8,452 | $ | 27,883 | ||||||||||||||||||
Loans | $ | 19,063 | $ | 466 | $ | 19,529 | ||||||||||||||||||
Investment securities | 368 | 474 | 842 | 1,040 | 1,519 | 2,559 | ||||||||||||||||||
Federal Home Loan Bank and FRB stock | 294 | (80 | ) | 214 | ||||||||||||||||||||
Federal Home Loan Bank stock | — | — | — | |||||||||||||||||||||
Deposits with other banks | (2 | ) | 878 | 876 | (158 | ) | 2,228 | 2,070 | ||||||||||||||||
Federal funds sold and securities purchased under agreements to resell | 108 | - | 108 | |||||||||||||||||||||
Total changes in interest income | 20,199 | 9,724 | 29,923 | 19,945 | 4,213 | 24,158 | ||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Interest bearing demand accounts | 126 | 21 | 147 | |||||||||||||||||||||
Interest-bearing demand accounts | 161 | 18 | 179 | |||||||||||||||||||||
Money market accounts | 610 | (177 | ) | 433 | 1,501 | (248 | ) | 1,253 | ||||||||||||||||
Savings accounts | 162 | 147 | 309 | 57 | (59 | ) | (2 | ) | ||||||||||||||||
Time deposits | 696 | 281 | 977 | (1,699 | ) | (2,632 | ) | (4,331 | ) | |||||||||||||||
Securities sold under agreements to repurchase | (2,277 | ) | (677 | ) | (2,954 | ) | ||||||||||||||||||
Other borrowed funds | 617 | 1,022 | 1,639 | (45 | ) | (58 | ) | (103 | ) | |||||||||||||||
Long-term debt | - | - | - | |||||||||||||||||||||
Total changes in interest expense | (66 | ) | 617 | 551 | (25 | ) | (2,979 | ) | (3,004 | ) | ||||||||||||||
Changes in net interest income | $ | 20,265 | $ | 9,107 | $ | 29,372 | $ | 19,970 | $ | 7,192 | $ | 27,162 | ||||||||||||
(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 $2.5 million in the second quarter of 2022 compared to a provision for credit losses of $8.6 million in the first quarter of 2022 and a reversal for credit losses of $9.0 million in the second quarter of 2021. In 2022, the first and second quarter provision for credit losses were primarily driven by the growth in loans during the period. As of June 30, 2022, the allowance for loan losses increased by $12.6 million to $148.8 million, or 0.84% 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 second quarter of 2022 consisted of a $2.8 million provision for loan losses, and $218 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 provision for credit losses was zero for the third quarter of 2017 and 2016. The provision/(reversal) for credit losses was based on a review of the appropriateness of the allowance for loan losses at September 30, 2017. The following table summarizessets forth the charge-offs and recoveries for the periods indicated:
Three months ended | Nine months ended September 30, | Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||||||||||
September 30, 2017 | September 30, 2016 | 2017 | 2016 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||||||||||||||||
Charge-offs: | ||||||||||||||||||||||||||||||||
Commercial loans | $ | 80 | $ | 3,278 | $ | 1,810 | $ | 12,035 | $ | 50 | $ | 7,712 | $ | 271 | $ | 16,850 | ||||||||||||||||
Real estate loans (1) | 305 | 4,626 | 860 | 5,830 | 1 | — | 1 | — | ||||||||||||||||||||||||
Total charge-offs | 385 | 7,904 | 2,670 | 17,865 | 51 | 7,712 | 272 | 16,850 | ||||||||||||||||||||||||
Recoveries: | ||||||||||||||||||||||||||||||||
Commercial loans | 575 | 2,006 | 1,401 | 3,720 | 175 | 155 | 534 | 1,425 | ||||||||||||||||||||||||
Construction loans | 47 | 548 | 143 | 7,871 | ||||||||||||||||||||||||||||
Real estate loans (1) | 5,489 | 343 | 6,195 | 903 | — | 303 | 6 | 413 | ||||||||||||||||||||||||
Real estate Construction loans | 94 | — | 240 | — | ||||||||||||||||||||||||||||
Total recoveries | 6,111 | 2,897 | 7,739 | 12,494 | 269 | 458 | 780 | 1,838 | ||||||||||||||||||||||||
Net (recoveries)/charge-offs | $ | (5,726 | ) | $ | 5,007 | $ | (5,069 | ) | $ | 5,371 | ||||||||||||||||||||||
Net charge-offs/(recoveries) | $ | (218 | ) | $ | 7,254 | $ | (508 | ) | $ | 15,012 | ||||||||||||||||||||||
(1) | Real estate loans include commercial mortgage loans, residential mortgage loans, equity lines and |
Non-InterestNon-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 $13.0$14.6 million for the thirdsecond quarter of 2017,2022, an increase of $4.2$2.0 million, or 47.1%15.9%, compared to $8.8$12.6 million for the thirdsecond quarter of 2016.2021. The increase was primarily due to an increase of $0.9 million in loan fees, when compared to the gain of $5.4 million on the acquisition of SinoPac Bancorp and was offset by a decrease in securities gains of $1.7 million from thesame quarter a year ago.
Non-Interest Expense
Non-interest expense increased $10.5$4.4 million, or 20.7%6.3%, to $61.2$74.1 million in the thirdsecond quarter of 20172022 compared to $50.7$69.7 million in the same quarter a year ago. The increase in non-interest expense in the thirdsecond quarter of 20172022 was primarily due to a $5.0an increase of $4.5 million increase in salarysalaries and employee benefitbenefits, due in part to the acquisition of certain West Coast HSBC branches, an increase of $1.9 million in professional service expenses, offset, in part, by a decrease of $3.4 million in amortization expense of investments in low-income housing and a $3.3 million increase in acquisition related expensealternative energy partnerships, when compared to the same quarter a year ago. Acquisition related expenses during the third quarter totaled approximately, $3.3 million, including $2.8 million in legal and investment banking fees and $0.5 million in severance and retention expenses. The efficiency ratio was 41.9%39.1% in the thirdsecond quarter of 20172022 compared to 45.1%43.4% for the same quarter a year ago.
Income Taxes
The effective tax rate for the thirdsecond quarter of 20172022 was 41.4%21.4% compared to 25.5%22.7% for the thirdsecond quarter of 2016.2021. The third quarter 2017 effective tax rate of 41.4% reflected additional tax expense to increaseincludes the full year effective tax rate to 34% compared to the 29% effective tax rate forecasted at June 30, 2017. This adjustment in the third quarter was the result of lower tax credits from the slow deploymentimpact of alternative energy investments. Incomeinvestments and low-income housing tax expense for the first quarter of 2017 was also reduced by $2.6 million in benefits from the distribution of restricted stock units and exercises of stock options.credits.
Year-to-Date Statement of Operations Review
Net income for the ninesix months ended SeptemberJune 30, 2017,2022, was $150.1$164.0 million, an increase of $23.0$13.4 million, or 18.1%8.9%, compared to net income of $127.1$150.6 million for the same period a year ago. Diluted earnings per share was $1.86$2.17 compared to $1.59$1.89 per share for the same period a year ago. The net interest margin for the ninesix months ended SeptemberJune 30, 2017,2022, was 3.63%3.39% compared to 3.39%3.22% for the same period a year ago.
Return on average stockholders’stockholders’ equity was 10.46%13.54% and return on average assets was 1.39%1.58% for the ninesix months ended SeptemberJune 30, 2017,2022, compared to a return on average stockholders’ equity of 9.66%12.36% and a return on average assets of 1.29% for the same period of 2016. The efficiency ratio for the nine months ended September 30, 2017, was 43.71% compared to 51.35%1.58% for the same period a year ago. The efficiency ratio for the six months ended June 30, 2022, was 39.77% compared to 45.17% 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 assetsassets and liabilities for the ninesix months ended SeptemberJune 30, 2017,2022, and 2016.2021. Average outstanding amounts included in the table are daily averages.
Interest-Earning Assets and Interest-Bearing Liabilities | ||||||||||||||||||||||||||||||||||||||||||||||||
Nine months ended September 30, | Interest-Earning Assets and Interest-Bearing Liabilities | |||||||||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | Six months ended June 30, | ||||||||||||||||||||||||||||||||||||||||||||||
Interest | Average | Interest | Average | 2022 | 2021 | |||||||||||||||||||||||||||||||||||||||||||
Average | Income/ | Yield/ | Average | Income/ | Yield/ | Interest | Average | Interest | Average | |||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Balance | Expense | Rate (1)(2) | Balance | Expense | Rate (1)(2) | ||||||||||||||||||||||||||||||||||||||||||
Interest earning assets: | ||||||||||||||||||||||||||||||||||||||||||||||||
Total loans and leases (1) | $ | 11,668,814 | $ | 401,129 | 4.60 | 10,468,328 | 349,212 | 4.46 | ||||||||||||||||||||||||||||||||||||||||
Average | Income/ | Yield/ | Average | Income/ | Yield/ | |||||||||||||||||||||||||||||||||||||||||||
Balance | Expense | Rate (1)(2) | Balance | Expense | Rate (1)(2) | |||||||||||||||||||||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||||||||||||||||||||||||||
Total loans (1) | $ | 17,236,850 | $ | 347,116 | 4.06 | % | $ | 15,688,132 | $ | 321,214 | 4.13 | % | ||||||||||||||||||||||||||||||||||||
Investment securities | 1,297,789 | 14,817 | 1.53 | 1,384,019 | 16,974 | 1.64 | 1,212,170 | 10,576 | 1.76 | 986,096 | 6,256 | 1.28 | ||||||||||||||||||||||||||||||||||||
Federal Home Loan Bank and FRB stock | 22,345 | 1,317 | 7.88 | 17,256 | 1,122 | 8.69 | ||||||||||||||||||||||||||||||||||||||||||
Interest bearing deposits | 359,580 | 3,140 | 1.17 | 272,690 | 1,094 | 0.54 | ||||||||||||||||||||||||||||||||||||||||||
Federal funds sold and securities purchased under agreements to resell | 12,033 | 108 | 1.20 | - | - | - | ||||||||||||||||||||||||||||||||||||||||||
Federal Home Loan Bank stock | 17,250 | 516 | 6.03 | 17,250 | 472 | 5.52 | ||||||||||||||||||||||||||||||||||||||||||
Interest-bearing deposits | 1,410,884 | 3,271 | 0.47 | 1,459,498 | 753 | 0.10 | ||||||||||||||||||||||||||||||||||||||||||
Total interest-earning assets | 13,360,561 | 420,511 | 4.21 | 12,142,293 | 368,402 | 4.05 | 19,877,154 | 361,479 | 3.67 | 18,150,976 | 328,695 | 3.65 | ||||||||||||||||||||||||||||||||||||
Non-interest earning assets: | ||||||||||||||||||||||||||||||||||||||||||||||||
Cash and due from banks | 235,097 | 215,415 | 166,901 | 152,868 | ||||||||||||||||||||||||||||||||||||||||||||
Other non-earning assets | 965,906 | 891,974 | 1,074,792 | 1,038,224 | ||||||||||||||||||||||||||||||||||||||||||||
Total non-interest earning assets | 1,201,003 | 1,107,389 | 1,241,693 | 1,191,092 | ||||||||||||||||||||||||||||||||||||||||||||
Less: Allowance for loan losses | (113,299 | ) | (133,232 | ) | (141,347 | ) | (154,429 | ) | ||||||||||||||||||||||||||||||||||||||||
Deferred loan fees | (4,531 | ) | (7,225 | ) | (4,823 | ) | (5,676 | ) | ||||||||||||||||||||||||||||||||||||||||
Total assets | $ | 14,443,734 | $ | 13,109,225 | $ | 20,972,677 | $ | 19,181,963 | ||||||||||||||||||||||||||||||||||||||||
Interest bearing liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||
Interest bearing demand accounts | $ | 1,282,904 | $ | 1,639 | 0.17 | $ | 1,013,129 | $ | 1,256 | 0.17 | ||||||||||||||||||||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||
Interest-bearing demand accounts | $ | 2,430,141 | $ | 1,292 | 0.11 | % | $ | 1,928,941 | $ | 1,295 | 0.14 | % | ||||||||||||||||||||||||||||||||||||
Money market accounts | 2,359,871 | 11,362 | 0.64 | 2,020,725 | 9,768 | 0.65 | 5,055,017 | 10,338 | 0.41 | 3,752,986 | 9,338 | 0.50 | ||||||||||||||||||||||||||||||||||||
Savings accounts | 817,540 | 1,244 | 0.20 | 626,200 | 759 | 0.16 | 1,130,551 | 393 | 0.07 | 871,287 | 426 | 0.10 | ||||||||||||||||||||||||||||||||||||
Time deposits | 4,840,293 | 33,429 | 0.92 | 4,752,938 | 32,177 | 0.90 | 5,084,212 | 11,784 | 0.47 | 6,218,967 | 24,064 | 0.78 | ||||||||||||||||||||||||||||||||||||
Total interest-bearing deposits | 9,300,608 | 47,674 | 0.69 | 8,412,992 | 43,960 | 0.70 | 13,699,921 | 23,807 | 0.35 | 12,772,181 | 35,123 | 0.55 | ||||||||||||||||||||||||||||||||||||
Securities sold under agreements to repurchase | 149,267 | 3,489 | 3.13 | 392,701 | 11,696 | 3.98 | ||||||||||||||||||||||||||||||||||||||||||
Other borrowings | 177,372 | 2,366 | 1.78 | 119,348 | 442 | 0.49 | 63,011 | 455 | 1.46 | 108,350 | 890 | 1.66 | ||||||||||||||||||||||||||||||||||||
Long-term debt | 119,136 | 4,320 | 4.85 | 119,136 | 4,336 | 4.86 | 119,136 | 2,863 | 4.85 | 119,136 | 2,863 | 4.85 | ||||||||||||||||||||||||||||||||||||
Total interest-bearing liabilities | 9,746,383 | 57,849 | 0.79 | 9,044,177 | 60,434 | 0.89 | 13,882,068 | 27,125 | 0.39 | 12,999,667 | 38,876 | 0.60 | ||||||||||||||||||||||||||||||||||||
Non-interest bearing liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||
Demand deposits | 2,542,754 | 2,131,742 | 4,376,246 | 3,502,495 | ||||||||||||||||||||||||||||||||||||||||||||
Other liabilities | 236,332 | 175,714 | 271,105 | 223,634 | ||||||||||||||||||||||||||||||||||||||||||||
Total equity | 1,918,265 | 1,757,592 | 2,443,258 | 2,456,167 | ||||||||||||||||||||||||||||||||||||||||||||
Total liabilities and equity | $ | 14,443,734 | $ | 13,109,225 | $ | 20,972,677 | $ | 19,181,963 | ||||||||||||||||||||||||||||||||||||||||
Net interest spread | 3.42 | % | 3.16 | % | 3.27 | % | 3.05 | % | ||||||||||||||||||||||||||||||||||||||||
Net interest income | $ | 362,662 | $ | 307,968 | $ | 334,354 | $ | 289,819 | ||||||||||||||||||||||||||||||||||||||||
Net interest margin | 3.63 | % | 3.39 | % | 3.39 | % | 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:rates for the six months ended June 30, 2022 and 2021:
Taxable-Equivalent Net Interest Income — Changes Due to Volumn and Rate(1) | ||||||||||||||||||||||||
| Taxable-Equivalent Net Interest Income — Changes Due to Volume and Rate(1) | Taxable-Equivalent Net Interest Income — Changes Due to Volume and Rate(1) | |||||||||||||||||||||||
Nine months ended September 30, | Six months ended June 30, | |||||||||||||||||||||||
2017-2016 | 2022-2021 | |||||||||||||||||||||||
Increase (Decrease) in | Increase/(Decrease) in | |||||||||||||||||||||||
Net Interest Income Due to: | Net Interest Income Due to: | |||||||||||||||||||||||
(Dollars in thousands) | Changes in Volume | Changes in Rate | Total Change | |||||||||||||||||||||
Changes in Volume | Changes in Rate | Total Change | ||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Loans and leases | $ | 40,745 | $ | 11,172 | $ | 51,917 | ||||||||||||||||||
Loans | $ | 31,338 | $ | (5,436 | ) | $ | 25,902 | |||||||||||||||||
Investment securities | (1,030 | ) | (1,127 | ) | (2,157 | ) | 1,638 | 2,682 | 4,320 | |||||||||||||||
Federal Home Loan Bank and FRB stock | 307 | (112 | ) | 195 | ||||||||||||||||||||
Federal Home Loan Bank stock | — | 44 | 44 | |||||||||||||||||||||
Deposits with other banks | 435 | 1,611 | 2,046 | (26 | ) | 2,544 | 2,518 | |||||||||||||||||
Federal funds sold and securities purchased under agreements to resell | 108 | - | 108 | |||||||||||||||||||||
Total changes in interest income | 40,565 | 11,544 | 52,109 | 32,950 | (166 | ) | 32,784 | |||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Interest bearing demand accounts | 343 | 40 | 383 | |||||||||||||||||||||
Interest-bearing demand accounts | 300 | (303 | ) | (3 | ) | |||||||||||||||||||
Money market accounts | 1,624 | (30 | ) | 1,594 | 2,877 | (1,877 | ) | 1,000 | ||||||||||||||||
Savings accounts | 264 | 221 | 485 | 109 | (142 | ) | (33 | ) | ||||||||||||||||
Time deposits | 583 | 669 | 1,252 | (3,840 | ) | (8,440 | ) | (12,280 | ) | |||||||||||||||
Securities sold under agreements to repurchase | (6,097 | ) | (2,110 | ) | (8,207 | ) | ||||||||||||||||||
Other borrowed funds | 303 | 1,621 | 1,924 | (338 | ) | (97 | ) | (435 | ) | |||||||||||||||
Long-term debt | - | (16 | ) | (16 | ) | |||||||||||||||||||
Total changes in interest expense | (2,980 | ) | 395 | (2,585 | ) | (892 | ) | (10,859 | ) | (11,751 | ) | |||||||||||||
Changes in net interest income | $ | 43,545 | $ | 11,149 | $ | 54,694 | $ | 33,842 | $ | 10,693 | $ | 44,535 | ||||||||||||
(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 $15.7$21.2 billion as of SeptemberJune 30, 2017,2022 an increase of $1.2 billion,$348.8 million or 8.3%,1.7% from $14.5$20.9 billion as of December 31, 2016, primarily due2021.
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 acquisitionrating of SinoPac Bancorp which had total assetsthe 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 $1.2 billion.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.
Investment SecuritiesLosses 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.
InvestmentThe amortized cost of the Company’s AFS debt securities excludes 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 June 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 8.7%5.8% of total assets as of SeptemberJune 30, 2017,2022, compared to 9.1%5.4% of total assets as of December 31, 2016. The carrying value of investment securities2021. Securities available-for-sale were $1.2 billion as of SeptemberJune 30, 2017, was $1.4 billion2022, compared to $1.3$1.1 billion as of December 31, 2016. Securities available-for-sale are carried at fair value and had a net unrealized gain, net of tax, of $2.0 million as of September 30, 2017, compared to a net unrealized loss, net of tax, of $1.5 million as of December 31, 2016.2021.
The following tables reflectset forth the amortized cost, gross unrealized gains, gross unrealized losses, and fair value of investment securities available-for-sale as of SeptemberJune 30, 2017,2022, and December 31, 2016:2021:
September 30, 2017 | ||||||||||||||||||||||||||||||||
Gross | Gross | June 30, 2022 | ||||||||||||||||||||||||||||||
Amortized | Unrealized | Unrealized | Gross | Gross | ||||||||||||||||||||||||||||
Cost | Gains | Losses | Fair Value | Amortized | Unrealized | Unrealized | ||||||||||||||||||||||||||
(In thousands) | Cost | Gains | Losses | Fair Value | ||||||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||
Securities Available-for-Sale | ||||||||||||||||||||||||||||||||
U.S. treasury securities | $ | 399,741 | $ | - | $ | 305 | $ | 399,436 | $ | 119,823 | $ | — | $ | 825 | $ | 118,998 | ||||||||||||||||
U.S. government agency entities | 9,679 | 27 | 6 | 9,700 | 75,781 | 1,285 | 125 | 76,941 | ||||||||||||||||||||||||
U.S. government sponsored entities | 400,000 | - | 6,278 | 393,722 | ||||||||||||||||||||||||||||
State and municipal securities | 1,943 | 12 | 1,931 | |||||||||||||||||||||||||||||
Mortgage-backed securities | 447,959 | 468 | 2,362 | 446,065 | 932,753 | 108 | 88,398 | 844,463 | ||||||||||||||||||||||||
Collateralized mortgage obligations | 1,715 | - | 5 | 1,710 | 23,949 | — | 1,369 | 22,580 | ||||||||||||||||||||||||
Corporate debt securities | 80,007 | 904 | 5 | 80,906 | 183,987 | — | 12,398 | 171,589 | ||||||||||||||||||||||||
Mutual funds | 6,500 | - | 229 | 6,271 | ||||||||||||||||||||||||||||
Preferred stock of government sponsored entities | 4,117 | 3,970 | - | 8,087 | ||||||||||||||||||||||||||||
Other equity securities | 13,294 | 7,463 | 98 | 20,659 | ||||||||||||||||||||||||||||
Total | $ | 1,364,955 | $ | 12,832 | $ | 9,300 | $ | 1,368,487 | $ | 1,336,293 | $ | 1,393 | $ | 103,115 | $ | 1,234,571 | ||||||||||||||||
December 31, 2016 | ||||||||||||||||||||||||||||||||
Gross | Gross | December 31, 2021 | ||||||||||||||||||||||||||||||
Amortized | Unrealized | Unrealized | Gross | Gross | ||||||||||||||||||||||||||||
Cost | Gains | Losses | Fair Value | Amortized | Unrealized | Unrealized | ||||||||||||||||||||||||||
(In thousands) | Cost | Gains | Losses | Fair Value | ||||||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||
Securities Available-for-Sale | ||||||||||||||||||||||||||||||||
U.S. treasury securities | $ | 489,839 | $ | 35 | $ | 857 | $ | 489,017 | ||||||||||||||||||||||||
U.S. government sponsored entities | 400,000 | - | 9,669 | 390,331 | ||||||||||||||||||||||||||||
U.S. government agency entities | 86,475 | 1,169 | 135 | 87,509 | ||||||||||||||||||||||||||||
Mortgage-backed securities | 339,241 | 309 | 3,290 | 336,260 | 886,614 | 9,465 | 7,414 | 888,665 | ||||||||||||||||||||||||
Collateralized mortgage obligations | 48 | - | 20 | 28 | 9,547 | — | 430 | 9,117 | ||||||||||||||||||||||||
Corporate debt securities | 74,965 | 247 | 862 | 74,350 | 144,231 | 441 | 2,654 | 142,018 | ||||||||||||||||||||||||
Mutual funds | 6,500 | - | 270 | 6,230 | ||||||||||||||||||||||||||||
Preferred stock of government sponsored entities | 2,811 | 4,497 | - | 7,308 | ||||||||||||||||||||||||||||
Other equity securities | 3,608 | 7,213 | - | 10,821 | ||||||||||||||||||||||||||||
Total | $ | 1,317,012 | $ | 12,301 | $ | 14,968 | $ | 1,314,345 | $ | 1,126,867 | $ | 11,075 | $ | 10,633 | $ | 1,127,309 | ||||||||||||||||
For additional information, see Note 78 to the Company’s unaudited condensed consolidated financial statements.Consolidated Financial Statements.
Investment securitiesSecurities available-for-sale having a carrying value of $291.4$102.9 million as of SeptemberJune 30, 2017,2022, and $649.1$30.5 million as of December 31, 2016,2021, were pledged to secure public deposits, other borrowings and treasury tax and loan and securities sold under agreements to repurchase. loan.
Equity Securities
The Company recognized a net loss of $1.0 million for the three months ended June 30, 2022, due to the decrease in fair value of equity investments with readily determinable fair values compared to a net loss of $0.9 million for the three months ended June 30, 2021. The Company recognized a net gain of $5.0 million for the six months ended June 30, 2022 due to the increase in fair value of equity investments readily determinable fair values compared to a net loss of $3.6 million for the six months ended June 30, 2021. Equity securities were $26.8 million and $22.3 million as of June 30, 2022, and December 31, 2021, respectively.
Loans
Gross loans excluding loans held for sale, were $12.6$17.8 billion at SeptemberJune 30, 2017,2022, an increase of $1.4 billion, or 12.5%8.6%, from $11.2$16.3 billion at December 31, 2016.2021. The increase was primarily due to increases of $591.8$212.1 million, or 10.2%7.1%, in commercial loans, an increase of $863.4 million, or 20.7% in residential mortgage loans, which included $592.9 million acquired from the acquisition of certain HSBC West Coast branches, and an increase of $419.7 million, or 5.2 % in commercial mortgage loans, $478.5offset, in part, by a decrease of $42.5 million, or 19.6%10.1%, in residential mortgagehome equity loans. For the second quarter of 2022, total loans, $171.7increased by $389.5 million or 7.6%, in commercial loans, and $143.4 million, or 26.2%, in real estate construction loans. 9.5% annualized.
The loan balances and composition at SeptemberJune 30, 2017,2022, compared to December 31, 2016, and to September 30, 2016,2021 are presentedset forth below:
September 30, 2017 | % of Gross Loans | December 31, 2016 | % of Gross Loans | % Change | ||||||||||||||||
Type of Loans | (Dollars in thousands) | |||||||||||||||||||
Commercial loans | $ | 2,419,891 | 19.2 | % | $ | 2,248,187 | 20.1 | % | 7.6 | % | ||||||||||
Residential mortgage loans | 2,922,537 | 23.3 | 2,444,048 | 21.8 | 19.6 | |||||||||||||||
Commercial mortgage loans | 6,377,047 | 50.6 | 5,785,248 | 51.7 | 10.2 | |||||||||||||||
Equity lines | 181,751 | 1.4 | 171,711 | 1.5 | 5.8 | |||||||||||||||
Real estate construction loans | 691,486 | 5.5 | 548,088 | 4.9 | 26.2 | |||||||||||||||
Installment and other loans | 4,722 | 0.0 | 3,993 | 0.0 | 18.3 | |||||||||||||||
Gross loans | $ | 12,597,434 | 100 | % | $ | 11,201,275 | 100 | % | 12.5 | % | ||||||||||
Allowance for loan losses | (121,535 | ) | (118,966 | ) | 2.2 | |||||||||||||||
Unamortized deferred loan fees | (3,424 | ) | (4,994 | ) | (31.4 | ) | ||||||||||||||
Total loans, net | $ | 12,472,475 | $ | 11,077,315 | 12.6 | % | ||||||||||||||
Loans held for sale | $ | - | $ | 7,500 | (100.0 | %) | ||||||||||||||
June 30, 2022 | % of | December 31, 2021 | % of | % | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Commercial loans | $ | 3,194,509 | 18.0 | % | $ | 2,982,399 | 18.2 | % | 7.1 | % | ||||||||||
Residential mortgage loans and equity lines | 5,422,392 | 30.5 | 4,601,493 | 28.2 | 17.8 | |||||||||||||||
Commercial mortgage loans | 8,563,001 | 48.1 | 8,143,272 | 49.8 | 5.2 | |||||||||||||||
Real estate construction loans | 602,052 | 3.4 | 611,031 | 3.8 | (1.5 | ) | ||||||||||||||
Installment and other loans | 5,934 | 0.0 | 4,284 | 0.0 | 38.5 | |||||||||||||||
Gross loans | $ | 17,787,888 | 100 | % | $ | 16,342,479 | 100 | % | 8.8 | % | ||||||||||
Allowance for loan losses | (148,772 | ) | (136,157 | ) | 9.3 | |||||||||||||||
Unamortized deferred loan fees | (5,540 | ) | (4,321 | ) | 28.2 | |||||||||||||||
Total loans, net | $ | 17,633,576 | $ | 16,202,001 | 8.8 | % | ||||||||||||||
Non-performing Assets
Non-performing assets include loans past due 90 days or more and still accruing interest, non-accrual loans, and other real estate owned (“OREO”). The Company’sOREO. 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 forto seek to identify problem loans. During the ordinary course of business,business, management becomesmay become aware of borrowers that may not be able to meet the contractual requirements of thetheir 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-performingnon-performing assets excluding non-accrual loans held for sale, to total assets was 0.6% at September0.3% as of June 30, 2017,2022, compared to 0.5% at0.3% as of December 31, 2016.2021. Total non-performing assets increased $17.6decreased $5.2 million, or 25.2%7.3%, to $87.4$66.5 million at SeptemberJune 30, 2017,2022, compared to $69.8$71.7 million at December 31, 2016,2021, primarily due to an increasea decrease of $15.7$5.2 million, or 31.6%7.9%, in non-accrual loans, offset byand a decrease of $2.0 million, or 9.7%,$301 thousand in other real estate owned.owned, offset in part, by an increase of $298 thousand or 20.7% in accruing loans past due 90 days or more.
As a percentage of gross loans,, excluding loans held for sale, plus OREO, our non-performing assets was 0.69%were 0.37% as of SeptemberJune 30, 2017,2022, compared to 0.62%0.44% as of December 31, 2016.2021. The non-performing loan portfolio loan coverage ratio, defined as the allowance for credit losses to non-performing loans, decreasedincreased to 181.6%248.3% as of SeptemberJune 30, 2017,2022, from 245.9%212.9% as of December 31, 2016.2021.
The following table presentssets forth the changes in non-performing assets and troubled debt restructurings (“TDRs”)TDRs as of SeptemberJune 30, 2017,2022, compared to December 31, 2016,2021, and to SeptemberJune 30, 2016:2021:
(Dollars in thousands) | September 30, 2017 | December 31, 2016 | % Change | September 30, 2016 | % Change | |||||||||||||||
Non-performing assets | ||||||||||||||||||||
Accruing loans past due 90 days or more | $ | 3,900 | $ | - | 100 | $ | - | 100 | ||||||||||||
Non-accrual loans: | ||||||||||||||||||||
Construction loans | 14,267 | 5,458 | 161 | 5,507 | 159 | |||||||||||||||
Commercial mortgage loans | 28,379 | 20,078 | 41 | 21,077 | 35 | |||||||||||||||
Commercial loans | 15,942 | 15,710 | 1 | 9,251 | 72 | |||||||||||||||
Residential mortgage loans | 6,763 | 8,436 | (20 | ) | 8,524 | (21 | ) | |||||||||||||
Total non-accrual loans: | $ | 65,351 | $ | 49,682 | 32 | $ | 44,359 | 47 | ||||||||||||
Total non-performing loans | 69,251 | 49,682 | 39 | 44,359 | 56 | |||||||||||||||
Other real estate owned | 18,115 | 20,070 | (10 | ) | 20,986 | (14 | ) | |||||||||||||
Total non-performing assets | $ | 87,366 | $ | 69,752 | 25 | $ | 65,345 | 34 | ||||||||||||
Accruing troubled debt restructurings | $ | 62,358 | $ | 65,393 | (5 | ) | $ | 86,555 | (28 | ) | ||||||||||
Non-accrual loans held for sale | $ | - | $ | 7,500 | (100 | ) | $ | 4,750 | (100 | ) | ||||||||||
Allowance for loan losses | $ | 121,535 | $ | 118,966 | 2 | $ | 117,942 | 3 | ||||||||||||
Total gross loans outstanding, at period-end (1) | $ | 12,597,434 | $ | 11,201,275 | 12 | $ | 11,010,457 | 14 | ||||||||||||
Allowance for loan losses to non-performing loans, at period-end (2) | 175.50 | % | 239.45 | % | 265.88 | % | ||||||||||||||
Allowance for loan losses to gross loans, at period-end (1) | 0.96 | % | 1.06 | % | 1.07 | % | ||||||||||||||
|
|
June 30, 2022 | December 31, 2021 | % Change | June 30, 2021 | % Change | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Non-performing assets | ||||||||||||||||||||
Accruing loans past due 90 days or more | $ | 1,737 | $ | 1,439 | 21 | $ | 1,513 | 15 | ||||||||||||
Non-accrual loans: | ||||||||||||||||||||
Construction loans | — | — | - | 4,116 | (100 | ) | ||||||||||||||
Commercial mortgage loans | 15,141 | 38,173 | (60 | ) | 36,884 | (59 | ) | |||||||||||||
Commercial loans | 27,849 | 16,558 | 68 | 16,333 | 71 | |||||||||||||||
Residential mortgage loans | 17,583 | 11,115 | 58 | 10,449 | 68 | |||||||||||||||
Installment and other loans | 79 | — | - | — | - | |||||||||||||||
Total non-accrual loans | $ | 60,652 | $ | 65,846 | (8 | ) | $ | 67,782 | (11 | ) | ||||||||||
Total non-performing loans | 62,389 | 67,285 | (7 | ) | 69,295 | (10 | ) | |||||||||||||
Other real estate owned | 4,067 | 4,368 | (7 | ) | 4,871 | (17 | ) | |||||||||||||
Total non-performing assets | $ | 66,456 | $ | 71,653 | (7 | ) | $ | 74,166 | (10 | ) | ||||||||||
Accruing troubled debt restructurings (TDRs) | $ | 12,675 | $ | 12,837 | (1 | ) | $ | 27,261 | (54 | ) | ||||||||||
Allowance for loan losses | $ | 148,772 | $ | 136,157 | 9 | $ | 131,256 | 13 | ||||||||||||
Total gross loans outstanding, at period-end | $ | 17,787,888 | $ | 16,342,479 | 9 | $ | 15,690,689 | 13 | ||||||||||||
Allowance for loan losses to non-performing loans, at period-end | 238.46 | % | 202.36 | % | 189.42 | % | ||||||||||||||
Allowance for loan losses to gross loans, at period-end | 0.84 | % | 0.83 | % | 0.84 | % | ||||||||||||||
Non-accrual Loans
At SeptemberAs of June 30, 2017,2022, total non-accrual loans were $65.4$60.7 million, an increasea decrease of $15.7$5.2 million, or 31.6%7.9%, resulting from several construction and commercial real estate loans placed on nonaccrual, from $49.7$65.8 million at December 31, 2016,2021, and an increasea decrease of $21.0$7.1 million, or 47.3%10.5%, from $44.4$67.8 million at SeptemberJune 30, 2016.2021. 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.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. Non-accrual loans also include those TDRs that do not qualify for accrual status.
The following tables presentset 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, 2017 | December 31, 2016 | June 30, 2022 | December 31, 2021 | |||||||||||||||||||||||||||||||||
Real | Real | Real | Real | |||||||||||||||||||||||||||||||||
Estate (1) | Commercial | Estate (1) | Commercial | Estate (1) | Commercial | Other | Estate (1) | Commercial | ||||||||||||||||||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||||||||||||||||||||
Type of Collateral | ||||||||||||||||||||||||||||||||||||
Single/multi-family residence | $ | 23,780 | $ | 7,742 | $ | 9,368 | $ | 218 | $ | 18,897 | $ | 2,065 | $ | — | $ | 12,456 | $ | 7,697 | ||||||||||||||||||
Commercial real estate | 25,591 | - | 24,321 | - | 13,827 | 262 | — | 36,832 | 338 | |||||||||||||||||||||||||||
Land | - | - | 283 | - | — | 2,656 | — | — | 2,744 | |||||||||||||||||||||||||||
Personal property (UCC) | - | 8,200 | - | 15,492 | — | 22,866 | 79 | — | 5,779 | |||||||||||||||||||||||||||
Total | $ | 49,371 | $ | 15,942 | $ | 33,972 | $ | 15,710 | $ | 32,724 | $ | 27,849 | $ | 79 | $ | 49,288 | $ | 16,558 | ||||||||||||||||||
(1) Real estate includes commercial mortgage loans, real estate construction loans, residential mortgage loans and equity lines.
(1) Real estate includes commercial mortgage loans, real estate construction loans, residential mortgage loans and equity lines. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
September 30, 2017 | December 31, 2016 | |||||||||||||||
Real | Real | |||||||||||||||
Estate (1) | Commercial | Estate (1) | Commercial | |||||||||||||
(In thousands) | ||||||||||||||||
Type of Business | ||||||||||||||||
Real estate development | $ | 31,890 | $ | 20 | $ | 13,804 | $ | - | ||||||||
Wholesale/Retail | 10,807 | 7,924 | 12,312 | 9,213 | ||||||||||||
Food/Restaurant | 140 | - | 153 | - | ||||||||||||
Import/Export | - | 7,998 | - | 6,174 | ||||||||||||
Other | 6,534 | - | 7,703 | 323 | ||||||||||||
Total | $ | 49,371 | $ | 15,942 | $ | 33,972 | $ | 15,710 | ||||||||
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Impaired Loans
A loan is considered impaired when it is probable that a creditor will be unable to collect all amounts due according to the contractual termsAs of the loan agreement based on current circumstances and events. The assessment for impairment occurs when and while such loans are on non-accrual as a result of delinquency status of over 90 days or receipt of information indicating that full collection of principal is doubtful, or when the loan has been restructured in a troubled debt restructuring (TDRs). Those loans with a balance less than our defined selection criteria, generally a loan amount less than $500,000, are treated as a homogeneous portfolio. If loans meeting the defined criteria are not collateral dependent, we measure the impairment based on the present value of the expected future cash flows discounted at the loan’s effective interest rate. If loans meeting the defined criteria are collateral dependent, we measure the impairment by using the loan’s observable market price or the fair value of the collateral. We obtain an appraisal to determine the amount of impairment at the date that the loan becomes impaired. The appraisals are based on “as is” or bulk sale valuations. To ensure that appraised values remain current, we generally obtain an updated appraisal every twelve months from qualified independent appraisers. If the fair value of the collateral, less cost to sell, is less than the recorded amount of the loan, we then recognize impairment by creating or adjusting an existing valuation allowance with a corresponding charge to the provision for loan losses. If an impaired loan is expected to be collected through liquidation of the collateral, the amount of impairment, excluding disposal costs, which range between 3% to 6% of the fair value, depending on the size of the impaired loan, is charged off against the allowance for loan losses. Non-accrual impaired loans, including TDRs, are not returned to accrual status unless the unpaid interest has been brought current and full repayment of the recorded balance is expected or if the borrower has made six consecutive monthly payments of the scheduled amounts due, and TDRs are reviewed for continued impairment until they are no longer reported as TDRs.
As of SeptemberJune 30, 2017,2022, recorded investment in impaired loans totaled $127.7 million and was comprised of non-accrual loans excluding loans held for sale, of $65.3 million and accruing troubled debt restructured loans (TDRs) of $62.4was $60.7 million. As of December 31, 2016,2021, recorded investment in impairednon-accrual loans totaled $115.1 million and was comprised of non-accrual loans, excluding loans held for sale, of $49.7 million and accruing TDRs of $65.4$65.8 million. For impairednon-accrual loans, the amounts previously charged off represent 7.1% as of September 30, 2017, and 8.4% as of December 31, 2016,2.6% of the contractual balances for impaired loans.non-accrual loans as of June 30, 2022 and 10.7% as of December 31, 2021. As of SeptemberJune 30, 2017, $49.42022, $32.7 million, or 75.7%53.9%, of the $65.3$60.7 million of non-accrual loans excluding loans held for sale, waswere secured by real estate compared to $34.0$49.3 million, or 68.4%74.9%, of the $49.7$65.8 million of non-accrual loans excluding loans held for sale, that waswere secured by real estate as of December 31, 2016.2021. The Bank obtainsgenerally seeks to obtain current appraisals, sales contracts, or other available market price information whichintended to provide updated factors in evaluating potential loss.
AsAs of SeptemberJune 30, 2017, $2.12022, $7.0 million of the $121.5$148.8 million allowance for loan losses was allocated for impairednon-accrual loans and $119.4$141.8 million was allocated to the general allowance. As of December 31, 2016, $2.8 million of the $119.0 million allowance for loan losses was allocated for impaired loans and $116.2 million was allocated to the general allowance.
The allowance for loan losses to non-accrualnon-performing loans was 186.0%238.5% as of SeptemberJune 30, 2017, from 239.5%2022, compared to 202.4% as of December 31, 2016,2021, primarily due to an increasea decrease in the non-accrual loans. Non-accrual loans also include those TDRs that do not qualify for accrual status.
The following table presents impairednon-accrual loans and the related allowance as of the dates indicated:June 30, 2022 and December 31, 2021:
June 30, 2022 | ||||||||||||
Unpaid Principal Balance | Recorded Investment | Allowance | ||||||||||
(In thousands) | ||||||||||||
With no allocated allowance | ||||||||||||
Commercial loans | $ | 12,349 | $ | 8,934 | $ | — | ||||||
Commercial mortgage loans | 15,884 | 12,756 | — | |||||||||
Residential mortgage loans and equity lines | 9,704 | 9,493 | — | |||||||||
Installment and other loans | 79 | 79 | — | |||||||||
Subtotal | $ | 38,016 | $ | 31,262 | $ | — | ||||||
With allocated allowance | ||||||||||||
Commercial loans | $ | 28,268 | $ | 18,916 | $ | 6,813 | ||||||
Commercial mortgage loans | 2,426 | 2,384 | 133 | |||||||||
Residential mortgage loans and equity lines | 8,742 | 8,090 | 38 | |||||||||
Installment and other loans | — | — | — | |||||||||
Subtotal | $ | 39,436 | $ | 29,390 | $ | 6,984 | ||||||
Total non-accrual loans | $ | 77,452 | $ | 60,652 | $ | 6,984 | ||||||
Impaired Loans | ||||||||||||||||||||||||||||||||||||
September 30, 2017 | December 31, 2016 | |||||||||||||||||||||||||||||||||||
December 31, 2021 | ||||||||||||||||||||||||||||||||||||
Unpaid Principal Balance | Recorded Investment | Allowance | Unpaid Principal Balance | Recorded Investment | Allowance | Unpaid Principal Balance | Recorded Investment | Allowance | ||||||||||||||||||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||||||||||||||||||||
With no allocated allowance | ||||||||||||||||||||||||||||||||||||
Commercial loans | $ | 23,953 | $ | 23,373 | $ | - | $ | 24,037 | $ | 23,121 | $ | - | $ | 15,879 | $ | 11,342 | $ | — | ||||||||||||||||||
Real estate construction loans | 22,309 | 21,748 | - | 5,776 | 5,458 | - | ||||||||||||||||||||||||||||||
Commercial mortgage loans | 39,154 | 32,370 | - | 60,522 | 54,453 | - | 24,437 | 21,209 | — | |||||||||||||||||||||||||||
Residential mortgage loans and equity lines | 2,264 | 2,264 | - | 5,472 | 5,310 | - | 6,020 | 5,850 | — | |||||||||||||||||||||||||||
Subtotal | $ | 87,680 | $ | 79,755 | $ | - | $ | 95,807 | $ | 88,342 | $ | - | $ | 46,336 | $ | 38,401 | $ | — | ||||||||||||||||||
With allocated allowance | ||||||||||||||||||||||||||||||||||||
Commercial loans | $ | 14,082 | $ | 13,985 | $ | 1,461 | $ | 5,216 | $ | 4,640 | $ | 1,827 | $ | 14,294 | $ | 5,217 | $ | 894 | ||||||||||||||||||
Commercial mortgage loans | 23,061 | 22,820 | 823 | 10,158 | 10,017 | 573 | 17,930 | 16,964 | 3,631 | |||||||||||||||||||||||||||
Residential mortgage loans and equity lines | 12,461 | 11,111 | 322 | 13,263 | 12,075 | 396 | 6,048 | 5,264 | 22 | |||||||||||||||||||||||||||
Subtotal | $ | 49,604 | $ | 47,916 | $ | 2,606 | $ | 28,637 | $ | 26,732 | $ | 2,796 | $ | 38,272 | $ | 27,445 | $ | 4,547 | ||||||||||||||||||
Total impaired loans | $ | 137,284 | $ | 127,671 | $ | 2,606 | $ | 124,444 | $ | 115,074 | $ | 2,796 | ||||||||||||||||||||||||
Total non-accrual loans | $ | 84,608 | $ | 65,846 | $ | 4,547 | ||||||||||||||||||||||||||||||
Loan Interest Reserves
In accordance with customary banking practice, we originate 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 65%50% in the case of land to 85% in the case of one to four family residential construction projects.
As of SeptemberJune 30, 2017,2022, construction loans of $515.4$514.2 million were disbursed with pre-established interest reserves of $61.8$52.2 million, compared to $500.2$520.5 million of such loans disbursed with pre-established interest reserves of $58.9$51.1 million at December 31, 2016.2021. The balance for construction loans with interest reserves whichthat have been extended was $81.3$10.3 million with pre-established interest reserves of $1.8$0.3 million at SeptemberJune 30, 2017,2022, compared to $113.1$20.4 million with pre-established interest reserves of $2.1$0.4 million at December 31, 2016.2021. Land loans of $23.2$41.1 million were disbursed with pre-established interest reserves of $680,000$1.1 million at SeptemberJune 30, 2017,2022, compared to $51.3$46.2 million of land loans disbursed with pre-established interest reserves of $1.0$0.6 million at December 31, 2016. The2021. At June 30, 2022 and December 31, 2021, the balance for land loans with interest reserves whichthat have been extended was $5.9$0.9 million at September 30, 2017 with pre-established interest reserves of $360,000 compared to $2.0 million in land loans with pre-established interest reserves of $40,000 at December 31, 2016. $58 thousand.
At SeptemberJune 30, 20172022 and December 31, 2016,2021, the Bank had no loans on non-accrual status with available interest reserves. At SeptemberJune 30, 2017, $14.3 million of2022 and December 31, 2021, there were zero non-accrual non-residential construction loans, and $8.0 million land loans had been originated with pre-established interest reserves. At December 31, 2016, $5.5 million of non-accrual non-residentialresidential construction loans, and $7.8 million of non-accrual land loans had beenthat 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’sCompany’s business activities are with customers located in the predominantlyhigh-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, andNevada. The Company also has loan customers in Hong Kong. The Company has no specific industry concentration, and generally itsour 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 SeptemberJune 30, 2017,2022, or as of December 31, 2016.2021.
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. TotalThe Bank’s loans for construction, land development, and other land represented 40.7%31% of the Bank’s total risk-based capital as of SeptemberJune 30, 2017,2022, and 40.4% as of December 31, 2016.2021. Total CRE loans represented 305%291.5% of total risk-based capital as of SeptemberJune 30, 2017,2022, and 300%285% as of December 31, 2016 and2021 which were belowwithin the Bank’s internal limit for CRE loans of 400%, of total capital at both dates.capital.
Allowance for Credit Losses
The Bank maintains the allowance for credit losses at a level that the BankBank’s management considers appropriate to absorbcover 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 the reserve 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 impairedindividually 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 Bank’sCompany’s Board of Directors has established a written credit policy that includes a credit review and control system that the Board of Directorsit 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 takestake 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 bestbusiness 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 in future periods.losses.
The allowance for loan losses was $121.5$148.7 million and the allowance for off-balance sheet unfunded credit commitments was $4.3$6.1 million at SeptemberJune 30, 2017,2022, which represented the amount believed by management to be appropriate to absorb credit losses inherent in the loan portfolio, including unfunded credit commitments. The $121.5 million allowance for loan losses at September 30, 2017, increased $2.5 million, or 2.1%, from $119.0 million at December 31, 2016. The allowance for loancredit losses represented 0.96%0.87% of period-end gross loans excluding loans held for sale, and 175.5%248.3% of non-performing loans at SeptemberJune 30, 2017.2022. The comparable ratios were 1.06%0.88% of period-end gross loans excluding loans held for sale, and 239.5%212.9% of non-performing loans at December 31, 2016. 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 -Management’s 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 second quarter of 2022, management included an additional reserve adjustment to reflect the time gap between the preparation of the June 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 June 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 June 30, 2022, would have been approximately $32.0 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, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Allowance for loan losses | (Dollars in thousands) | |||||||||||||||
Balance at beginning of period | $ | 115,809 | $ | 122,948 | $ | 118,966 | $ | 138,963 | ||||||||
Reversal for credit losses | - | - | (2,500 | ) | (15,650 | ) | ||||||||||
Charge-offs : | ||||||||||||||||
Commercial loans | (80 | ) | (3,278 | ) | (1,810 | ) | (12,036 | ) | ||||||||
Real estate loans | (305 | ) | (4,625 | ) | (860 | ) | (5,829 | ) | ||||||||
Total charge-offs | (385 | ) | (7,903 | ) | (2,670 | ) | (17,865 | ) | ||||||||
Recoveries: | ||||||||||||||||
Commercial loans | 575 | 2,006 | 1,401 | 3,720 | ||||||||||||
Construction loans | 47 | 548 | 143 | 7,871 | ||||||||||||
Real estate loans | 5,489 | 343 | 6,195 | 903 | ||||||||||||
Total recoveries | 6,111 | 2,897 | 7,739 | 12,494 | ||||||||||||
Balance at end of period | $ | 121,535 | $ | 117,942 | $ | 121,535 | $ | 117,942 | ||||||||
Reserve for off-balance sheet credit commitments | ||||||||||||||||
Balance at beginning of period | $ | 4,513 | $ | 2,124 | $ | 3,224 | $ | 1,494 | ||||||||
Provision for credit losses | (259 | ) | 100 | 1,030 | 730 | |||||||||||
Balance at end of period | $ | 4,254 | $ | 2,224 | $ | 4,254 | $ | 2,224 | ||||||||
Average loans outstanding during the period (1) | $ | 12,317,721 | $ | 10,668,341 | $ | 11,668,814 | $ | 10,466,764 | ||||||||
Total gross loans outstanding, at period-end (1) | $ | 12,597,434 | $ | 11,010,457 | $ | 12,597,434 | $ | 11,010,457 | ||||||||
Total non-performing loans, at period-end (2) | $ | 69,251 | $ | 44,359 | $ | 69,251 | $ | 44,359 | ||||||||
Ratio of net charge-offs/(recoveries) to average loans outstanding during the period (1) | (0.18% | ) | 0.19 | % | (0.06% | ) | 0.07 | % | ||||||||
Provision for credit losses to average loans outstanding during the period (1) | (0.01% | ) | 0.00 | % | (0.02% | ) | (0.19% | ) | ||||||||
Allowance for credit losses to non-performing loans, at period-end (2) | 181.64 | % | 270.89 | % | 181.64 | % | 270.89 | % | ||||||||
Allowance for credit losses to gross loans, at period-end (1) | 1.00 | % | 1.09 | % | 1.00 | % | 1.09 | % | ||||||||
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Our allowance for loan losses consists of the following:
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General allowance: The unclassified portfolio is segmented on a group basis. Segmentation is determined by loan type and common risk characteristics. The non-impaired loans are grouped into 19 segments: two commercial segments, ten commercial real estate segments, one residential construction segment, one non-residential construction segment, one SBA segment, one installment loans segment, one residential mortgage segment, one equity lines of credit segment, and one overdrafts segment. The allowance is provided for each segmented group based on the group’s historical loan loss experience aggregated based on loan risk classifications which take into account the current financial condition of the borrowers and guarantors, the prevailing value of the underlying collateral if collateral dependent, charge-off history, management’s knowledge of the portfolio, general economic conditions, environmental factors including the trends in delinquency and non-accrual, and other significant factors, such as the national and local economy, volume and composition of the portfolio, strength of management and loan staff, underwriting standards, and concentration of credit. In addition, management reviews reports on past-due loans to ensure appropriate classification.
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
(In thousands) | ||||||||||||||||
Allowance for loan losses | ||||||||||||||||
Balance at beginning of period | $ | 145,786 | $ | 145,110 | $ | 136,157 | $ | 166,538 | ||||||||
Impact of ASU 2016-13 adoption | — | — | — | (1,560 | ) | |||||||||||
Adjusted beginning balance | $ | 145,786 | $ | 145,110 | $ | 136,157 | $ | 164,978 | ||||||||
Provision/(Reversal) for credit losses | 2,768 | (6,600 | ) | 12,107 | (18,710 | ) | ||||||||||
Charge-offs: | ||||||||||||||||
Commercial loans | (50 | ) | (7,712 | ) | (272 | ) | (16,850 | ) | ||||||||
Real estate loans | (1 | ) | — | (1 | ) | — | ||||||||||
Total charge-offs | (51 | ) | (7,712 | ) | (273 | ) | (16,850 | ) | ||||||||
Recoveries: | ||||||||||||||||
Commercial loans | 175 | 155 | 534 | 1,425 | ||||||||||||
Construction loans | — | — | 6 | — | ||||||||||||
Real estate loans | 94 | 303 | 240 | 413 | ||||||||||||
Total recoveries | 269 | 458 | 780 | 1,838 | ||||||||||||
Balance at the end of period | $ | 148,772 | $ | 131,256 | $ | 148,771 | $ | 131,256 | ||||||||
Reserve for off-balance sheet credit commitments | ||||||||||||||||
Balance at beginning of period | $ | 6,404 | $ | 10,450 | $ | 7,100 | $ | 5,880 | ||||||||
Impact of ASU 2016-13 adoption | — | — | — | 6,018 | ||||||||||||
Adjusted beginning balance | 6,404 | 10,450 | 7,100 | 11,898 | ||||||||||||
Reversal for credit losses | (268 | ) | (2,400 | ) | (964 | ) | (3,848 | ) | ||||||||
Balance at the end of period | $ | 6,136 | $ | 8,050 | $ | 6,136 | $ | 8,050 | ||||||||
Average loans outstanding during the period | $ | 17,530,650 | $ | 15,684,329 | $ | 17,236,850 | $ | 15,688,131 | ||||||||
Total gross loans outstanding, at period-end | $ | 17,787,888 | $ | 15,690,689 | $ | 17,787,888 | $ | 15,690,689 | ||||||||
Total non-performing loans, at period-end | $ | 62,389 | $ | 69,295 | $ | 62,389 | $ | 69,295 | ||||||||
Ratio of net (recoveries)/charge-offs to average loans outstanding during the period | (0.00 | %) | 0.19 | % | (0.01 | %) | (0.19 | %) | ||||||||
Provision for credit losses to average loans outstanding during the period | 0.06 | % | (0.23 | %) | 0.13 | % | (0.29 | %) | ||||||||
Allowance for credit losses to non-performing loans, at period-end | 248.29 | % | 201.03 | % | 248.29 | % | 201.03 | % | ||||||||
Allowance for credit losses to gross loans, at period-end | 0.87 | % | 0.89 | % | 0.87 | % | 0.89 | % | ||||||||
The table set forth below reflects management’smanagement’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, 2017 | December 31, 2016 | |||||||||||||||
Percentage of | Percentage of | |||||||||||||||
Loans in Each | Loans in Each | |||||||||||||||
Category | Category | |||||||||||||||
to Average | to Average | |||||||||||||||
Amount | Gross Loans | Amount | Gross Loans | |||||||||||||
Type of Loan: | (Dollars in thousands) | |||||||||||||||
Commercial loans | $ | 51,039 | 19.1 | % | $ | 49,203 | 21.1 | % | ||||||||
Residential mortgage loans (1) | 11,062 | 24.3 | 11,620 | 22.0 | ||||||||||||
Commercial mortgage loans | 37,402 | 51.5 | 34,864 | 52.2 | ||||||||||||
Real estate construction loans | 22,008 | 5.0 | 23,268 | 4.7 | ||||||||||||
Installment and other loans | 24 | 0.0 | 11 | 0.0 | ||||||||||||
Total | $ | 121,535 | 100 | % | $ | 118,966 | 100 | % | ||||||||
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June 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 | $ | 49,070 | 18.2 | % | $ | 43,394 | 18.4 | % | ||||||||
Real estate construction loans | 7,276 | 3.5 | 6,302 | 4.2 | ||||||||||||
Commercial mortgage loans | 68,600 | 48.5 | 61,081 | 48.7 | ||||||||||||
Residential mortgage loans and equity lines | 23,691 | 29.8 | 25,379 | 28.7 | ||||||||||||
Installment and other loans | 135 | — | 1 | — | ||||||||||||
Total loans | $ | 148,772 | 100 | % | $ | 136,157 | 100 | % | ||||||||
The allowance allocated to commercial loans increased $1.8$5.7 million, or 3.7%13.1%, to $51.0$49.1 million at SeptemberJune 30, 2017,2022, from $49.2$43.4 million at December 31, 2016.2021. The increase is due primarily to an increase in non-accrual commercial loan growth.
The allowance allocated for residential mortgage loans decreased $0.5 million, or 4.3%, to $11.1 million at as of September 30, 2017, from $11.6 million at December 31, 2016 as a result of the decrease in the amount of general allowance determined to be required for residential mortgage loans. .
The allowance allocated to commercial mortgage loans increased $2.5 million, or 7.2%, to $37.4 million at September 30, 2017, from $34.9 million at December 31, 2016 as a result of the increase in the amount of general allowance determined to be required for commercial mortgage loans.balances.
The allowance allocated to real estate construction loans decreased $1.3increased $1.0 million, or 5.6%15.5%, to $22.0$7.3 million at SeptemberJune 30, 20172022, from $23.3$6.3 million at December 31, 2016.2021.
The allowance allocated to commercial mortgage loans increased $7.5 million, or 12.3%, to $68.6 million at June 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.
The allowance allocated for residential mortgage loans and equity lines decreased by $1.7 million, or 6.7%, to $23.7 million as of June 30, 2022, from $25.4 million at December 31, 2021. The decrease is due primarily to thea decrease in the amount of specific reserves and general allowance determined to be requiredexpected life for construction loans.residential mortgages.
Deposits
Total deposits were $12.6$18.3 billion at Septemberas June 30, 2017,2022, an increase of $887$228.5 million, or 7.6%,1.3% from $11.7$18.1 billion atas December 31, 2016. 2021. During the second quarter of 2022, our deposits increased by $227.0 million, or 5.0% annualized.
The following table displayssets forth the deposit mix as of the dates indicated:
September 30, 2017 | December 31, 2016 | |||||||||||||||
Amount | Percentage | Amount | Percentage | |||||||||||||
Deposits | (Dollars in thousands) | |||||||||||||||
Non-interest-bearing demand deposits | $ | 2,730,006 | 21.7 | % | $ | 2,478,107 | 21.2 | % | ||||||||
Interest bearing demand deposits | 1,379,100 | 11.0 | 1,230,445 | 10.6 | ||||||||||||
Money market deposits | 2,370,724 | 18.9 | 2,198,938 | 18.8 | ||||||||||||
Savings deposits | 925,312 | 7.4 | 719,949 | 6.2 | ||||||||||||
Time deposits | 5,156,553 | 41.0 | 5,047,287 | 43.2 | ||||||||||||
Total deposits | $ | 12,561,695 | 100.0 | % | $ | 11,674,726 | 100.0 | % | ||||||||
June 30, 2022 | December 31, 2021 | |||||||||||||||
Amount | Percentage | Amount | Percentage | |||||||||||||
Deposits | (In thousands) | |||||||||||||||
Non-interest-bearing demand deposits | $ | 4,433,959 | 24.2 | % | $ | 4,492,054 | 24.9 | % | ||||||||
NOW deposits | 2,494,524 | 13.6 | 2,522,442 | 14.0 | ||||||||||||
Money market deposits | 5,322,510 | 29.1 | 4,611,579 | 25.5 | ||||||||||||
Savings deposits | 1,178,572 | 6.4 | 915,515 | 5.1 | ||||||||||||
Time deposits | 4,857,762 | 26.6 | 5,517,252 | 30.5 | ||||||||||||
Total deposits | $ | 18,287,327 | 100.0 | % | $ | 18,058,842 | 100.0 | % | ||||||||
The following table showssets forth the maturity distribution of time deposits as of Septemberat June 30, 2017:2022:
Time Deposits -under $100,000 | Time Deposits - $100,000 and over | Total Time Deposits | ||||||||||
(In thousands) | ||||||||||||
Less than three months | $ | 320,157 | $ | 921,819 | $ | 1,241,976 | ||||||
Three to six months | 320,580 | 836,506 | 1,157,086 | |||||||||
Six to twelve months | 371,407 | 1,704,311 | 2,075,718 | |||||||||
Over one year | 224,168 | 457,605 | 681,773 | |||||||||
Total | $ | 1,236,312 | $ | 3,920,241 | $ | 5,156,553 | ||||||
Percent of total deposits | 9.8 | % | 31.2 | % | 41.0 | % | ||||||
At June 30, 2022 | ||||||||||||
Time Deposits - under $100,000 | Time Deposits - $100,000 and over | Total Time Deposits | ||||||||||
(In thousands) | ||||||||||||
Three months or less | $ | 193,818 | $ | 1,531,148 | $ | 1,724,966 | ||||||
Over three to six months | 92,796 | 1,011,820 | 1,104,616 | |||||||||
Over six to twelve months | 298,041 | 1,607,044 | 1,905,085 | |||||||||
Over twelve months | 23,627 | 99,468 | 123,095 | |||||||||
Total | $ | 608,282 | $ | 4,249,480 | $ | 4,857,762 | ||||||
Percent of total deposits | 3.3 | % | 23.2 | % | 26.6 | % | ||||||
Borrowings
Borrowings include federal funds purchased, securities sold under agreements to repurchase, Federal funds purchased, funds obtained as advances from the Federal Home Loan Bank (“FHLB”)FHLB of San Francisco, and borrowings from other financial institutions.
Securities Sold Under AgreementsBorrowings from the FHLB – There were no over-night borrowings from the FHLB as of June 30, 2022, and December 31, 2021. Advances from the FHLB were $95.0 million at an average rate of 1.92% as of June 30, 2022, compared to Repurchase. $20 million at an average rate of 2.89% as of December 31, 2021. As of June 30, 2022, final maturity for the FHLB advances is $20.0 million in May 2023 and $75.0 million in July 2022.
Junior Subordinated NotesSecurities sold under agreements – At June 30, 2022, Junior Subordinated Notes totaled $119.1 million with a weighted average interest rate of 4.1%, compared to repurchase were $100$119.1 million with a weighted average rate of 2.86% as of September 30, 2017, compared to $350 million with a weighted average rate of 4.06% as of2.38% at December 31, 2016. Final2021. The Junior Subordinated Notes have a stated maturity forterm of 30 years. The trusts are not consolidated with the two fixed rate non-callable securities sold under agreements to repurchase was $50.0 millionCompany in June 2018 and $50.0 millionaccordance with an accounting pronouncement that took effect in July 2018.December 2003.
These transactions are accounted for as collateralized financing transactions and recorded atFor additional information, see Note 11 to the amounts at which the securities were sold. The Company may have to provide additional collateral for the repurchase agreements, as necessary. The underlying collateral pledged for the repurchase agreements consists of U.S. Treasury securities and mortgage-backed securities with a fair value of $109 million as of September 30, 2017, and $372 million as of December 31, 2016.
Borrowing from the FHLB. As of September 30, 2017, over-night borrowings from the FHLB were $450 million at a rate of 1.16% compared to $275 million at a rate of 0.55% as of December 31, 2016. As of September 30, 2017, the advances from the FHLB were $145 million at a rate of 1.35%. As of September 30, 2017, FHLB advances of $490 million will mature in October 2017, $55 million in 2018 and $50 million in December 2019.Company’s unaudited Consolidated Financial Statements.
Long-term Debt
Long-term debt was $255.2 million as of September 30, 2017, and December 31, 2016. Long-term debt is comprised of a $119.1 million Junior Subordinated Notes, which qualify as Tier I capital for regulatory purposes, issued in connection with our various pooled trust preferred securities offerings, and $136.1 million of deferred payments to Bank SinoPac.
Off-Balance-Sheet Arrangements and Contractual Obligations
The following table summarizes the Company’sCompany’s contractual obligations to make future payments as of SeptemberJune 30, 2017.2022. 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 | Payment Due by Period | ||||||||||||||||||||||||||||||||||||||
1 year but | more but | More than | 3 years or | |||||||||||||||||||||||||||||||||||||
1 year | less than | less than | 5 years | 1 year but | more but | |||||||||||||||||||||||||||||||||||
or less | 3 years | 5 years | or more | Total | 1 year | less than | less than | 5 years | ||||||||||||||||||||||||||||||||
(In thousands) | or less | 3 years | 5 years | or more | Total | |||||||||||||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||||||||||
Contractual obligations: | ||||||||||||||||||||||||||||||||||||||||
Deposits with stated maturity dates | $ | 4,474,779 | $ | 680,903 | $ | 860 | $ | 11 | $ | 5,156,553 | $ | 4,734,667 | $ | 122,420 | $ | 655 | $ | 20 | $ | 4,857,762 | ||||||||||||||||||||
Non-callable securities sold under agreements to repurchase | 100,000 | - | - | - | 100,000 | |||||||||||||||||||||||||||||||||||
Advances from the Federal Home Loan Bank | 540,000 | 55,000 | - | - | 595,000 | 95,000 | — | — | — | 95,000 | ||||||||||||||||||||||||||||||
Other borrowings | - | - | - | 17,518 | 17,518 | — | — | — | 22,319 | 22,319 | ||||||||||||||||||||||||||||||
Long-term debt | - | - | - | 119,136 | 119,136 | — | — | — | 119,136 | 119,136 | ||||||||||||||||||||||||||||||
Deferred payments from acquisition | - | - | 136,056 | - | 136,056 | |||||||||||||||||||||||||||||||||||
Operating leases | 9,820 | 12,853 | 8,791 | 8,052 | 39,516 | 11,311 | 15,579 | 7,686 | 2,709 | 37,285 | ||||||||||||||||||||||||||||||
Total contractual obligations and other commitments | $ | 5,124,599 | $ | 748,756 | $ | 145,707 | $ | 144,717 | $ | 6,163,779 | $ | 4,840,978 | $ | 137,999 | $ | 8,341 | $ | 144,184 | $ | 5,131,502 | ||||||||||||||||||||
In the normal course of business, we enter into various transactions, which, in accordance with U.S. generally accepted accounting principles,GAAP, are not included in our condensed consolidated balance sheets.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 condensed consolidated balance sheets.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 $2.0$2.43 billion as of SeptemberJune 30, 2017, an increase2022, a decrease of $140.2$14.7 million, from $1.8$2.45 billion as of December 31, 2016,2021, primarily due to net income of $150.1$164.0 million, stock-based compensation of $3.4 million, proceeds from dividend reinvestment of $1.9 million and $34.9 million of common stock issued for the acquisitionto directors of SinoPac Bancorp partially$0.8 million, offset by, other comprehensive loss of $68.3 million, purchases of treasury stock of $63.5 million, common stock cash dividends of $50.5$51.0 million and shares withheld related to net share settlement of RSUs of $5.1$2.0 million.
The following table summarizes changes in total equity for the ninesix months ended SeptemberJune 30, 2017:2022:
Nine months ended | ||||
(In thousands) | September 30, 2017 | |||
Net income | $ | 150,102 | ||
Stock issued to directors | 549 | |||
Stock options exercised and RSUs distributed | 1,018 | |||
Proceeds from shares issued through the Dividend Reinvestment Plan | 1,849 | |||
Shares withheld related to net share settlement of RSUs | (5,127 | ) | ||
Share-based compensation | 3,900 | |||
Other comprehensive income | 3,498 | |||
Equity consideration for acquisition | 34,862 | |||
Cash dividends paid to common stockholders | (50,491 | ) | ||
Net increase in total equity | $ | 140,160 | ||
Six months ended | ||||
June 30, 2022 | ||||
(In thousands) | ||||
Net income | $ | 164,006 | ||
Proceeds from shares issued through the Dividend Reinvestment Plan | 1,872 | |||
Shares withheld related to net share settlement of RSUs | (2,015 | ) | ||
Purchase of treasury stock | (63,484 | ) | ||
Stock issued to directors | 849 | |||
RSU vested | 1 | |||
Share-based compensation | 3,367 | |||
Cash dividends paid to common stockholders | (51,052 | ) | ||
Other comprehensive loss | (68,263 | ) | ||
Net decrease in total equity | $ | (14,719 | ) | |
Capital Adequacy Review
Management seeks to maintain the Company’sretain our capital at a level sufficient to support future growth, protect depositors and stockholders, and comply with various regulatory requirements.
Both Bancorp’s and the Bank’s regulatory capital continued to exceed the regulatory minimum requirements under Basel III rules that became effective January 1, 2015, with transitional provisions as of September 30, 2017. In addition, the capital ratios of the Bank place it in the “well capitalized” category, which is defined as institutions with a common equity tier 1 capital ratio equal to or greater than 6.5%, a Tier 1 risk-based capital ratio equal to or greater than 8%, a total risk-based capital ratio equal to or greater than 10%, and a Tier 1 leverage capital ratio equal to or greater than 5%.
The following table presents Bancorp’stables set forth actual and the Bank’srequired capital and leverage ratios as of SeptemberJune 30, 2017,2022 and December 31, 2016:2021 for Bancorp and the Bank under the Basel III Capital Rules. The Basel III Capital Rules became fully phased-in on January 1, 2019. 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.
Cathay General Bancorp | Cathay Bank | |||||||||||||||||||||||||||||||
September 30, 2017 | December 31, 2016 | September 30, 2017 | December 31, 2016 | |||||||||||||||||||||||||||||
(Dollars in thousands) | Balance | % | Balance | % | Balance | % | Balance | % | ||||||||||||||||||||||||
Common equity Tier 1 capital (to risk-weighted assets) | $ | 1,555,919 | 12.22 | $ | 1,459,351 | 12.84 | $ | 1,461,917 | 12.34 | $ | 1,515,096 | 13.35 | ||||||||||||||||||||
Common equity Tier 1 capital minimum requirement | 573,075 | 4.50 | 511,590 | 4.50 | 532,962 | 4.50 | 510,582 | 4.50 | ||||||||||||||||||||||||
Excess | $ | 981,121 | 7.68 | $ | 947,761 | 8.34 | $ | 927,155 | 7.80 | $ | 1,004,514 | 8.85 | ||||||||||||||||||||
Tier 1 capital (to risk-weighted assets) | $ | 1,555,919 | 12.22 | $ | 1,574,806 | 13.85 | $ | 1,461,917 | 12.34 | $ | 1,515,096 | 13.35 | ||||||||||||||||||||
Tier 1 capital minimum requirement | 764,100 | 6.00 | 682,120 | 6.00 | 710,616 | 6.00 | 680,776 | 6.00 | ||||||||||||||||||||||||
Excess | $ | 789,522 | 6.18 | $ | 892,686 | 7.85 | $ | 748,901 | 6.30 | $ | 834,320 | 7.35 | ||||||||||||||||||||
Total capital (to risk-weighted assets) | $ | 1,802,206 | 14.15 | $ | 1,702,144 | 14.97 | $ | 1,587,501 | 13.40 | $ | 1,637,286 | 14.43 | ||||||||||||||||||||
Total capital minimum requirement | 1,018,800 | 8.00 | 909,493 | 8.00 | 947,487 | 8.00 | 907,701 | 8.00 | ||||||||||||||||||||||||
Excess | $ | 780,343 | 6.11 | $ | 792,651 | 6.97 | $ | 636,814 | 5.36 | $ | 729,585 | 6.43 | ||||||||||||||||||||
Tier 1 capital (to average assets) – Leverage ratio | $ | 1,555,919 | 10.41 | $ | 1,574,806 | 11.57 | $ | 1,461,917 | 10.54 | $ | 1,515,096 | 11.16 | ||||||||||||||||||||
Minimum leverage requirement | 597,635 | 4.00 | 544,614 | 4.00 | 554,685 | 4.00 | 543,059 | 4.00 | ||||||||||||||||||||||||
Excess | $ | 958,284 | 6.41 | $ | 1,030,192 | 7.57 | $ | 907,232 | 6.54 | $ | 972,037 | 7.16 | ||||||||||||||||||||
Risk-weighted assets | $ | 12,734,995 | $ | 11,368,663 | $ | 11,843,593 | $ | 11,346,260 | ||||||||||||||||||||||||
Total average assets (1) | $ | 14,940,863 | $ | 13,615,348 | $ | 13,867,125 | $ | 13,576,477 | ||||||||||||||||||||||||
Actual | Minimum Capital Required - Basel III | Required to be Considered Well Capitalized | ||||||||||||||||||||||
Capital Amount | Ratio | Capital Amount | Ratio | Capital Amount | Ratio | |||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| June 30, 2022 | ||||||||||||||||||||||||
Common Equity Tier 1 to Risk-Weighted Assets | ||||||||||||||||||||||||
Cathay General Bancorp | $ | 2,105,531 | 12.18 | $ | 1,210,514 | 7.00 | $ | 1,124,049 | 6.50 | |||||||||||||||
Cathay Bank | 2,170,723 | 12.56 | 1,209,816 | 7.00 | 1,123,401 | 6.50 | ||||||||||||||||||
Tier 1 Capital to Risk-Weighted Assets | ||||||||||||||||||||||||
Cathay General Bancorp | 2,105,531 | 12.18 | 1,469,910 | 8.50 | 1,383,444 | 8.00 | ||||||||||||||||||
Cathay Bank | 2,170,723 | 12.56 | 1,469,062 | 8.50 | 1,382,647 | 8.00 | ||||||||||||||||||
Total Capital to Risk-Weighted Assets | ||||||||||||||||||||||||
Cathay General Bancorp | 2,375,940 | 13.74 | 1,815,771 | 10.50 | 1,729,305 | 10.00 | ||||||||||||||||||
Cathay Bank | 2,325,632 | 13.46 | 1,814,724 | 10.50 | 1,728,309 | 10.00 | ||||||||||||||||||
Leverage Ratio | ||||||||||||||||||||||||
Cathay General Bancorp | 2,105,531 | 10.15 | 829,426 | 4.00 | 1,037,157 | 5.00 | ||||||||||||||||||
Cathay Bank | 2,170,723 | 10.47 | 829,026 | 4.00 | 1,036,282 | 5.00 | ||||||||||||||||||
Actual Minimum Capital Required - Basel III Required to be Considered Well Capitalized Capital Amount Ratio Capital Amount Ratio Capital Amount Ratio (In thousands) Common Equity Tier 1 to Risk-Weighted Assets Cathay General Bancorp Cathay Bank Tier 1 Capital to Risk-Weighted Assets Cathay General Bancorp Cathay Bank Total Capital to Risk-Weighted Assets Cathay General Bancorp Cathay Bank Leverage Ratio Cathay General Bancorp Cathay Bank As of June 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 June 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. Our BoardIf we are not current in our payment of Directors increased the common stock dividend to $0.21 per share in December 2016. The terms ofdividends on our Junior Subordinated Notes, also limitwe may not pay dividends on our ability to pay dividends.common stock.
The Company declared a cash dividend of $0.21$0.34 per share on 80,795,51275,150,090 shares outstanding on September 1, 2017, for distribution to holders of our common stock on September 11, 2017, $0.21 per share on 79,847,124 shares outstanding on June 1, 2017,May 16, 2022, for distribution to holders of our common stock on June 12, 2017, and $0.21 per share on 79,788,541 shares outstanding on March 1, 2017, for distribution to holders of our common stock on March 10, 2017.6, 2022. The Company paid total cash dividends of $50.5$25.5 million duringin the first nine monthssecond quarter of 2017.
Country Risk Exposures
The Company’s total assets were $15.7 billion and total foreign country risk net exposures were $454.7 million as of September 30, 2017. Total foreign country risk net exposures as of September 30, 2017, were comprised primarily of $277.3 million from Hong Kong, $45.6 million from China, $30.8 million from Australia, $25.2 million from France, $15.6 million from Singapore, $13.5 million from Germany, $10.0 million from Virgin Island, $9.3 million from England, $7.6 million from Taiwan, $5.1 million from Canada, $5.0 million from Cayman Island, $4.2 million from Macau, $2.2 million from Indonesia, $1.4 million from Switzerland, $1.1 million from Japan, $0.3 million from New Zealand, and $0.3 million from Venezuela. Risk is determined based on location of the borrowers, issuers, and counterparties.2022.
All foreign country risk net exposures as of September 30, 2017, were to non-sovereign counterparties, except $11.8 million due from the Hong Kong Monetary Authority.
Unfunded loans to foreign entities exposures were $10.7 million as of September 30, 2017, primarily due to $10.0 million of unfunded loans to financial institutions in China and $0.7 million of unfunded loans to borrowers in Canada.
Financial Derivatives
It is theour policy of the Company not to speculate on the future direction of interest rates. However, the Company entersfrom time to time, we may enter into financial derivatives in order to seek mitigation of exposure to interest rate risks relatedrelated 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 the Company’sour assets or liabilities and against risk in specific transactions. In such instances, the Companywe 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 sheetCompany’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 consolidatedConsolidated 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 statements.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’sBancorp’s $119.1 million of Junior Subordinated Debentures that had been issued to five trusts, with the quarterly interest payments 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. Bancorp pays a weighted average fixed interest rate of 2.61% and receives a variable interest rate of the three-month LIBOR at a weighted average rate of 1.32%. As of SeptemberJune 30, 2017,2022, and 2021, the notional amountineffective portion of cash flowthese interest rate swaps was $119.1 million and their unrealized loss of $2.3 million, net of taxes, was included in other comprehensive income. The amount of periodic net settlement of interest rate swaps included in interest expense was $407,000 for the three months ended September 30, 2017 compared to $588,000 for the same quarter a year ago. For the nine months ended September 30, 2017, the periodic net settlement of interest rate swaps included in interest expense was $1.3 million compared to $1.8 million for the same period in 2016.not significant.
AsThe notional amount and net unrealized loss of Septemberthe Company’s cash flow derivative financial instruments as of June 30, 2017,2022, and December 31, 2021, were as follows:
June 30, 2022 | December 31, 2021 | |||||||
(In thousands) | ||||||||
| Cash flow swap hedges: | ||||||||
Notional | $ | 119,136 | $ | 119,136 | ||||
Weighted average fixed rate-pay | 2.61 | % | 2.61 | % | ||||
Weighted average variable rate-receive | 1.40 | % | 0.16 | % | ||||
Unrealized gain/(loss), net of taxes (1) | $ | 882 | $ | (3,276 | ) | |||
Three months ended | Six months ended | |||||||||||||||
June 30, 2022 | June 30, 2021 | June 30, 2022 | June 30, 2021 | |||||||||||||
Periodic net settlement of swaps (2) | $ | 484 | $ | 731 | $ | 1,172 | $ | 1,442 | ||||||||
(1) Included in other comprehensive income. | ||||||||||||||||
(2) the amount of periodic net settlement of interest rate swaps was included in interest expense. | ||||||||||||||||
The Bank has entered into interest rate swap contracts with various terms from four to eight years. These interest rate swap contractsthat are matched to individual 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 loanloans due to changes in interest rates. As of June 30, 2022, the Bank’s outstanding interest rate swap contracts had a notional amount of $901.4 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. The Bank pays a weighted average fixed rate of 4.55% and receives a variable rate at the one month LIBOR rate plus a weighted average spread of 293 basis points, or at a weighted average rate of 4.16%. As of SeptemberJune 30, 2017, the notional amount of fair value interest rate swaps was $510.6 million2022, and their unrealized gain of $1.9 million was included in other non-interest income. The amount of periodic net settlement of interest rate swaps reducing interest income was $514,000 for the three months ended September 30, 2017, compared to $879,000 for the same quarter a year ago. The amount of periodic net settlement of interest rate swaps reducing interest income was $1.9 million for the nine months ended September 30, 2017, compared to $2.8 million for the same period a year ago. As of September 30, 2017,2021, the ineffective portion of these interest rate swaps was not significant.
The Company has designated as a partial-term hedging election $670.8 million notional as last-of-layer hedge on pools of loans with a notational value of $1.3 billion as of June 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 $670.8 million portion of $1.3 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 June 30, 2022, the last-of-layer loan tranche had a fair value basis adjustment of $20.0 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’sour 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 derivativesderivative clearing organization and daily margin is indirectly maintained with the derivativesderivative clearing organization. CashThere was no cash collateral deposit posted as collateral by Bancorp related to derivative contracts totaled $6.3as of June 30, 2022 and $5.9 million as of September 30, 2017.December 31, 2021.
The notional amount and net unrealized loss of the Company’s fair value derivative financial instruments as of June 30, 2022, and December 31, 2021, were as follows:
June 30, 2022 | December 31, 2021 | |||||||
(In thousands) | ||||||||
| Fair value swap hedges: | ||||||||
Notional | $ | 901,388 | $ | 729,280 | ||||
Weighted average fixed rate-pay | 2.01 | % | 2.65 | % | ||||
Weighted average variable rate spread | 0.67 | % | 1.31 | % | ||||
Weighted average variable rate-receive | 1.54 | % | 1.43 | % | ||||
Unrealized gain/(loss), net of taxes (1) | $ | 23,375 | $ | (1,013 | ) | |||
Three months ended | Six months ended | |||||||||||||||
June 30, 2022 | June 30, 2021 | June 30, 2022 | June 30, 2021 | |||||||||||||
Periodic net settlement of swaps (2) | $ | (1,328 | ) | $ | (2,387 | ) | $ | (3,089 | ) | $ | (4,774 | ) | ||||
(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 instrumentsinstruments and are recorded at fair value in our condensed consolidated balance sheets.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. As of September 30, 2017, the
The notional amount of option contracts totaled $12.3 million with a net negativeand fair value of $234,000. As of September 30, 2017, spot, forward, and swap contracts with a total notional amount of $69.3 million had a positive fair value of $1.7 million. Spot, forward, and swap contracts with a total notional amount of $86.6 million had a negative fair value of $1.1 millionthe Company’s derivative financial instruments not designated as hedging instruments as of SeptemberJune 30, 2017. As of2022, and December 31, 2016, the notional amount of option contracts totaled $12.1 million with a net negative fair value of $121,000. As of December 31, 2016, spot, forward, and swap contracts with a total notional amount of $82.4 million had a positive fair value of $1.3 million. Spot, forward, and swap contracts with a total notional amount of $89.5 million had a negative fair value of $3.1 million2021, were as of December 31, 2016.follows:
June 30, 2022 | December 31, 2021 | |||||||
(In thousands) | ||||||||
| Derivative financial instruments not designated as hedging instruments: | ||||||||
Notional amounts: | ||||||||
Option contracts | $ | 202 | $ | 676 | ||||
Spot, forward, and swap contracts with positive fair value | $ | 134,895 | $ | 181,997 | ||||
Spot, forward, and swap contracts with negative fair value | $ | 105,824 | $ | 51,782 | ||||
Fair value: | ||||||||
Option contracts | $ | 2 | $ | 3 | ||||
Spot, forward, and swap contracts with positive fair value | $ | 344 | $ | 1,113 | ||||
Spot, forward, and swap contracts with negative fair value | $ | (914 | ) | $ | (327 | ) | ||
Liquidity
Liquidity is our ability to maintain sufficient cash flow to meet maturing financial obligations and customercustomer 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, federalFederal funds purchased, securities sold under agreements to repurchase, and advances from the FHLB. As of SeptemberJune 30, 2017,2022, our average monthly liquidity ratio (defined as net cash plus short-term and marketable securities to net deposits and short-term liabilities) was 14.0%13.6% compared to 12.6%17.3% as of December 31, 2016.2021.
Before merging on October 27, 2017, the two subsidiary banks of the Company were both shareholdersThe Bank is a shareholder of the FHLB, of San Francisco, enabling themwhich enables the Bank to have access to lower costlower-cost FHLB financing when necessary. As of SeptemberAt June 30, 2017,2022, the two subsidiary banks’Bank had an approved credit line with the FHLB totaled $5.5of San Francisco totaling $5.2 billion. AdvancesTotal advances from the FHLB of San Francisco were $595.0$95.0 million and standby letterletters of creditscredit issued by the FHLB on the Company’s behalf were $100.7$700.8 million as of SeptemberJune 30, 2017. The2022. These borrowings bear fixed rates and are secured by the Bank’s loans. See Note 11 to the Consolidated Financial Statements. At June 30, 2022, the Bank expects to be able to continue to access this source of funding, if required, in the near term. The Bank has pledged a portion$694.3 thousand of its commercial loans and $1.7 million of securities to the Federal Reserve Bank’s Discount Window under the Borrower-in-Custody program to secure these borrowings. As of September 30, 2017, theprogram. The Bank had borrowing capacity underof $2.1 million from the Borrower-in-Custody program was $47.3 million.Federal Reserve Bank Discount Window at June 30, 2022.
Liquidity can also be provided through the sale of liquid assets, which consist of federal funds sold, securities soldsecurities purchased under agreements to repurchase,resell, and unpledged investment securities. As of Septembersecurities available-for-sale. At June 30, 2017,2022, investment securities totaled $1.4$1.2 billion, with $291.4$102.9 million pledged as collateral for borrowings and other commitments. The remaining $1.1 billionbalance was available as additional liquidity or to be pledged as collateral for additional borrowings.
Approximately 87.0%97.5% of the Company’sour time deposits mature within one year or less as of SeptemberJune 30, 2017.2022. Management anticipates that there may be some outflow of these deposits upon maturity due to among other factors, the keen competition in the Bank’s marketplace. However, based on our historical run-offrunoff experience, we expect that the outflow will not be minimalsignificant and can be replenished through our normal growth in deposits. ManagementAs of June 30, 2022, management believes all the above-mentioned sources will provide adequate liquidity toduring the next twelve months for the Bank to meet its daily 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 $113.4$130.0 million in 2016 and $208.2$90.0 million induring the first nine monthssecond quarter of 2017.2022 and 2021, respectively.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
WeWe 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, so as 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 is verycan be helpful in managing interest rate risk, it does require significant assumptionsassumptions 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 attemptsseeks 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 ratesrates on net interest income and market value of equity as of SeptemberJune 30, 2017:2022:
Net Interest | Market Value | Net Interest | Market Value | |||||||||||||||
Income | of Equity | Income | of Equity | |||||||||||||||
Change in Interest Rate (Basis Points) | Change in Interest Rate (Basis Points) | Volatility (1) | Volatility (2) | Volatility (1) | Volatility (2) | |||||||||||||
+200 | 8.9 | 3.1 | 13.7 | 8.4 | ||||||||||||||
+100 | 4.5 | 1.8 | 6.9 | 4.4 | ||||||||||||||
| -100 | -1.9 | 4.9 | -10.2 | 1.9 | ||||||||||||||
| -200 | -4.7 | -0.9 | -19.3 | 1.7 | ||||||||||||||
(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.PROCEDURES.
The Company’sCompany’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 thirdsecond quarter of 20172022 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Bancorp’s wholly-owned subsidiary, Cathay Bank, is a party to ordinary routine litigation fromFrom 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. Management does not believe thatBased upon information available to the Company and its review of any such litigation iswith 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, or results of operations.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.
ThereThe Company is nonot aware of any material change into the risk factors as previously disclosed in Part I, Item 1A, of the Company’s Annual2021 Form 10-K. In addition to the other information set forth in this Quarterly Report on Form 10-K for10-Q, you should carefully consider the year ended December 31, 2016, in response to Item 1Arisk factors disclosed in Part I, Item 1A, of the Company’s 2021 Form 10-K.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.
ItemITEM 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 | |||||||||||||
Month #1 (July 1, 2017 - July 31, 2017) | 0 | $0 | 0 | $7,543,008 | |||||||||||||
Month #2 (August 1, 2017 - August 31, 2017) | 0 | $0 | 0 | $7,543,008 | |||||||||||||
Month #3 (September 1, 2017 - September 30, 2017) | 0 | $0 | 0 | $7,543,008 | |||||||||||||
Total | 0 | $0 | 0 | $7,543,008 | |||||||||||||
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 | ||||||||||||
(April 1, 2022 - April 30, 2022) | 0 | $ | 0.00 | 0 | $ | 0 | ||||||||||
(May 1, 2022 - May 31, 2022) | 110,000 | $ | 41.17 | 110,000 | $ | 120,471,333 | ||||||||||
(June 1, 2022 - June 30, 2022) | 639,998 | $ | 40.72 | 639,998 | $ | 94,412,200 | ||||||||||
Total | 749,998 | $ | 40.78 | 749,998 | $ | 94,412,200 | ||||||||||
For a discussion of limitations on the payment of dividends, see “Dividend Policy” and “LiquiditLiquidityy” 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.
None.
None.
Exhibit 3.1 |
Exhibit 3.1.1
Exhibit 3.2 | |
Exhibit 3.3 | |
Exhibit 3.4 | |
Exhibit 31.1 |
Exhibit 31.2 |
Exhibit 32.1 |
Exhibit 32.2 | |
Exhibit 101.INS | XBRL Instance 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. |
++ |
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|
* |
|
Filed electronically herewith. |
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: August 8, 2022 |
| |||
| /s/ Chang M. Liu | ||||
| Chang M. Liu | ||||
| President and Chief Executive Officer |
| Date: August 8, 2022 | |||
| /s/ | ||
| |||
| |||
| Executive Vice President and | ||
| Chief Financial Officer |
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