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UNITED STATES

securities and exchange commissionSECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

form 10-qFORM 10-Q

(Mark One)

[ X ]☒

 quarterly report pursuant to sectionQUARTERLY REPORT PURSUANT TO SECTION 13 orOR 15(d) of(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended

September 30, 20172021

OR

[    ]☐

transition report pursuant to sectionTRANSITION REPORT PURSUANT TO SECTION 13 orOR 15 (d) of thed) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from    to    

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

(I.R.S. Employer

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:(213) 625-4700

 

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

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

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock

CATY

Nasdaq Global Select Market

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

Indicate by check mark whether the registrant has submitted electronically 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 or a smaller reporting company, or an emerging growth company. See the definitionsdefinition of “large“large accelerated filer,” “accelerated filer,” and “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☑

☑

Accelerated filer ☐

☐

Non-accelerated filer ☐

☐

(Do not check if a smaller reporting company)

Smaller reporting company ☐

☐

Emerging growth company ☐

☐

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of 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, 80,819,96777,223,495 shares outstanding as of October 31, 2017.2021.

 

 
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CATHAY GENERAL BANCORP AND SUBSIDIARSUBSIDIARIESies

3RRDDquarter 2017QUARTER 2021 REPORT ON FORM 10-Q

table of contentsTABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION

FINANCIAL INFORMATION3

Item 1.

FINANCIAL STATEMENTS (Unaudited)

3

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

6

Item 2.8

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

40

Item 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

64

80

Item 4.

CONTROLS AND PROCEDURESPROCEDURES.

65

81

PART II –

OTHER INFORMATION

66
81

Item 1.

LEGAL PROCEEDINGSPROCEEDINGS.

66

81

Item 1A.

RISK FACTORSFACTORS.

66

Item 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

7682

Item 3.

DEFAULTS UPON SENIOR SECURITIESSECURITIES.

7683

Item 4.

MINE SAFETY DISCLOSURESDISCLOSURES.

67

83

Item 5.

OTHER INFORMATIONINFORMATION.

67

83

Item 6.

EXHIBITSEXHIBITS.

67

83

SIGNATURES

68

84

 

 
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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:

 

 

●

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

 

●

possible additional provisions for loan lossesthe impact on our business, operations, financial condition, liquidity, results of operations, prospects and charge-offs;trading prices of our shares arising out of the COVID-19 pandemic;

 

●

possible additional provisions for loan losses and charge-offs;

●

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

 

●

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

 

●

increased costs of compliance and other risks associated with changes in regulation, including the implementation of the Dodd-Frank Wall Street Reform and ConsumerConsumer Protection Act (the “Dodd-Frank Act”);

●

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

 

●

higher capital requirements fromcompliance with the implementation of the Basel III capital standards;Bank Secrecy Act and other money laundering statutes and regulations;

 

●

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

 

●

potential goodwill impairment;liquidity risk;

 

●

liquidity risk;fluctuations in interest rates;

 

●

fluctuations in interest rates;risks associated with acquisitions and the expansion of our business into new markets;

 

●

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

 

●

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

 

●

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

1
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●environmental liabilities;

environmental liabilities;

●

our ability to compete, including against larger competitors;

 

●

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

1
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●

successful management of reputational risk;our ability to compete with larger competitors;

●

our ability to retain key personnel;

●

successful management of reputational risk;

 

●

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

 

●

general economicfailures, interruptions, or business conditions in Asia, and other regions where the Bank has operations;security breaches of our information systems;

●

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

 

●

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

●

risk management processes and strategies;

 

●

risk management processes and strategies;adverse results in legal proceedings;

●

adverse results in legal proceedings;

 

●

the impact of regulatory enforcementenforcement actions, if any;

●

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

 

●

certain provisionschanges in our charteraccounting standards or tax laws and bylaws that may affect acquisition of the Company;regulations;

 

●

changes in accounting standards or tax lawsmarket disruption and regulations;volatility;

●

market disruption and volatility;

 

●

fluctuations in the Bancorp’sBancorp’s stock price;

 

●

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

 

●

●issuances of preferred stock;

issuances of preferred stock;

 

●

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

 

●

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, 20162020 (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.

 

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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

 
 

September 30, 2021

  

December 31, 2020

 
         

(In thousands, except share and per share data)

 

Assets

                

Cash and due from banks

 $167,886  $218,017  $156,287  $138,616 

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

 1,667,875  1,282,462 

Securities available-for-sale (amortized cost of $1,073,074 at September 30, 2021 and $1,019,230 at December 31, 2020)

 1,079,216  1,036,550 

Loans

  12,597,434   11,201,275  15,976,781  15,644,396 

Less: Allowance for loan losses

  (121,535)  (118,966) (131,945) (166,538)

Unamortized deferred loan fees, net

  (3,424)  (4,994)  (3,835)  (2,494)

Loans, net

  12,472,475   11,077,315  15,841,001  15,475,364 

Equity securities

 20,117  23,744 

Federal Home Loan Bank stock

  30,681   17,250  17,250  17,250 

Other real estate owned, net

  18,115   20,070  5,251  4,918 

Affordable housing investments and alternative energy partnerships, net

  298,426   251,077  313,517  309,016 

Premises and equipment, net

  107,954   105,607  100,344  102,998 

Customers’ liability on acceptances

  12,009   12,182 

Customers’ liability on acceptances

 13,185  13,753 

Accrued interest receivable

  42,190   37,299  56,844  59,032 

Goodwill

  372,189   372,189  372,189  372,189 

Other intangible assets, net

  9,408   2,949  4,831  5,434 

Right-of-use assets - operating leases

 29,179  30,919 

Other assets

  255,538   117,902   183,354   170,889 

Total assets

 $15,728,417  $14,520,769  $19,860,440  $19,043,134 
        

Liabilities and Stockholders’ Equity

        

Deposits

        

Liabilities

        

Deposits:

     

Non-interest-bearing demand deposits

 $2,730,006  $2,478,107  $4,024,504  $3,365,086 

Interest-bearing deposits:

             

Demand deposits

  1,379,100   1,230,445 

NOW deposits

 2,202,956  1,926,135 

Money market deposits

  2,370,724   2,198,938  4,132,912  3,359,191 

Savings deposits

  925,312   719,949  920,138  785,672 

Time deposits

  5,156,553   5,047,287   5,726,360   6,673,317 

Total deposits

  12,561,695   11,674,726  17,006,870  16,109,401 
        

Securities sold under agreements to repurchase

  100,000   350,000 

Advances from the Federal Home Loan Bank

  595,000   350,000  20,000  150,000 

Other borrowings of affordable housing investments

  17,518   17,662  23,197  23,714 

Long-term debt

  119,136   119,136  119,136  119,136 

Deferred payments from acquisition

  136,056   - 

Acceptances outstanding

  12,009   12,182  13,185  13,753 

Lease liabilities - operating leases

 32,028  33,484 

Other liabilities

  218,304   168,524   182,733   175,502 

Total liabilities

  13,759,718   12,692,230   17,397,149   16,624,990 

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; 90,850,175 issued and 77,240,215 outstanding at September 30, 2021, and 90,643,206 issued and 79,508,265 outstanding at December 31, 2020

 909  906 

Additional paid-in-capital

  932,521   895,480  969,719  964,734 

Accumulated other comprehensive loss, net

  (217)  (3,715)

Accumulated other comprehensive income, net

 (368) 5,310 

Retained earnings

  1,275,094   1,175,485  1,935,831  1,789,325 

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 (13,609,960 shares at September 30, 2021, and 11,134,941 shares at December 31, 2020)

  (442,800)  (342,131)

Total equity

  1,968,699   1,828,539   2,463,291   2,418,144 

Total liabilities and equity

 $15,728,417  $14,520,769  $19,860,440  $19,043,134 

 

See accompanying notesNotes to unaudited condensed consolidated financial statementsConsolidated Financial Statements.

 

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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 September 30,

  

Nine months ended September 30,

 
 

2017

  

2016

  

2017

  

2016

  

2021

  

2020

  

2021

  

2020

 
 

(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  $163,948  $167,556  $485,162  $513,575 

Investment securities

  5,692   4,850   14,817   16,974  3,707  4,115  9,963  17,130 

Federal Home Loan Bank and FRB stock

  607   393   1,317   1,122 

Term federal funds sold

  108   -   108   - 

Federal Home Loan Bank stock

 258  216  730  735 

Deposits with banks

  1,288   412   3,140   1,094   714   347   1,467   1,538 

Total interest and dividend income

  154,078   124,155   420,511   368,402   168,627   172,234   497,322   532,978 
                 

Interest Expense

                        

Time deposits

  11,678   10,701   33,429   32,177  9,299  26,247  33,363  92,213 

Other deposits

  5,101   4,212   14,245   11,783  5,243  5,761  16,302  19,671 

Securities sold under agreements to repurchase

  874   3,828   3,489   11,696 

Advances from Federal Home Loan Bank

  872   134   1,465   442  146  1,251  1,036  4,119 

Long-term debt

  1,456   1,456   4,320   4,336  1,455  1,456  4,318  4,336 

Deferred payments from acquisition

  901   -   901   -  0  15  0  115 

Short-term borrowings

  0   0   0   234 

Total interest expense

  20,882   20,331   57,849   60,434   16,143   34,730   55,019   120,688 
                

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 for credit losses

 152,484  137,504  442,303  412,290 

Provision for credit losses

  3,050   12,500   (19,508)  62,500 

Net interest income after provision for credit losses

  149,434   125,004   461,811   349,790 
                 

Non-Interest Income

                        

Securities gains/(losses), net

  24   1,692   (439)  3,141 

Net gain/(loss) from equity securities

 3  (1,605) (3,628) (1,928)

Securities losses, net

 0  0  853  1,153 

Letters of credit commissions

  1,302   1,212   3,618   3,698  1,764  1,792  5,236  4,992 

Depository service fees

  1,407   1,401   4,259   4,109  1,401  1,263  4,107  3,678 

Gain from acquisition

  5,440   -   5,440   - 

Other operating income

  4,788   4,506   12,953   14,461   9,048   8,527   28,231   23,474 

Total non-interest income

  12,961   8,811   25,831   25,409   12,216   9,977   34,799   31,369 
                 

Non-Interest Expense

                        

Salaries and employee benefits

  27,913   22,881   79,929   71,313  33,437  33,341  98,917  92,477 

Occupancy expense

  5,312   4,734   14,733   13,587  5,136  5,295  15,142  15,435 

Computer and equipment expense

  2,643   2,337   7,895   7,360  3,175  3,044  10,093  8,218 

Professional services expense

  4,942   4,999   14,541   13,981  6,232  5,241  16,698  15,586 

Data processing service expense

  2,918   2,279   7,846   6,556  3,524  3,772  10,422  11,004 

FDIC and regulatory assessments

  2,552   2,288   7,261   7,640  1,830  1,993  5,195  6,854 

Marketing expense

  2,103   1,516   4,833   3,314  945  1,089  5,270  3,890 

Other real estate owned expense/(income)

  369   (176)  747   612 

Other real estate owned (income)/expense

 (88) 423  197  (3,229)

Amortization of investments in low income housing and alternative energy partnerships

  5,723   5,432   16,797   35,626  12,411  16,173  34,663  42,997 

Amortization of core deposit intangibles

  281   172   626   517  172  172  515  515 

Acquisition and integration costs

  3,277   -   3,277   - 

Costs associated with debt redemption

 0  0  732  0 

Acquisition, integration and reorganization costs

 476  0  476  0 

Other operating expense

  3,215   4,275   11,307   10,681   4,965   5,454   15,005   14,672 

Total non-interest expense

  61,248   50,737   169,792   171,187   72,215   75,997   213,325   208,419 
             

Income before income tax expense

  84,909   61,898   221,201   177,840  89,435  58,984  283,285  172,740 

Income tax expense

  35,163   15,808   71,099   50,756   17,038   2,190   60,305   14,773 

Net income

 $49,746  $46,090  $150,102  $127,084  $72,397  $56,794  $222,980  $157,967 
                 

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 

Other Comprehensive Income, net of tax

        

Unrealized holding (loss)/gain on securities available-for-sale

 (3,232) (2,496) (7,271) 8,880 

Unrealized holding gain/(loss) on cash flow hedge derivatives

  157   804   (94)  (3,598) 492  532  2,194  (3,981)

Total other comprehensive gain, net of tax

  1,203   761   3,498   10,329 

Less: reclassification adjustments for losses included in net income

  0   0   601   812 

Total other comprehensive (loss)/gain, net of tax

  (2,740)  (1,964)  (5,678)  4,087 

Total other comprehensive income

 $69,656  $54,830  $217,302  $162,054 
             

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  $0.93  $0.71  $2.83  $1.98 

Diluted

 $0.61  $0.58  $1.86  $1.59  $0.93  $0.71  $2.82  $1.98 

Cash dividends paid per common share

 $0.21  $0.18  $0.63  $0.54  $0.31  $0.31  $0.93  $0.93 

Average common shares outstanding

                

Average Common Shares Outstanding:

        

Basic

  80,665,398   78,865,860   80,073,249   79,147,839  77,846,424  79,628,372  78,841,899  79,599,288 

Diluted

  81,404,854   79,697,069   80,797,179   79,902,846  78,153,408  79,764,318  79,128,644  79,758,943 

 

See accompanying notesNotes to unaudited condensed consolidated financial statements.Consolidated Financial Statements.

 

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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

  

Income

  

Earnings

  

Stock

  

Equity

 
  

(In thousands, except share data)

 

Balance at June 30, 2021

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

Dividend Reinvestment Plan

  22,267   0   894   0   0   0   894 

Restricted stock units vested

  1,971   0   0   0   0   0   0 

Shares withheld related to net share settlement of RSUs

  —   0   (38)  0   0   0   (38)

Stock issued to directors

  0   0   0   0   0   0   0 

Purchases of treasury stock

  (942,613)  0   0   0   0   (37,139)  (37,139)

Stock-based compensation

  —   0   1,697   0   0   0   1,697 

Cash dividends of $0.31 per share

  —   0   0   0   (24,137)  0   (24,137)

Other comprehensive loss

  —   0   0   (2,740)  0   0   (2,740)

Net income

  —   0   0   0   72,397   0   72,397 

Balance at September 30, 2021

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

              

Accumulated

             
  

Common Stock

  

Additional

  

Other

          

Total

 
  

Number of

      

Paid-in

  

Comprehensive

  

Retained

  

Treasury

  

Stockholders'

 
  

Shares

  

Amount

  

Capital

  

Income

  

Earnings

  

Stock

  

Equity

 
  

(In thousands, except share data)

 

Balance at June 30, 2020

  79,619,984  $903  $953,616  $8,353  $1,710,994  $(331,418) $2,342,448 

Dividend Reinvestment Plan

  37,420   1   866   0   0   0   867 

Restricted stock units vested

  1,992   0   0   0   0   0   0 

Shares withheld related to net share settlement of RSUs

  —   —   (4)  —   —   —   (4) 

Stock issued to directors

  0   0   0   0   0   0   0 

Stock-based compensation

  —   0   1,264   0   0   0   1,264 

Cash dividends of $0.31 per share

  —   0   0   0   (24,682)  0   (24,682)

Other comprehensive income

  —   0   0   (1,964)  0   0   (1,964)

Net income

  —   0   0   0   56,794   0   56,794 

Balance at September 30, 2020

  79,659,396  $904  $955,742  $6,389  $1,743,106  $(331,418) $2,374,723 

See accompanying Notes to Consolidated Financial Statements.

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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'

 

Nine months ended

 

Shares

  

Amount

  

Capital

  

Income

  

Earnings

  

Stock

  

Equity

 
  

(In thousands, except share data)

 

Balance at December 31, 2020

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

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

  —   0   0   0   (3,139)  0   (3,139)

Dividend Reinvestment Plan

  62,326   1   2,618   0   0   0   2,619 

Restricted stock units vested

  123,893   1   0   0   0   0   1 

Shares withheld related to net share settlement of RSUs

  —   0   (2,632)  0   0   0   (2,632)

Stock issued to directors

  20,750   0   850   0   0   0   850 

Purchases of treasury stock

  (2,475,019)  0   0   0   0   (100,668)  (100,668)

Stock-based compensation

  —   0   4,149   0   0   0   4,149 

Cash dividends of $0.93 per share

  —   0   0   0   (73,335)  0   (73,335)

Other comprehensive loss

  —   0   0   (5,678)  0   0   (5,678)

Net income

  —   0   0   0   222,980   0   222,980 

Balance at September 30, 2021

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

              

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 December 31, 2019

  79,729,419  $900  $950,466  $2,302  $1,659,153  $(318,538) $2,294,283 

Dividend Reinvestment Plan

  109,988   2   2,571   0   0   0   2,573 

Restricted stock units vested

  188,879   2   0   0   0   0   2 

Shares withheld related to net share settlement of RSUs

  —   0   (1,903)  0   0   0   (1,903)

Stock issued to directors

  31,110   0   800   0   0   0   800 

Purchases of treasury stock

  (400,000)  0   0   0   0   (12,880)  (12,880)

Stock-based compensation

  —   0   3,808   0   0   0   3,808 

Cash dividends of $0.93 per share

  —   0   0   0   (74,014)  0   (74,014)

Other comprehensive income

  —   0   0   4,087   0   0   4,087 

Net income

  —   0   0   0   157,967   0   157,967 

Balance at September 30, 2020

  79,659,396  $904  $955,742  $6,389  $1,743,106  $(331,418) $2,374,723 

See accompanying Notes to Consolidated Financial Statements.

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CATHAY GENERAL BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)(Unaudited)

 

 

Nine months ended September 30

  

Nine months ended September 30,

 
 

2017

  

2016

  

2021

  

2020

 
 

(In thousands)

  

(In thousands)

 

Cash Flows from Operating Activities

            

Net income

 $150,102  $127,084  $222,980  $157,967 

Adjustments to reconcile net income to net cash provided by/(used in) operating activities:

        

Reversal for loan losses

  (2,500)  (15,650)

Provision for losses on other real estate owned

  889   176 

Deferred tax liability

  10,319   22,483 

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

 

(Reversal)/provision for credit losses

 (15,710) 62,500 

(Reversal)/Provision for losses on other real estate owned

 (8) 717 

Deferred tax (benefit)/ provision

 8,867  (10,305)

Depreciation and amortization

  5,416   5,684  5,942  5,644 

Amortization of right-of-use asset

 5,972  6,624 

Change in operating lease liabilities

 (1,456) (757)

Net gains on sale and transfer of other real estate owned

  (394)  (476) (120) (4,216)

Net gains on sale of loans

  -   (285) (357) (219)

Proceeds from sales of loans

  7,500   13,525  5,351  6,406 

Originations of loans held-for-sale

  -   (12,665)

Originations of loans held for sale

 (4,994) (6,187)

Amortization on alternative energy partnerships, venture capital and other investments

  2,778   27,282  31,610  42,904 

Net loss/(gain) on sales and calls of securities

  438   (3,347)

Net gain on sales and calls of securities

 (853) (1,153)

Amortization/accretion of security premiums/discounts, net

  990   5,193  6,128  6,211 

Loss on sales or disposal of fixed assets

  -   19  55  45 

Write-down on impaired securities

  -   206 

Stock based compensation and stock issued to officers as compensation

  4,449   3,804 

Unrealized loss on equity securities

 3,628  1,928 

Stock-based compensation and stock issued to officers as compensation

 4,999  4,608 

Net change in accrued interest receivable and other assets

  (51,776)  2,101  (21,607) (13,000)
Gain on acquisition (5,440) - 

Net change in other liabilities

  828   (4,537)  (12,880)  (26,597)

Net cash provided by operating activities

  123,599   170,597   237,547   233,120 
         

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) (406,750) (272,961)

Proceeds from sale of investment securities available-for-sale

  99,541   415,543  21,102  107,539 

Proceeds from sale of equity securities

 0  3,112 

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

  389,829   585,285  326,527  543,114 

Purchase of Federal Home Loan Bank stock

  -   (1,650) 0  (840)

Redemptions of Federal Home Loan Bank stock

  6,459   -  0  1,680 

Net increase in loans

  (686,225)  (853,453) (349,924) (496,732)

Purchase of premises and equipment

  (976)  (3,166) (2,828) (4,372)

Proceeds from sales of premises and equipment

  -   11 
Benefits received from bank owned life insurance policies 2,752  0 

Proceeds from sales of other real estate owned

  2,186   6,713  0  4,308 

Net increase in investment in affordable housing and alternative energy partnerships

  (20,867)  (59,844)  (19,039)  (60,129)

Acquisition, net of cash acquired

  (14,309)  - 

Net cash used for investing activities

  (159,099)  (856,404)  (428,160)  (175,281)
         

Cash Flows from Financing Activities

            

Net (decrease)/increase in deposits

  73,120   429,976 

Net decrease in federal funds purchased and securities sold under agreements to repurchase

  (250,000)  (50,000)

Net increase in deposits

 897,713  1,342,019 

Advances from Federal Home Loan Bank

  2,608,000   2,730,000  50,000  1,450,000 

Repayment of Federal Home Loan Bank borrowings

  (2,393,000)  (2,305,000) (180,000) (1,890,000)

Cash dividends paid

  (50,491)  (42,570) (73,335) (74,014)

Repayment of other borrowings

 0  (7,663)

Purchases of treasury stock

  -   (54,441) (100,668) (12,880)

Repayment of short-term borrowings

 0  (25,683)

Proceeds from shares issued under Dividend Reinvestment Plan

  1,849   1,643  2,619  2,573 

Proceeds from exercise of stock options

  1,018   49 

Taxes paid related to net share settlement of RSUs

  (5,127)  (103)  (2,632)  (1,903)

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 provided by financing activities

  593,697   782,449 
 

Decrease in cash, cash equivalents, and restricted cash

 403,084  840,288 

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

  1,421,078   593,778 

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

 $1,824,162  $1,434,066 
      

Supplemental disclosure of cash flow information

         

Cash paid during the period:

         

Interest

 $58,416  $61,212  $61,574  $133,151 

Income taxes paid

 $62,296  $31,717  $65,291  $35,490 

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)

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

 $(7,872) $8,068 

Net change in unrealized holding gain/(loss) on cash flow hedge derivatives

 $2,194  $(3,981)

Transfers to other real estate owned from loans held for investment

 $726  $2,698  $205  $0 

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

 $-  $- 

 

See accompanying notesNotes to unaudited condensed consolidated financial statements.Consolidated Financial Statements.

 

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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”), seventen 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 September 30, 2017, 2021, the Bank operates 2224 branches in Southern California, 1213 branches in Northern California, 1210 branches in New York State, three branches in Illinois, three branchesfour in Washington State, 2 in Illinois, two branches in Texas, one branch in Maryland, Massachusetts, one branch inNevada, and New Jersey, one branch in Maryland, one branch in Nevada, one branch 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

On July 14, 2017, the Company completed the acquisition of SinoPac Bancorp, the parent of Far East National Bank (FENB), pursuant to 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 closing 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 nine branches in California, and a representative office in Beijing. The acquisition will be accounted for as a business combination, subject to the provisions of ASC 805-10-50, Business Combinations.

The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of the July 14, 2017 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 statement of income beginning on the acquisition date. The purchase accounting adjustments are preliminary and subject to finalization during the one-year measurement period from the date of the acquisition.

 

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The fair value of the assets and the liabilities acquired as of July 14, 2017 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 

3.2. 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. 2021. 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, 2016.2020 filed with the SEC on March 1, 2021 (the "2020 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 estimates subject to change are the allowance for loan losses, goodwilllosses.

Summary of Significant Accounting Policies

With the exception of the updated accounting policies listed below, the accompanying unaudited interim Consolidated Financial Statements have been prepared on a consistent basis with the accounting policies described in Consolidated Financial Statements and Supplementary Data - Note 1 - “Summary of Significant Accounting Policies” under Part II, Item 8 of our 2020 Form 10K.

Securities Available for Sale

Prior to January 1, 2021, available-for-sale ("AFS") debt securities were measured at fair value and declines in the fair value were reviewed to determine whether the impairment was other-than-temporary. If we did not expect to recover the entire amortized cost basis of the security, then an other-than-temporary impairment (“OTTI”) was considered to have occurred. The cost basis of the security was written down to its estimated fair value and other-than-temporary impairment.the amount of the write-down was recognized through a charge to earnings. If the amount of the amortized cost basis expected to be recovered increased in a future period, the cost basis of the security was not increased but rather recognized prospectively through interest income.

 

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4. Recent Accounting PronouncementsEffective January 1, 2021, upon the adoption of ASU 2016-13, debt securities AFS are measured at fair value and subject to impairment testing. When an AFS 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 loss 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.

 

Accounting Standards adopted in 2017Interest income includes amortization of premiums and discounts as an adjustment of yield on a level-yield basis. Premiums on callable debt securities are amortized to their earliest call date. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.

 

In March 2016,A debt security is placed on nonaccrual status at the FASB issued ASU 2016-09, “time any principal or interest payments become delinquent by 90 days or greater. Interest accrued but not received for a security placed on non-accrual is reversed against interest income. No interest was reversed against interest income during the period.

Compensation Stock Compensation (Topic 718): ImprovementsAllowance for Credit Losses on Available for Sale Securities

For AFS debt securities in an unrealized loss position, the Company first assesses whether it intends to Employee Share-Based Payment Accounting.” ASU 2016-09 changes aspectssell, 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 accountingcriteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value with the credit component of the unrealized loss of the impaired AFS debt security recognized as an allowance for share-based payment award transactions, including: (1) accountingcredit losses, and a corresponding provision for income taxes; (2) classification of excess tax benefitscredit losses on the consolidated statement of cash flows; (3) forfeitures; (4) minimum statutory tax withholding requirements;income and (5) classificationthe non-credit component is recognized in other comprehensive income (loss), net of employee taxes paid onapplicable taxes. For AFS debt securities that do not meet the statementaforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, the payment structure of the security, failure of the issuer of the security to make scheduled interest or principal payments, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows 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 eachexpected to be collected from the security are compared to the amortized cost basis of the topics covered by the ASU. The Company elected to apply all topics covered by the ASU on a prospective basis andsecurity. Any fair value changes that has elected to continue to estimate forfeitures expected to occurnot been recorded through an allowance for credit losses is recognized in determining the amount of compensation cost to be recognized each period.other comprehensive income.

 

Under ASU 2016-09, all excess tax benefits and tax deficiencies from share based payments are recognized as income tax expense or benefitChanges in the income statement insteadallowance for credit losses are recorded as provision for credit loss expense. Losses are charged against the allowance when management believes the uncollectability of an available-for-sale security is confirmed or when either of the previous accountingcriteria regarding intent or requirement to sell is met.

The amortized cost of the Company’s AFS debt securities excludes accrued interest, 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 areis 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 Standards

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The new guidance replaces existing revenue recognition guidance for contracts to provide goods or services to customers and amends existing guidance related to recognition of gains and losses“accrued interest receivable” on 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 uncertainty of revenue and cash flows arising from contracts with customers are 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.Consolidated Balance Sheets. The Company has completed the assessment phase of implementing this new standard. In the assessment phase,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 which revenue streamswhen certain criteria listed in the terms are within the scope and those that are excluded from the scope of the new standard. Based on this assessment,met, the Company concluded that substantially allassesses the default status of each security as defined by 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.debt security’s specific security structure.

 

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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 valuesTrading securities are reported at fair value, with unrealized gains or losses included in income.

Loans Held for Investment

Loans receivable that the Company has the intent and ability to hold for the foreseeable future or until maturity are stated at their outstanding principal, reduced by an allowance for loan losses and net of deferred loan fees or costs on originated loans and unamortized premiums or discounts on purchased loans. Nonrefundable fees and direct costs associated with the origination or purchase of loans are deferred and netted against outstanding loan balances. The deferred net loan fees and costs are recognized in interest income as an adjustment to yield over the loan term using the effective interest method or straight-line method. Discounts or premiums on purchased loans are accreted or amortized to interest income using the effective interest method or straight-line method over the remaining period to contractual maturity. Interest on loans is calculated using the simple-interest method on daily balances of the principal amounts outstanding based on an actual or 360-day basis.

Generally, loans are placed on nonaccrual status when they become 90 days past due. Loans are considered past due when contractually required principal or interest payments have not been made on the due dates. Loans are also placed on nonaccrual status when management believes, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that full collection of principal or interest becomes uncertain, regardless of the length of past due status. Once a loan is placed on nonaccrual status, interest accrual is discontinued, and all unpaid accrued interest is reversed against interest income. As a result, accrued interest receivable does not carry a credit loss reserve. Interest payments received on nonaccrual loans are reflected as a reduction of principal and not as interest income. A loan is returned to accrual status when the borrower has demonstrated a satisfactory payment trend subject to management’s assessment of the borrower’s ability to repay the loan.

Loans Held for Sale

Held for sale loans are carried at the lower of aggregate cost or fair value. Gains and losses are recorded in non-interest income based on the difference between sales proceeds, net of sales commissions, and carrying value. When a determination is made at the time of commitment to originate or purchase loans as held-for-investment, it is the Company’s intent to hold these loans to maturity or for the “foreseeable future,” subject to periodic review under the Company’s management evaluation processes, including asset/liability management. When the Company subsequently changes inits intent to hold certain loans, the loans are transferred from the loans held-for-investment portfolio at amortized cost to the loans held-for-sale portfolio at lower of aggregate cost or fair value recognized in net income. Equity investment without readily determinable fair values will be measured at fair value eitherand the existing ACL on the loans transferred is reversed.

Allowance for Credit Losses on Loans Held for Investment.

Effective January 1, 2021, and upon the occurrenceadoption of an observable price change or upon identification of an impairment and any amount by whichASU 2016-13, the carrying value exceedingCompany replaced the fair value will be recognized as an impairment in net income. This update also requires an entity to disclose fair value ofincurred loss accounting approach with the current expected credit loss (“CECL”) approach for financial instruments measured at amortized cost and other commitments to extend credit. CECL requires the immediate recognition of estimated credit losses expected to occur over the estimated remaining life of the asset. The forward-looking concept of CECL requires loss estimates to consider historical experience, current conditions and reasonable and supportable economic forecasts of future events and circumstances.

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

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Under the Company's CECL approach, management estimates the ACL using relevant available information from internal and external sources, relating to measurepast events, current conditions, and reasonable and supportable economic forecasts that fair value usingvary by loan portfolio. We use economic forecasts from Moody’s Analytics in this process. The economic forecast is updated monthly; therefore, the exit price option. In addition, this update requires separate presentationone used for each quarter-end calculation is generally based on a one-month lag based on the timing of when the forecast is released. The Company does not consider a one-month lag to create a material difference but will consider 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 comprehensive incomecurrent 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 will use the present value of future cash flows.

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 liabilitysimplified 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 2007 to the fourth quarter of 2020. Loss given default rates would be computed based on the net charge-offs recognized divided by the expected exposure at default of defaulted loans starting with the fourth quarter of 2007 through the fourth quarter of 2020. 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 will revert linearly for the four-quarter reversion period to the long-term loss rates for each of the six portfolios of loans.

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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.

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 and gas, included as part of the C&I loan portfolio, and the higher risk characteristics of purchased syndicated loans. Current and forecasted economic trends and underlying market values for collateral dependent loans also are considered within the econometric models described above.

The Company's CECL methodology requires a significant amount of management judgment in determining the appropriate allowance for credit losses. Several of the steps in the methodology involve judgment and are subjective in nature including, among other things: segmenting the loan portfolio; determining the amount of loss history to consider; selecting predictive econometric regression models that use appropriate macroeconomic variables; determining the methodology to forecast prepayments; 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; and 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.

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Individually Evaluated Loans

Loans that do not share similar risk characteristics with other financial assets are individually evaluated for impairment and excluded from loan pools used within the collective evaluation of estimated credit losses. We defined the following criteria for what constitutes a “default”, which results in a loan no longer sharing similar risk characteristics with other loans, and therefore requires an individual evaluation for expected credit losses. The criteria for default may include any one of the following: on nonaccrual status, modified under a troubled debt restructuring, or payment delinquency of 90 days or more.

Impaired Loans

Prior to January 1, 2021, a loan or lease was considered impaired when it was probable that we would be unable to collect all amounts due according to the contractual terms of the loan or lease agreement. The measurement of impairment may be based on (1) the present value of the expected future cash flows of the impaired loan discounted at the loan’s original effective interest rate, (2) the observable market price of the impaired loan or (3) the fair value of the collateral of a collateral-dependent loan. The amount by which the recorded investment in the loan exceeds the measure of the impaired loan is recognized by recording a valuation allowance with a corresponding charge to the provision for loan losses. When loans are placed on an impaired status, previously accrued but unpaid interest is reversed against current income and subsequent payments received are generally first applied toward the outstanding principal balance of the loan.

Troubled Debt Restructured Loan (“TDR”)

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

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

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) as extended by the Consolidated Appropriation Act, 2021 (“CAA”) permits financial institutions to suspend requirements under GAAP for loan modifications to borrowers affected by COVID-19 and is intended to provide interpretive guidance as to conditions that would constitute a short-term modification that would not meet the definition of a TDR. Such conditions include the following (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.

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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 by measurement category and form of financial asset. ASU 2016-01 becomes effective for interim and annual periods beginning after December 15, 2017.  instruments in Note 9 in the Notes to Consolidated Financial Statements (Unaudited).

The Company estimates expected credit losses over the contractual period in which the Company is currently evaluatingexposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the impactCompany, using the same loss factors as used for the allowance for loan losses. The reserve for unfunded loan commitments uses the expected 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 its consolidated financial statements.the Consolidated Balance Sheets. Changes in the allowance for unfunded commitments are included in the provision for loan losses.

3. Recent Accounting Pronouncements

Accounting Standards Adopted in 2021

 

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 on the consolidated balance sheet as lease assets 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 for the remaining obligation under the lease agreements and a corresponding right-of-use asset in its consolidated financial statements. ASU 2016-02 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 FASBFinancial Accounting Standards Board ("FASB") issued ASU 2016-13, “FinancialAccounting Standards Update ("ASU") 2016-13, “Financial Instruments - Credit Losses (Topic 326)326): Measurement of Credit Losses on Financial Instruments.”  This update requires an entity to use a broader range of reasonable and supportableR&S forecasts, in addition to historical experience and current conditions, to develop an expected credit loss estimate, referred to as the CECL model, 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 value is below amortized cost. ASU 2016-13 becomes effective for interim and annual periods beginning after December 15, 2019.  The Company has designated a management team to evaluate ASU 2016-13 and develop an implementation strategy. The Company has not yet determined the effect of ASU 2016-13 on its accounting policies or the impact on the Company’s consolidated financial statements.

 

In August 2016, theThe FASB issued ASU 2016-15, “Statement of Cash Flows – Classification of Certain Cash Receiptsadditional ASUs containing clarifying guidance, transition relief provisions 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 relationminor updates 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 original ASU. These include ASU 2018-19 (issued November 2018), ASU 2019-04 (issued April 2019), ASU 2019-05 (issued May 2019), ASU 2019-10 (issued November 2019), ASU 2019-11 (issued November 2019), ASU 2020-02 (issued February 2020) and application of the predominance principle. The amendments reduce currentASU 2020-03 (issued March 2020). ASU 2016-13 and potential future diversity in practice. The amendments in this update apply to all entities thatsubsequent ASUs 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 Company 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 consolidated financial statements.

In January 2017, 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 adding 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, 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, by integrating the acquired set with their own inputs and processes. The amendments in this update also provide a screen to determine when a set is not a business. 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. Adoption of ASU 2017-01 is not expected to have a significant impact on the Company’s consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” This update simplifies how an entity 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. Adoption of ASU 2017-04 is not expected to have a significant impact on the Company’s consolidated financial statements.

In February 2017, the FASB issued ASU 2017-05, "Other Income—Gains and Losses from theDerecognition of Nonfinancial Assets (Subtopic 610-20):Clarifying the Scope of Asset Derecognition Guidanceand Accounting for Partial Sales of Nonfinancial Assets.” This update clarifies that a financial asset is within 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 counterparty in a contract if substantially all of the fair value of the assets (recognized and unrecognized) that are promised to the counterparty in the contract is concentrated in nonfinancial assets, then all of the financial assets promised to the counterparty are in substance nonfinancial assets 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 effective 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.

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. 2019. This amendment requires using a modified retrospective approach with a cumulative-effect adjustment to beginning retained earnings, as of the beginning of the first reporting period in which the guidance is effective. 

Effective January 1, 2021, the Company adopted ASU 2016-13 and the related amendments to Accounting Standards Codification ("ASC") Topic 326, Financial Instruments - Credit Losses, to replace the incurred loss accounting approach with a CECL approach for financial instruments measured at amortized cost and other commitments to extend credit. The new standard is generally intended to require earlier recognition of credit losses. While the standard changes the measurement of the allowance for credit losses, it does not change the credit risk of our lending portfolios or the ultimate losses in those portfolios.

Under the CECL approach, the standard requires immediate recognition of estimated credit losses expected to occur over the estimated remaining life of the asset. The forward-looking concept of CECL requires loss estimates to consider historical experience, current conditions and reasonable and supportable forecasts. The standard modifies the other-than-temporary impairment model for available-for-sale debt securities to require entities to record an allowance when recognizing credit losses for available-for-sale securities, rather than reducing the amortized cost of the securities by direct write-offs.

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The Company adopted the new standard using the modified retrospective approach and recognized a cumulative effect adjustment to decrease retained earnings by $3.1 million, net of taxes, and decrease the allowance for loan losses by $1.6 million and increase the reserve for unfunded loan commitments by $6.0 million without restating prior periods and applied the requirements of the new standard prospectively. There was no cumulative effect adjustment related to available-for-sale securities at adoption. The Company elected to account for accrued interest receivable separately from the amortized cost of loans and investment securities. Accrued interest receivable is currently evaluatingincluded in "accrued interest receivables" on the impactConsolidated Balance Sheets. The Company elected the practical expedient to use the fair value of the collateral at the reporting date when determining the allowance for credit losses for a financial asset for which the repayment is expected to be provided substantially through the operation or sale of the collateral when the borrower is experiencing financial difficulty based on its consolidatedthe entity’s assessment as of the reporting date (collateral dependent financial statements.asset). Additionally, the Company implemented new business processes, new internal controls, and modified existing and/or implemented new internal models and tools to facilitate the ongoing application of the new standard. See Note 8.Loans for further details.

The following table sets forth the cumulative effect of the changes to the Company’s unaudited Consolidated Balance Sheets at January 1, 2021, for the adoption of ASC 326:

  

Balance at

  

Adjustments due to

  

Balance at

 
  

December 31, 2020

  

Adoption of ASC 326

  

January 1, 2021

 

 

 

(In thousands)

 
Assets:            

Allowance for credit losses on loans

 $166,538  $(1,560) $164,978 

Deferred tax assets

  85,610   1,319   86,929 

Liabilities:

            

Allowance for unfunded commitments

 $5,880  $6,018  $11,898 

Stockholders' equity:

            

Retained earnings, net of tax

 $2,418,144  $(3,140) $2,415,004 

 

In MayJuly 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,-11, “Earnings per Share (Topic 260)260), Distinguishing Liabilities from Equity (Topic 480)480) and Derivatives and Hedging (Topic 815)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 Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification.ASC. 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) Retrospectivelyretrospectively 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) Retrospectivelyretrospectively 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 250-10-45-5250-10-45-5 through 45-10.45-10. 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 theAdoption of ASU 2017-11 did not have a material impact on its consolidated financial statements.the Company’s Consolidated Financial Statements.

 

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In August 2017, December 2019, the FASB issued ASU 2017-12, “Derivatives and HedgingNo.2019-12, “Income Taxes (Topic 815)740); Simplifying the Accounting for Income Taxes.”, targeted improvements This ASU removes specific exceptions to the general principles in Topic 740 in GAAP. It eliminates the need for an organization to analyze whether the following apply in a given period: exception to the incremental approach for intra-period tax allocation; exception to accounting for hedging activities. The amendmentsbasis differences when there are ownership changes in this update better align an entity’s risk management activitiesforeign investments; 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 hedgeexception in interim period income tax accounting for both nonfinancial andyear-to-date losses that exceed anticipated losses. The ASU also (i) improves financial risk components and align the recognition and presentationstatement preparers’ application of the effects of the hedging instrument and the hedged itemincome tax-related guidance (ii) simplifies GAAP for franchise taxes that are partially based on income; transactions with a government that result in a step up in the tax basis of goodwill; and separate financial statements. Forstatements of legal entities that are not subject to tax; and (iii) establishes changes in tax laws in interim periods. This ASU is effective for public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2018,2020 with early adoption permitted for public business entities for periods for which financial statements have not yet been issued. Adoption of ASU 2019-12 did not have a material impact on the Company’s Consolidated Financial Statements.

In January 2020, the FASB issued ASU No.2020-01, “'Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint-Ventures (Topic 323), and Derivatives and Hedging (Topic 815). Clarifying the Interactions between Topic 321, Topic 323, and Topic 815.” This ASU is effective for public business entities for fiscal years, 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, including early adoption in anyan interim period after issuancefor public business entities for periods for which financial statements have not yet been issued. An entity should apply ASU No.2020-01 prospectively at the beginning of the update.interim period that includes the adoption date. This ASU among other things clarifies that a company should consider observable transactions that require a company to either apply or discontinue the equity method of accounting under Topic 323, Investments—Equity Method and Joint Ventures, for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. The new ASU clarifies that, when determining the accounting for certain forward contracts and purchased options a company should not consider, whether upon settlement or exercise, if the underlying securities would be accounted for under the equity method or fair value option. Adoption of ASU 2020-01 did not have a material impact on the Company’s Consolidated Financial Statements.

Other Accounting Standards Pending Adoption

In March 2020, the FASB issued ASU No.2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” ASU No.2020-04 is effective for all entities as of March 12, 2020, through December 31, 2022. This ASU provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The ASU is intended to help stakeholders during the global market-wide reference rate transition period. Therefore, it will be in effect for a limited time through December 31, 2022.  In January 2021, the FASB issued ASU 2021-01 as subsequent amendments, which expanded the scope of Topic 848 to include all affected derivatives and clarified certain optional expedients and exceptions regarding the hedge accounting for derivative contracts affected by the discounting transition. Based on our current assessment, we will plan to offer SOFR as the primary alternative reference rate but may consider alternate rates based on customer demands and/or the type of loan or financial instrument. The Company will also continue to assess impacts to our operations, financial models, data and technology as part of our transition plan. The adoption of this guidance is currently evaluating thenot expected to have a material impact on itsthe Company’s consolidated financial statements.

 

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4. Cash, Cash Equivalents and Restricted Cash

 

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

The Company is required to maintain reserves with the Federal Reserve Bank. Reserve requirements are based on a percentage of deposit liabilities. The average reserve balances required were 0 and $60 thousand for the nine months ended September 30, 2021 and for the year ended December 31, 2020, respectively. As of September 30, 2021 and December 31, 2020, the Company had $31.9 million and $34.7 million, respectively, on deposit in a cash margin account that serves as collateral for interest rate swaps. These amounts included $8.0 million and $11.9 million as of September 30, 2021 and December 31, 2020, respectively, on deposit in a cash margin account that serves as collateral for the Bancorp’s interest rate swaps. As of September 30, 2021 and December 31, 2020, the Company held $1.0 million and $9.3 million, respectively, in a restricted escrow account with a major bank for its alternative energy investments.

5.5. 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 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. Stock-Based Compensation

Under the Company’s equity incentive plans, directors and eligible employees may be 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 equal to the fair market value of a share of the Company’s common stock on 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.

  

Three months ended September 30,

  

Nine months ended September 30,

 
  

2021

  

2020

  

2021

  

2020

 
  

(In thousands, except share and per share data)

 

Net income

 $72,397  $56,794  $222,980  $157,967 
                 

Weighted-average shares:

                

Basic weighted-average number of common shares outstanding

  77,846,424   79,628,372   78,841,899   79,599,288 

Dilutive effect of weighted-average outstanding common share equivalents RSUs

  306,984   135,946   286,745   159,655 

Diluted weighted-average number of common shares outstanding

  78,153,408   79,764,318   79,128,644   79,758,943 
                 

Average restricted stock units with anti-dilutive effect

  884   117,621   30,130   97,110 

Earnings per common share:

                

Basic

 $0.93  $0.71  $2.83  $1.98 

Diluted

 $0.93  $0.71  $2.82  $1.98 

 

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6. Stock-Based Compensation

 

Option compensation expense was zero forPursuant to the three monthsCompany’s 2005 Incentive Plan, as amended and forrestated, the nine months ended September 30, 2017,Company may grant incentive stock options (employees only), non-statutory stock options, common stock awards, restricted stock, RSUs, stock appreciation rights and September 30, 2016. Stock-based compensation was fully recognizedcash awards to non-employee directors and eligible employees.

RSUs are generally granted at no cost to the recipient. RSUs generally vest ratably 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 millionthree years or cliff vest after one or three years of continued employment from the exercisedate of stock options which had an aggregate intrinsic valuethe grant. While a portion 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 RSUs may be time-vesting awards, others may vest subject to continued employmentthe 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 vesting dates.

The Company granted restricted stock units for 87,781 shares at an average closing pricetarget amount of $38.59 per share inawards. Based on the first nine monthsCompany’s attainment of 2017. The Company granted restricted stock units for 88,693 shares at an average closing pricespecified performance goals and consideration of $30.37 per share in 2016.

Starting in December 2013, the Company granted performance share unit awards in whichmarket conditions, the number of units earnedshares that vest can be adjusted to a minimum of zero and to a maximum of 150% of the target. The amount of performance-based RSUs that are eligible to vest is calculateddetermined at the end of each performance period and is then added together to determine the total number of performance shares that are eligible to vest. Performance-based RSUs generally cliff vest three years from the date of grant.

Compensation costs for the time-based awards are based on the 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 nine months ended September 30, 2017:2021:

 

Units

Balance at December 31, 2016

727,419

Granted

164,404

Distributed

(297,905)

Forfeited

(10,424)

Balance at September 30, 2017

583,494

  

Time-Based RSUs

  

Performance-Based RSUs

 
      

Weighted-Average

      

Weighted-Average

 
      

Grant Date

      

Grant Date

 
  

Shares

  

Fair Value

  

Shares

  

Fair Value

 

Balance at December 31, 2020

  292,670  $33.37   302,802  $32.55 

Granted

  60,666   41.11   113,764   37.13 

Vested

  (96,869)  41.72   (76,292)  42.56 

Forfeited

  (23,324)  29.92   (7,768)  40.60 

Balance at September 30, 2021

  233,143  $32.26   332,506  $31.63 

 

The compensationcompensation expense recorded for restricted stock unitsRSUs was $1.7 million and $1.3 million for the three months ended September 30, 2017, compared to $1.2 million in the same period a year ago.2021, and 2020, respectively. For the nine months ended September 30, 2017 2021 and 2016,2020, the compensation expense recorded related to the restricted stock unitsfor RSUs was $3.9$4.1 million and $3.3$3.8 million, respectively. Unrecognized stock-based compensation expense related to restricted stock unitsRSUs was $9.1$10.3 million and $8.0 million as of September 30, 2017, 2021 and is2020, respectively. As of September 30, 2021, these costs are expected to be recognized over the next 2.0 years.1.9 years for time-based and performance-based RSUs.

 

As of September 30, 2017, 3,465,4112021, 1,863,749 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

18
Table 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.Contents

7. 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 September 30, 2017, 2021, and December 31, 2016:2020:

 

 

September 30, 2017

  

September 30, 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

 $399,741  $-  $305  $399,436  $40,206  $5  $0  $40,211 

U.S. government agency entities

  9,679   27   6   9,700  89,823  1,255  135  90,943 

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  798,905  12,490  6,328  805,067 

Collateralized mortgage obligations

  1,715   -   5   1,710  9,792  0  231  9,561 

Corporate debt securities

  80,007   904   5   80,906   134,348   514   1,428   133,434 

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  $1,073,074  $14,264  $8,122  $1,079,216 

 

  

December 31, 2016

 
      

Gross

  

Gross

     
  

Amortized

  

Unrealized

  

Unrealized

     
  

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 

Mortgage-backed securities

  339,241   309   3,290   336,260 

Collateralized mortgage obligations

  48   -   20   28 

Corporate debt securities

  74,965   247   862   74,350 

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 

  

December 31, 2020

 
      

Gross

  

Gross

     
  

Amortized

  

Unrealized

  

Unrealized

     
  

Cost

  

Gains

  

Losses

  

Fair Value

 
  

(In thousands)

 

Securities Available-for-Sale

                

U.S. treasury securities

 $80,948  $6  $6  $80,948 

U.S. government agency entities

  99,944   441   546   99,839 

Mortgage-backed securities

  709,709   17,965   606   727,068 

Collateralized mortgage obligations

  10,358   0   34   10,324 

Corporate debt securities

  118,271   367   267   118,371 

Total

 $1,019,230  $18,779  $1,459  $1,036,550 

As of September 30, 2021, the amortized cost of AFS debt securities excluded accrued interest receivables of $2.6 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 2.Basis of Presentation and Summary of Significant Accounting Policies to the Consolidated Financial Statements in this Form 10Q.

 

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The amortized cost and fair value of investment securities asavailable-for-sale as of September 30, 2017, 2021, 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.  

 

 

September 30, 2021

 
 

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  $45,215  $45,234 

Due after one year through five years

  465,328   459,924  117,088  115,615 

Due after five years through ten years

  8,658   8,647  149,474  153,657 

Due after ten years (1)

  475,187   484,361 

Due after ten years

  761,297   764,710 

Total

 $1,364,955  $1,368,487  $1,073,074  $1,079,216 

 

(1) Equity securities are reported in this category

There were no sales transactionsEquity Securities - The Company recognized a net gain of mortgage-backed securities$3 thousand for the three months ended September 30, 2021, due to the increase in fair value during the first nine monthsquarter of 2017. Proceedsequity investments with readily determinable fair values compared to a net gain 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$1.6 million for the ninethree months ended September 30, 2017 and 2016, respectively. Proceeds2020. The Company recognized a net loss of $99.5$3.6 million were received fromfor the sale of other investment securities during the nine months ended September 30, 2017. There were no sales transactions2021, due to the decrease in fair value, year to date, of other investment securities duringequity investments with readily determinable fair values compared to a net loss of $1.9 million for the nine months ended September 30, 2016. Proceeds from maturities and calls of other investment2020. Equity securities were $341.3$20.1 million during the nine months ended and $23.7 million as of September 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 2021, and $206,000 were recorded during the first nine months of 2017 and 2016, December 31, 2020, respectively.

 

The tables below showfollowing tables set forth the gross unrealized losses and related fair value and unrealized losses of the temporarily impaired securitiesCompany’s investment portfolio, aggregated by investment category and the length of time that individual security has been in our investment securities portfolioa continuous unrealized loss position, as of September 30, 2017,2021, and December 31, 2016:2020:

 

 

September 30, 2017

 
 

Temporarily impaired securities

 
    

September 30, 2021

 
 

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

 $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 

U.S. government agency entities

 $0  $0  $2,403  $135  $2,403  $135 

Mortgage-backed securities

  359,112   2,359   122   3   359,234   2,362  399,470  5,632  7,038  696  406,508  6,328 

Collateralized mortgage obligations

  1,710   5   -   -   1,710   5  9,418  219  144  12  9,562  231 

Corporate debt securities

  5,029   5   -   -   5,029   5   91,870   1,144   19,716   284   111,586   1,428 

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  $500,758  $6,995  $29,301  $1,127  $530,059  $8,122 

  

December 31, 2020

 
  

Less than 12 Months

  

12 Months or Longer

  

Total

 
      

Gross

      

Gross

      

Gross

 
  

Fair

  

Unrealized

  

Fair

  

Unrealized

  

Fair

  

Unrealized

 
  

Value

  

Losses

  

Value

  

Losses

  

Value

  

Losses

 
  

(In thousands)

 

Securities Available-for-Sale

                        

U.S. treasury securities

 $40,952  $6  $0  $0  $40,952  $6 

U.S. government agency entities

  26,390   102   40,009   444   66,399   546 

Mortgage-backed securities

  1,694   23   8,093   583   9,787   606 

Collateralized mortgage obligations

  10,131   25   193   9   10,324   34 

Corporate debt securities

  58,405   267   0   0   58,405   267 

Total

 $137,572  $423  $48,295  $1,036  $185,867  $1,459 

 

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Allowance for Credit Losses

  

December 31, 2016

 
  

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

 $299,088  $857  $-  $-  $299,088  $857 

U.S. government sponsored entities

  390,331   9,669   -   -   390,331   9,669 

Mortgage-backed securities

  328,236   3,288   62   2   328,298   3,290 

Collateralized mortgage obligations

  -   -   28   20   28   20 

Corporate debt securities

  -   -   29,138   862   29,138   862 

Mutual funds

  -   -   6,230   270   6,230   270 

Total

 $1,017,655  $13,814  $35,458  $1,154  $1,053,113  $14,968 

 

As of The securities that were in an unrealized loss position at September 30, 2017,2021, 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 haduses in analyzing securities for impairment related to credit losses, see Note 2Basis of Presentation and Summary of Significant Accounting Policies - Allowance for Credit Losses on Available for Sale Securities to the Consolidated Financial Statements in this Form 10Q.

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 September 30, 2021, against these securities, and there was no provision for credit losses recognized for the nine months ended September 30, 2021. For the nine months ended September 30, 2020, there was no credit loss recognized.

 

Investment securitiesSecurities available-for-sale having a carrying value of $291.4$30.9 million and $22.7 million as of September 30, 2017, 2021, and $649.1 million as of December 31, 2016,2020, respectively, were pledged to secure public deposits, other borrowings, treasury tax and loan, and securities sold under agreements to repurchase. loan.

 

88. 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.

 

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Table of Contents

The types of loans in the Company’s condensed consolidated balance sheetsConsolidated Balance Sheets as of September 30, 2017, 2021 and December 31, 2016, 2020, were as follows:

 

 

September 30, 2021

  

December 31, 2020

 
 

September 30, 2017

  

December 31, 2016

  

(In thousands)

 
 

(In thousands)

  

Commercial loans

 $2,419,891  $2,248,187  $2,871,693  $2,836,833 

Residential mortgage loans

  2,922,537   2,444,048  4,144,789  4,145,389 

Commercial mortgage loans

  6,377,047   5,785,248  7,835,528  7,555,027 

Real estate construction loans

  691,486   548,088  688,195  679,492 

Equity lines

  181,751   171,711  433,206  424,555 

Installment & other loans

  4,722   3,993 

Installment and other loans

  3,370   3,100 

Gross loans

 $12,597,434  $11,201,275  $15,976,781  $15,644,396 

Allowance for loan losses

  (121,535)  (118,966) (131,945) (166,538)

Unamortized deferred loan fees

  (3,424)  (4,994)

Unamortized deferred loan fees, net

  (3,835)  (2,494)

Total loans, net

 $12,472,475  $11,077,315  $15,841,001  $15,475,364 

Loans held for sale

 $-  $7,500 

 

 

AsAs of September 30, 2017, 2021, recorded investment in non-accrual loans was $68.7 million. As of December 31, 2020, recorded investment in impaired loans totaled $127.7$95.4 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 $62.4 million. As of December 31, 2016, recorded investment in impaired loans totaled $115.1 million and was comprised of non-accrual loans, excluding loans held for sale, of $49.7$67.7 million and accruing TDRs of $65.4$27.7 million. For non-accrual loans, the amounts previously charged off represent 10.6% of the contractual balances for non-accrual loans as of September 30, 2021. For impaired loans, the amounts previously charged off represent 7.1% as of September 30, 2017, and 8.4% as of December 31, 2016, of the contractual balances for impaired loans.loans as of December 31, 2020.

 

The following table presents the average balancerecorded investment and interest income recognized related to impairedon non-accrual loans for the periodsperiod indicated:

 

 

Impaired Loans

 
 

Average Recorded Investment

  

Interest Income Recognized

  

Three Months Ended

  

Nine Months Ended

 
 

Three months ended

  

Nine months ended

  

Three months ended

  

Nine months ended

  

September 30, 2021

  

September 30, 2021

 
 

September 30,

  

September 30,

  

September 30,

  

September 30,

  

Average

Recorded

Investment

  

Interest Income

Recognized

  

Average

Recorded

Investment

  

Interest Income

Recognized

 
 

2017

  

2016

  

2017

  

2016

  

2017

  

2016

  

2017

  

2016

  

(In thousands)

 
         (In thousands)                  

Commercial loans

 $24,987  $28,091  $22,572  $18,602  $678  $170  $760  $488  $16,379  $0  $22,989  $0 

Real estate construction loans

  29,780   5,869   29,868   12,005   99   66   287   196  4,548  50  4,310  220 

Commercial mortgage loans

  58,555   81,005   60,074   86,456   391   776   1,015   2,124  37,017  140  37,964  297 

Residential mortgage loans and equity lines

  13,937   18,256   15,208   17,456   96   148   287   401   9,831   7   8,976   23 

Total impaired loans

 $127,259  $133,221  $127,722  $134,519  $1,264  $1,160  $2,349  $3,209 

Total non-accrual loans

 $67,775  $197  $74,239  $540 

 

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In connection with the adoption of ASU 2016-13, the Company no longer provides information on impaired loans. The following table presents the average recorded investment and interest income recognized on individually evaluated loans for the period indicated:

  

Three Months Ended

  

Nine Months Ended

 
  

September 30, 2020

  

September 30, 2020

 
  

Average

Recorded

Investment

  

Interest Income

Recognized

  

Average

Recorded

Investment

  

Interest Income

Recognized

 
  

(In thousands)

 
                 

Commercial loans

 $30,346  $148  $30,723  $242 

Real estate construction loans

  4,368   98   4,444   245 

Commercial mortgage loans

  40,708   268   37,730   966 

Residential mortgage loans and equity lines

  16,609   74   15,240   200 

Total impaired loans

 $92,031  $588  $88,137  $1,653 

 

The following table presentspresents non-accrual loans and the related allowance as of September 30, 2021:

  

September 30, 2021

 
  

Unpaid

Principal

Balance

  

Recorded

Investment

  

Allowance

 
  

(In thousands)

 
             

With no allocated allowance

            

Commercial loans

 $13,897  $10,442  $— 

Real estate construction loans

  7,201   5,491   — 

Commercial mortgage loans

  19,356   18,407   — 

Residential mortgage loans and equity lines

  6,989   6,813   — 

Subtotal

 $47,443  $41,153  $— 
             

With allocated allowance

            

Commercial loans

 $16,739  $6,656  $1,301 

Commercial mortgage loans

  18,664   18,561   5,229 

Residential mortgage loans and equity lines

  2,892   2,312   0 

Subtotal

 $38,295  $27,529  $6,530 

Total non-accrual loans

 $85,738  $68,682  $6,530 

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Table of Contents

In connection with the adoption of ASU 2016-13, the Company no longer provides information on impaired loans. The following table presents impaired loans and the related allowance for loan losses as of the dates indicated:December 31, 2020:

 

  

Impaired Loans

 
  

September 30, 2017

  

December 31, 2016

 
                   
  

Unpaid

Principal

Balance

  

Recorded Investment

  

Allowance

  

Unpaid

Principal

Balance

  

Recorded Investment

  

Allowance

 
  

(In thousands)

 
                         

With no allocated allowance

                        

Commercial loans

 $23,953  $23,373  $-  $24,037  $23,121  $- 

Real estate construction loans

  22,309   21,748   -   5,776   5,458   - 

Commercial mortgage loans

  39,154   32,370   -   60,522   54,453   - 

Residential mortgage loans and equity lines

  2,264   2,264   -   5,472   5,310   - 

Subtotal

 $87,680  $79,755  $-  $95,807  $88,342  $- 

With allocated allowance

                        

Commercial loans

 $14,082  $13,985  $1,461  $5,216  $4,640  $1,827 

Commercial mortgage loans

  23,061   22,820   823   10,158   10,017   573 

Residential mortgage loans and equity lines

  12,461   11,111   322   13,263   12,075   396 

Subtotal

 $49,604  $47,916  $2,606  $28,637  $26,732  $2,796 

Total impaired loans

 $137,284  $127,671  $2,606  $124,444  $115,074  $2,796 

  

December 31, 2020

 
  

Unpaid

Principal

Balance

  

Recorded

Investment

  

Allowance

 
  

(In thousands)

 
             

With no allocated allowance

            

Commercial loans

 $23,784  $20,698  $— 

Real estate construction loans

  5,776   4,286   — 

Commercial mortgage loans

  22,877   22,287   — 

Residential mortgage loans and equity lines

  6,379   6,307   — 

Subtotal

 $58,816  $53,578  $— 
             

With allocated allowance

            

Commercial loans

 $13,703  $6,372  $1,030 

Commercial mortgage loans

  31,134   31,003   5,254 

Residential mortgage loans and equity lines

  5,005   4,452   145 

Subtotal

 $49,842  $41,827  $6,429 

Total impaired loans

 $108,658  $95,405  $6,429 

 

The following tablestables present the aging of the loan portfolio by type as of September 30, 2017, 2021, and as of December 31, 2016:2020:

 

 

September 30, 2017

  

September 30, 2021

 
 

30-59 Days

Past Due

  

60-89 Days

Past Due

  

90 Days or More Past

Due

  

Non-accrual Loans

  

Total

Past Due

  

Loans Not

Past Due

  

Total

  

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)

 
 

(In thousands)

 
 

Commercial loans

 $8,412  $14,855  $3,900  $15,942  $43,109  $2,376,782  $2,419,891  $15,391  $2,326  $2,861  $17,098  $37,676  $2,834,017  $2,871,693 

Real estate construction loans

  -   -   -   14,267   14,267   677,219   691,486  0  0  0  5,491  5,491  682,704  688,195 

Commercial mortgage loans

  -   -   -   28,379   28,379   6,348,668   6,377,047  458  0  1,472  36,968  38,898  7,796,630  7,835,528 

Residential mortgage loans and equity lines

  -   89   -   6,725   6,814   3,097,474   3,104,288  0  2,451  0  9,125  11,576  4,566,419  4,577,995 

Installment and other loans

  -   -   -   -   -   4,722   4,722   8   0   0   0   8   3,362   3,370 

Total loans

 $8,412  $14,944  $3,900  $65,313  $92,569  $12,504,865  $12,597,434  $15,857  $4,777  $4,333  $68,682  $93,649  $15,883,132  $15,976,781 

 

  

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, 2020

 
  

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)

 
                             

Commercial loans

 $52,601  $3,182  $2,947  $23,087  $81,817  $2,755,016  $2,836,833 

Real estate construction loans

  6,257   0   0   4,286   10,543   668,949   679,492 

Commercial mortgage loans

  45,186   18,069   2,035   33,715   99,005   7,456,022   7,555,027 

Residential mortgage loans and equity lines

  14,315   4,223   0   6,596   25,134   4,544,810   4,569,944 

Installment and other loans

  43   0   0   0   43   3,057   3,100 

Total loans

 $118,402  $25,474  $4,982  $67,684  $216,542  $15,427,854  $15,644,396 

 

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’sborrower'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’sBank'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.

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Table of Contents

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 the “Basis of Presentation and Summary of Significant Accounting Policies” above, 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 ofSeptember 30, 2017, 2021, accruing TDRs were $62.4$24.4 million and non-accrual TDRs were $33.7$8.3 million compared to accruing TDRs of $65.4$27.7 million and non-accrual TDRs of $29.7$9.0 million as of December 31, 2016. 2020. The Company allocated specific$181 thousand in reserves of $1.1 million to accruing TDRs and $143,000$24 thousand to non-accrual TDRs as of September 30, 2017, and $1.3 million2021, compared to $122 thousand to accruing TDRs and $1.1 million$24 thousand to non-accrual TDRs as of December 31, 2016. 2020. The following tables presentset forth TDRs that were modified during the three and nine months ended September 30, 2017 2021 and 2016,2020, their specific reserves as of September 30, 2017 2021, and 2016,2020, and charge-offs for the three and nine months ended September 30, 2017 2021, and 2016:2020:

 

  

Three 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

  8  $18,873  $18,873  $-  $636 

Commercial mortgage loans

  5   4,123   3,818   305   10 

Residential mortgage loans and equity lines

  1   483   483   -   32 

Total

  14  $23,479  $23,174  $305  $678 

 

Three months ended September 30, 2016

  

September 30, 2016

  

Three Months Ended September 30, 2021

  

September 30, 2021

 
 

No. of Contracts

  

Pre-Modification Outstanding Recorded Investment

  

Post-Modification Outstanding Recorded Investment

  

Charge-offs

  

Specific Reserve

  

No. of

Contracts

  

Pre-Modification

Outstanding

Recorded

Investment

  

Post-Modification

Outstanding

Recorded

Investment

  

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

  1   479   479   0   14 

Total

  8  $18,996  $18,996  $-  $208   1  $479  $479  $0  $14 

 

19
25
Table of Contents
 
  

Three Months Ended September 30, 2020

  

September 30, 2020

 
  

No. of

Contracts

  

Pre-Modification

Outstanding

Recorded

Investment

  

Post-Modification

Outstanding

Recorded

Investment

  

Charge-offs

  

Specific Reserve

 
  

(In thousands)

 
                     

Commercial loans

  2  $2,983  $2,983  $0  $203 

Residential mortgage loans and equity lines

  0   0   0   0   0 

Total

  2  $2,983  $2,983  $0  $203 

 

 

Nine months ended September 30, 2017

  

September 30, 2017

  

Nine Months Ended September 30, 2021

  

September 30, 2021

 
 

No. of Contracts

  

Pre-Modification Outstanding Recorded Investment

  

Post-Modification Outstanding Recorded Investment

  

Charge-offs

  

Specific Reserve

  

No. of

Contracts

  

Pre-Modification

Outstanding

Recorded

Investment

  

Post-Modification

Outstanding

Recorded

Investment

  

Charge-offs

  

Specific Reserve

 
 

(Dollars in thousands)

  

(In thousands)

 
                               

Commercial loans

  13  $19,543  $19,543  $-  $641  1  $686  $686  $0  $0 

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   1   479   479   0  14 

Total

  21  $52,638  $52,333  $305  $683   2  $1,165  $1,165  $0  $14 

 

 

Nine months ended September 30, 2016

  

September 30, 2016

  

Nine Months Ended September 30, 2020

  

September 30, 2020

 
 

No. of Contracts

  

Pre-Modification Outstanding Recorded Investment

  

Post-Modification Outstanding Recorded Investment

  

Charge-offs

  

Specific Reserve

  

No. of

Contracts

  

Pre-Modification

Outstanding

Recorded

Investment

  

Post-Modification

Outstanding

Recorded

Investment

  

Charge-offs

  

Specific Reserve

 
 

(Dollars in thousands)

  

(In thousands)

 
                               

Commercial loans

  11  $23,102  $23,102  $-  $222  5  $5,417  $5,417  $0  $204 

Commercial mortgage loans

  1   738   738   -   - 

Residential mortgage loans and equity lines

  2   367   367   -   -   0   0   0   0   0 

Total

  14  $24,207  $24,207  $-  $222   5  $5,417  $5,417  $0  $204 

 

Modifications of the loan terms duringin the first nine months of 2017 ended September 30, 2021, 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 September 30, 2017, 2021, 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, however, could increase the risk of such TDRs becoming non-accrual due to the borrowers’ inability to continue to comply with their restructured terms.

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Table of Contents

A summary of TDRs by type of concession and by type of loan, as of September 30, 2017, 2021, and December 31, 2016, 2020, is shownset forth in the table below:

 

  

September 30, 2021

 
  

Payment

Deferral

  

Rate

Reduction

  

Rate Reduction

and Payment

Deferral

  

Total

 
  

(In thousands)

 

Accruing TDRs

                

Commercial loans

 $1,453  $0  $0  $1,453 

Commercial mortgage loans

  441   5,552   13,114   19,107 

Residential mortgage loans

  1,726   251   1,869   3,846 

Total accruing TDRs

 $3,620  $5,803  $14,983  $24,406 

 

 

September 30, 2017

  

September 30, 2021

 

Accruing TDRs

 

Payment

Deferral

  

Rate

Reduction

  

 

Rate Reduction

and Payment Deferral

  

Total

 
 

(In thousands)

  

Payment

Deferral

  

Rate

Reduction

  

Rate Reduction

and Payment

Deferral

  

Total

 
 

(In thousands)

 

Non-accrual TDRs

        

Commercial loans

 $21,416  $-  $-  $21,416  $7,784  $0  $0  $7,784 

Real estate construction loans

  7,480   -   -   7,480 

Commercial mortgage loans

  16,130   5,895   4,787   26,812  0  0  0  0 

Residential mortgage loans

  3,516   337   2,797   6,650   500   0   0   500 

Total accruing TDRs

 $48,542  $6,232  $7,584  $62,358 

Total non-accrual TDRs

 $8,284  $0  $0  $8,284 

 

  

December 31, 2020

 
  

Payment

Deferral

  

Rate

Reduction

  

Rate Reduction

and Payment

Deferral

  

Total

 
  

(In thousands)

 

Accruing TDRs

                

Commercial loans

 $3,983  $0  $0  $3,983 

Commercial mortgage loans

  515   5,635   13,425   19,575 

Residential mortgage loans

  1,724   275   2,164   4,163 

Total accruing TDRs

 $6,222  $5,910  $15,589  $27,721 

 

 

December 31, 2020

 
 

Payment

Deferral

  

Rate

Reduction

  

Rate Reduction

and Payment

Deferral

  

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  $8,462  $0  $0  $8,462 

Commercial mortgage loans

  1,347   1,706   16,508   19,561 

Residential mortgage loans

  714   -   157   871   523   0   0   523 

Total non-accrual TDRs

 $15,320  $1,706  $16,665  $33,691  $8,985  $0  $0  $8,985 

 

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Table of Contents

  

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 TDRsTDRs for the periods indicated is shownset forth below:

 

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 
  

2021

  

2020

  

2021

  

2020

 
  

(In thousands)

 

Accruing TDRs

                

Beginning balance

 $27,261  $31,671  $27,721  $35,336 

New restructurings

  (208)  2,983   479   5,417 

Restructured loans restored to accrual status

  0   263   0   263 

Charge-offs

  0   0   0   0 

Payments

  (2,406)  (6,330)  (3,553)  (12,429)

Restructured loans placed on non-accrual status

  (241)  0   (241)  0 

Ending balance

 $24,406  $28,587  $24,406  $28,587 

 

 

Three months ended September 30,

  

Nine months ended September 30,

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 

Accruing TDRs

 

2017

  

2016

  

2017

  

2016

 
 

(In thousands)

  

2021

  

2020

  

2021

  

2020

 
 

(In thousands)

 

Non-accrual TDRs

        

Beginning balance

 $79,819  $74,708  $65,393  $81,680  $8,402  $12,670  $8,985  $18,048 

New restructurings

  21,790   18,347   49,973   20,412  0  0  0  0 

Restructured loans placed on non-accrual status

 234  0  241  0 

Charge-offs

 0  0  0  (4,970)
Payments (352) (2,488) (710) (2,896)

Restructured loans restored to accrual status

  -   -   -   10,303   0   (263)  (232)  (263)

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  $8,284  $9,919  $8,284  $9,919 

 

  

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 

 

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 and which had subsequently defaulted as of September 30, 2017.2021.

 

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 September 30, 2017, 2021, there were no 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.

 

21
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Table of Contents

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.

 

In connection with the adoption of ASU 2016-13, the Company no longer provides information on impaired loans. The following tables present the presents loan portfolio by risk rating as of September 30, 2017, and as of December 31, 2016:2020:

 

  

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

  

December 31, 2020

 
 

Pass/Watch

  

Special Mention

  

Substandard

  

Doubtful

  

Total

  

Pass/Watch

  

 

Special

Mention

  

Substandard

  

Doubtful

  

Total

 
 

(In thousands)

  

(In thousands)

 

Commercial loans

 $2,023,114  $140,682  $84,293  $98  $2,248,187  $2,581,128  $141,344  $108,788  $5,573  $2,836,833 

Real estate construction loans

  469,909   44,129   34,050   -   548,088  593,196  82,010  4,286  0  679,492 

Commercial mortgage loans

  5,410,623   250,221   124,404   -   5,785,248  7,202,568  186,283  166,176  0  7,555,027 

Residential mortgage loans and equity lines

  2,605,834   -   9,925   -   2,615,759  4,547,052  11,647  11,245  0  4,569,944 

Installment and other loans

  3,993   -   -   -   3,993   3,100   0   0   0   3,100 

Total gross loans

 $10,513,473  $435,032  $252,672  $98  $11,201,275  $14,927,044  $421,284  $290,495  $5,573  $15,644,396 
                    

Loans held for sale

 $-  $-  $7,500  $-  $7,500 

 

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The allowancefollowing table summarizes the Company’s loan held for loan losses and the reserve for off-balance sheet credit commitments are significant estimates that can and do change based on management’s process in analyzing theinvestment by loan portfolio segments, internal risk ratings and on management’s assumptions about specific borrowers, underlying collateral, and applicable economic and environmental conditions, among other factors.vintage year. The vintage year is the year of origination, renewal or major modification:

  

Loans Amortized Cost Basis by Origination Year

             

September 30, 2021

 

2021

  

2020

  

2019

  

2018

  

2017

  

Prior

  

Revolving

Loans

  

Revolving

Converted to

Term Loans

  

Total

 
  

(In thousands)

 

Commercial loans

                                    

Pass/Watch

 $552,079  $309,944  $245,936  $188,790  $87,579  $69,354  $1,266,946  $7,650  $2,728,278 

Special Mention

  93   570   4,506   1,703   2,871   0   22,073   89   31,905 

Substandard

  31   6,286   21,896   16,829   13,077   5,319   39,457   6,089   108,984 

Doubtful

  0   0   0   0   0   0   901   0   901 

Loss

  0   0   0   0   0   0   0   0   0 

Total

 $552,203  $316,800  $272,338  $207,322  $103,527  $74,673  $1,329,377  $13,828  $2,870,068 

YTD period charge-offs

 $0  $927  $507  $366  $0  $50  $17,649  $0  $19,499 

YTD period recoveries

  0   0   0   (75)  0   (169)  (1,301)  0   (1,545)

Net

 $0  $927  $507  $291  $0  $(119) $16,348  $0  $17,954 

Real estate construction loans

                                    

Pass/Watch

 $160,357  $213,737  $152,626  $64,908  $30,272  $0  $0  $0  $621,900 

Special Mention

  4,772   22,233   11,800   17,306   0   0   0   0   56,111 

Substandard

  0   0   3,344   0   0   4,066   0   0   7,410 

Doubtful

  0   0   0   0   0   0   0   0   0 

Loss

  0   0   0   0   0   0   0   0   0 

Total

 $165,129  $235,970  $167,770  $82,214  $30,272  $4,066  $0  $0  $685,421 

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

 $1,256,784  $1,266,048  $1,284,803  $1,089,005  $813,707  $1,473,901  $177,509  $0  $7,361,757 

Special Mention

  18,826   52,416   45,281   104,703   42,329   82,614   2,499   0   348,668 

Substandard

  1,116   235   10,906   46,149   1,590   62,095   856   0   122,947 

Doubtful

  0   0   0   0   0   0   0   0   0 

Loss

  0   0   0   0   0   0   0   0   0 

Total

 $1,276,726  $1,318,699  $1,340,990  $1,239,857  $857,626  $1,618,610  $180,864  $0  $7,833,372 

YTD period charge-offs

 $0  $0  $0  $0  $0  $0  $0  $0  $0 

YTD period recoveries

  0   0   (180)  0   0   (21)  (83)  0   (284)

Net

 $0  $0  $(180) $0  $0  $(21) $(83) $0  $(284)

Residential mortgage loans

                                    

Pass/Watch

 $722,013  $663,292  $731,803  $544,362  $474,271  $992,504  $0  $0  $4,128,245 

Special Mention

  0   140   4,369   1,448   839   589   0   0   7,385 

Substandard

  479   167   1,921   2,520   1,167   4,466   0   0   10,720 

Doubtful

  0   0   0   0   0   0   0   0   0 

Loss

  0   0   0   0   0   0   0   0   0 

Total

 $722,492  $663,599  $738,093  $548,330  $476,277  $997,559  $0  $0  $4,146,350 

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  $7  $400,991  $31,677  $432,675 

Special Mention

  0   0   0   0   0   0   0   0   0 

Substandard

  0   0   0   0   0   0   1,240   450   1,690 

Doubtful

  0   0   0   0   0   0   0   0   0 

Loss

  0   0   0   0   0   0   0   0   0 

Total

 $0  $0  $0  $0  $0  $7  $402,231  $32,127  $434,365 

YTD period charge-offs

 $0  $0  $0  $0  $0  $0  $0  $0  $0 

YTD period recoveries

  0   0   0   0   0   0   (8)  (58)  (66)

Net

 $0  $0  $0  $0  $0  $0  $(8) $(58) $(66)

Installment and other loans

                                    

Pass/Watch

 $2,120  $1,250  $0  $0  $0  $0  $0  $0  $3,370 

Special Mention

  0   0   0   0   0   0   0   0   0 

Substandard

  0   0   0   0   0   0   0   0   0 

Doubtful

  0   0   0   0   0   0   0   0   0 

Loss

  0   0   0   0   0   0   0   0   0 

Total

 $2,120  $1,250  $0  $0  $0  $0  $0  $0  $3,370 

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

 $2,718,670  $2,536,318  $2,519,191  $2,077,723  $1,467,702  $2,694,915  $1,912,472  $45,955  $15,972,946 

Net charge-offs/(recoveries)

 $0  $927  $327  $291  $3  $(424) $16,257  $(58) $17,323 

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Table of Contents

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

 

The following table presentssets forth the balance in the allowance for loan losses by portfolio segment and based on impairment method as of September 30, 2017, and as of December 31, 2016:2020. This table is no longer presented after December 31, 2020, given the adoption of ASU 2016-13, which has a single impairment methodology.

 

      

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 

  

December 31, 2020

 
      

Real Estate

  

Commercial

  

Residential

  

Installment

     
  

Commercial

  

Construction

  

Mortgage

  

Mortgage Loans

  

and

     
  

Loans

  

Loans

  

Loans

  

and Equity Lines

  

Other Loans

  

Total

 
  

(In thousands)

 

Loans individually evaluated for impairment

                     

Allowance

 $1,030  $0  $5,254  $145  $0  $6,429 

Balance

 $27,070  $4,286  $53,289  $10,760  $0  $95,405 

Loans collectively evaluated for impairment

                     

Allowance

 $67,712  $30,854  $43,951  $17,592  $0  $160,109 

Balance

 $2,809,763  $675,206  $7,501,738  $4,559,184  $3,100  $15,548,991 

Total allowance

 $68,742  $30,854  $49,205  $17,737  $0  $166,538 

Total balance

 $2,836,833  $679,492  $7,555,027  $4,569,944  $3,100  $15,644,396 

 

The following tables detailtables set forth activity in the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2017, 2021, and September 30, 2016. 2020. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

 

Three months ended September 30, 2021 and 2020

                     
              

Residential

         
      

Real Estate

  

Commercial

  

Mortgage Loans

  

Installment

     
  

Commercial

  

Construction

  

Mortgage

  

and

  

and Other

     
  

Loans

  

Loans

  

Loans

  

Equity Lines

  

Loans

  

Total

 
  

(In thousands)

 
                         

June 30, 2021 Ending Balance

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

Provision/(reversal) for possible credit losses

  674   149   2,786   (609)  0   3,000 

Charge-offs

  (2,649)  0   0   (3)  0   (2,652)

Recoveries

  121   76   144   0   0   341 

Net (charge-offs)/recoveries

  (2,528)  76   144   (3)  0   (2,311)

September 30, 2021 Ending Balance

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

Allowance for unfunded credit commitments June 30, 2021

 $4,388  $3,581  $81  $0  $0  $8,050 

Provision/(reversal) for possible credit losses

  329   (396)  117   0   0   50 

Allowance for unfunded credit commitments September 30, 2021

 $4,717  $3,185  $198  $0  $0  $8,100 

 

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)

 
                         

June 30, 2020 Ending Balance

 $82,256  $26,700  $41,132  $19,592  $0  $169,680 

Provision/(reversal) for possible credit losses

  298   6,012   5,438   752   0   12,500 

Charge-offs

  (6,956)  0   0   0   0   (6,956)

Recoveries

  3,796   0   95   15   0   3,906 

Net (charge-offs)/recoveries

  (3,160)  0   95   15   0   (3,050)

September 30, 2020 Ending Balance

 $79,394  $32,712  $46,665  $20,359  $0  $179,130 

 

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Nine months ended September 30, 2021 and 2020

                        
              

Residential

         
      

Real Estate

  

Commercial

  

Mortgage Loans

  

Installment

     
  

Commercial

  

Construction

  

Mortgage

  

and

  

and Other

     
  

Loans

  

Loans

  

Loans

  

Equity Lines

  

Loans

  

Total

 
  

(In thousands)

 
                         

2021 Beginning 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)

Allowance for loan losses, January 1, 2021

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

Provision/(reversal) for possible credit losses

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

Charge-offs

  (19,499)  0   0   (3)  0   (19,502)

Recoveries

  1,545   76   284   274   0   2,179 

Net (charge-offs)/recoveries

  (17,954)  76   284   271   0   (17,323)

September 30, 2021 Ending Balance

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

Allowance for unfunded credit commitments December 31, 2020

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

Impact of ASU 2016-13 adoption

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

Allowance for loan losses, January 1, 2021

  8,038   3,825   35   0   0   11,898 

Provision/(reversal) for possible credit losses

  (3,321)  (640)  163   0   0   (3,798)

Allowance for unfunded credit commitments September 30, 2021

 $4,717  $3,185  $198  $0  $0  $8,100 

              

Residential

         
      

Real Estate

  

Commercial

  

Mortgage Loans

  

Installment

     
  

Commercial

  

Construction

  

Mortgage

  

and

  

and Other

     
  

Loans

  

Loans

  

Loans

  

Equity Lines

  

Loans

  

Total

 
  

(In thousands)

 
                         

2020 Beginning Balance

 $57,021  $19,474  $33,602  $13,108  $19  $123,224 

Provision/(reversal) for possible credit losses

  29,402   13,238   12,718   7,161   (19)  62,500 

Charge-offs

  (13,383)  0   0   0   0   (13,383)

Recoveries

  6,354   0   345   90   0   6,789 

Net (charge-offs)/recoveries

  (7,029)  0   345   90   0   (6,594)

September 30, 2020 Ending Balance

 $79,394  $32,712  $46,665  $20,359  $0  $179,130 

Reserve for impaired loans

 $7,704  $0  $582  $209  $0  $8,495 

Reserve for non-impaired loans

 $71,690  $32,712  $46,083  $20,150  $0  $170,635 

Reserve for off-balance sheet credit commitments

 $4,297  $896  $172  $294  $4  $5,663 

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The U. S. economy has gradually recovered from the COVID-19 pandemic with improving gross national product and a declining unemployment rate in the first half of 2021. This contributed to a positive economic outlook and forecasts that resulted in a decrease to the allowance for credit losses.

 

Despite the gradual recovery in the first half of 2021,the ongoing COVID-19 pandemic has caused significant disruption in the United States and international economies and financial markets. Although banks have generally been permitted to continue operating, the COVID-19 pandemic has caused disruptions to our business and could cause material disruptions to our business and operations in the future. The Company has continued its efforts to support its customers affected by the pandemic and to maintain asset quality and balance sheet strength, including the following:

•

The Company has provided loans through the SBA's Paycheck Protection Program, (or “PPP”). As of September 30, 2021, 1,514 PPP loans with a current balance of $169.4 million were outstanding and an additional $264.4 million have been forgiven by the U.S. Government. These loans do not carry an allowance for loan losses.

•

The Company has outstanding COVID-19 modifications on approximately 6 CRE loans totaling $44.8 million as of September 30, 2021, which represented 0.6% of the Bank’s CRE loans and 3 commercial loans, totaling $2.8 million, which represented 0.1% of the total commercial loans.

•

As of September 30, 2021, there were seven COVID-19 residential mortgage loan modifications outstanding, or $5.1 million, that represented 0.1% of the total residential mortgage portfolio.

9.9. Commitments and Contingencies

The Company is involved in various

From 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.

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The Company’s unfunded commitments related to investments in qualified affordable housing and alternative energy partnerships were $119.0 million and $103.1 million as of September 30, 2021, and December 31, 2020, respectively.

10. Leases

 

The Company determines if a contract arrangement is a lease at inception and primarily enters into operating lease contracts for its branch locations, office space and certain equipment. As part of its property lease agreements, the Company may seek to include options to extend or terminate a lease when it is reasonably certain that the Company will exercise those options. The Right-of-Use (“ROU”) lease asset also includes any lease payments made and lease incentives. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company does not possess any leases that have variable lease payments or residual value guarantees as of September 30, 2021.

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ASU 2016-02, “Leases (Topic 842),” as amended by ASU No.2018-01, “Land Easement Practical Expedient for Transition to Topic 842”; ASU No.2018-10, “Codification Improvements to Topic 842, Leases”; and ASU No.2018-11, “Targeted Improvements,” establishes a ROU model that requires a lessee to recognize an ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. The standard provides a number of optional practical expedients in transition. We have elected the “package of practical expedients,” which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. We also elected all of the new standard’s available transition practical expedients, including the short-term lease recognition exemption that includes not recognizing ROU assets or lease liabilities for existing short-term leases, and the practical expedient to not separate lease and non-lease components for all of our leases.The Company uses its incremental borrowing rate to determine the present value of its lease liabilities.

The following table presents the operating lease amounts reported on the Consolidated Balance Sheets, and other supplemental information as of September 30, 2021 and December 31, 2020:

  

September 30, 2021

  

December 31, 2020

 
  

(In millions)

 

Operating Leases:

        

ROU assets

 $29.2  $30.9 

Lease liabilities

 $32.0  $33.5 
         

Weighted-average remaining lease term (in years)

  4.5   4.7 

Weighted-average discount rate

  2.62

%

  2.77

%

Operating lease expense was $3.2 million and $3.1 million for the three months ended September 30, 2021 and 2020, respectively, and includes short-term leases that were immaterial. Operating lease expense was $9.5 million and $8.8 million for the nine months ended September 30, 2021 and September 30, 2020, respectively, and includes short-term leases that were immaterial. Operating cash flows from operating leases were $2.5 million and $2.2 million for the three months ended September 30, 2021 and 2020, respectively. Operating cash flows from operating leases were $7.4 million and $6.8 million for the nine months ended September 30, 2021 and 2020, respectively. In the nine months ended September 30, 2021 the Company recognized an ROU asset impairment of $187 thousand related to an early termination of a lease agreement. This amount was included in other expenses in the Consolidated Statement of Operations and Comprehensive Income.

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The following table presents a maturity analysis of the Company’s operating lease liabilities as of September 30, 2021, and December 31, 2020, respectively.

  

As of September 30, 2021

 
  

Operating Leases

 
  

(In thousands)

 

Remaining 2021

 $2,374 

2022

  9,432 

2023

  7,996 

2024

  5,565 

2025

  3,307 

Thereafter

  5,352 

Total lease payments

  34,026 

Less amount of payment representing interest

  (1,998)

Total present value of lease payments

 $32,028 

  

As of December 31, 2020

 
  

Operating Leases

 
  

(In thousands)

 

2021

 $9,384 

2022

  8,335 

2023

  6,890 

2024

  4,635 

2025

  2,520 

Thereafter

  4,153 

Total lease payments

  35,917 

Less amount of payment representing interest

  (2,433)

Total present value of lease payments

 $33,484 

10.11. Borrowed Funds

Borrowings from the Federal Home Loan Bank (“FHLB”) – There were 0 over-night borrowings from the FHLB as of September 30, 2021, and December 31, 2020. Advances from the FHLB were $20.0 million at a weighted average rate of 2.89% as of September 30, 2021, and $150.0 million at a weighted average rate of 2.15% as of December 31, 2020. As of September 30, 2021, FHLB advances of $20.0 million will mature in May 2023.

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 Soldas 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 Agreementsthe 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.

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At September 30, 2021, Junior Subordinated Notes totaled $119.1 million with a weighted average interest rate of 2.36%, 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 2.40% at December 31, 2016. Final2020. 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 quarterfirstnine months of 20172021 was 41.4%21.3% compared to 25.5%8.6% for the third quarterfirstnine months of 2016.2020. 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.

 

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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 September 30, 2017, 2021 and December 31, 2016:2020:

 

September 30, 2017

 

Fair Value Measurements Using

  

Total at

 
 

September 30, 2021

    
 

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  $40,211  $0  $0  $40,211 

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  90,943  0  90,943 

Mortgage-backed securities

  -   446,065   -   446,065  0  805,067  0  805,067 

Collateralized mortgage obligations

  -   1,710   -   1,710  0  9,561  0  9,561 

Corporate debt securities

  -   80,906   -   80,906   0   133,434   0   133,434 

Total securities available-for-sale

  40,211   1,039,005  0   1,079,216 
         

Equity securities

                

Mutual funds

  6,271   -   -   6,271  6,289  0  0  6,289 

Preferred stock of government sponsored entities

  8,087   -   -   8,087  1,493  0  0  1,493 

Other equity securities

  20,659   -   -   20,659   12,335   0   0   12,335 

Total securities available-for-sale

  434,453   934,034   -   1,368,487 

Total equity securities

  20,117  0  0   20,117 
         

Warrants

  -   -   97   97  0  0  22  22 

Interest rate swaps

 0  5,187  0  5,187 

Foreign exchange contracts

  -   1,725   -   1,725   0   1,319   0   1,319 

Interest rate swaps

  -   2,314   -   2,314 

Total assets

 $434,453  $938,073  $97  $1,372,623  $60,328  $1,045,511  $22  $1,105,861 
                         

Liabilities

                                
                

Option contracts

 $-  $234  $-  $234 

Interest rate swaps

 $0  $9,037  $0  $9,037 

Foreign exchange contracts

  -   1,083   -   1,083   0   1,723   0   1,723 

Interest rate swaps

  -   5,049   -   5,049 

Total liabilities

 $-  $6,366  $-  $6,366  $0  $10,760  $0  $10,760 

 

28
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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 
 
  

December 31, 2020

     
  

Fair Value Measurements Using

  

Total Fair Value

 
  

Level 1

  

Level 2

  

Level 3

  

Measurements

 
  

(In thousands)

 

Assets

                

Securities available-for-sale

                

U.S. Treasury securities

 $80,948  $0  $0  $80,948 

U.S. government agency entities

  0   99,839   0   99,839 

Mortgage-backed securities

  0   727,068   0   727,068 

Collateralized mortgage obligations

  0   10,324   0   10,324 

Corporate debt securities

  0   118,371   0   118,371 

Total securities available-for-sale

  80,948   955,602   0   1,036,550 
                 

Equity securities

                

Mutual funds

  6,413   0   0   6,413 

Preferred stock of government sponsored entities

  5,485   0   0   5,485 

Other equity securities

  11,846   0   0   11,846 

Total equity securities

  23,744   0   0   23,744 
                 

Warrants

  0   0   21   21 

Interest rate swaps

  0   3,409   0   3,409 

Foreign exchange contracts

  0   4,658   0   4,658 

Total assets

 $104,692  $963,669  $21  $1,068,382 
                 

Liabilities

                

Interest rate swaps

 $0  $10,286  $0  $10,286 

Foreign exchange contracts

  0   2,200   0   2,200 

Total liabilities

 $0  $12,486  $0  $12,486 

 

 

The CompanyFinancial assets and liabilities measured theat estimated fair value of its warrants on a recurring basis using significant unobservable inputs. Thenon-recurring basis:

Certain assets or liabilities are required to be measured at estimated fair value on a nonrecurring basis subsequent to initial recognition. Generally, these adjustments are the result of warrants was $97,000 aslower-of-cost-or-fair value or other impairment write-downs of individual assets. In determining the estimated fair values during the period, the Company determined that substantially all the changes in estimated fair value were due to declines in market conditions versus instrument specific credit risk. For the periods ended September 30, 2017, compared to $79,000 as of 2021, and December 31, 2016. The2020, 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.

 

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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 September 30, 2017, 2021, 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 September 30, 2017, 2021, and December 31, 2016, 2020, and the total losses for the periods indicated:

 

 

September 30, 2017

      

Total (Gains)/Losses

  

As of September 30, 2021

  

Total Losses

 
 

Fair Value Measurements Using

  

Total at

  

Three Months Ended

  

Nine Months Ended

  

Fair Value Measurements Using

  

Total Fair

  

For the Three Months Ended

  

For the Nine 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

  

Value Measurements

  

September 30, 2021

  

September 30, 2020

  

September 30, 2021

  

September 30, 2020

 
 

(In thousands)

  

(In thousands)

 

Assets

                                                                

Impaired loans by type:

                                

Loans held-for-investment:

                                

Commercial loans

 $-  $-  $12,525  $12,525  $-  $-  $25  $-  $0  $0  $5,355  $5,355  $0  $6,950  $2,037  $6,950 

Commercial mortgage loans

  -   -   21,997   21,997   -   -   -   -  0  0  13,332  13,332  0  0  0  0 

Residential mortgage loans and equity lines

  -   -   10,790   10,790   -   -   -   -   0   0   2,277   2,227   0   0   0   0 

Total impaired loans

  -   -   45,312   45,312   -   -   25   - 

Total loans held-for-investment

 0  0  20,964  20,914  0  6,950  2,037  6,950 

Other real estate owned (1)

  -   6,317   4,322   10,639   405   (206)  654   9  0  0  5,497  5,497  (55) 0  (8) 717 

Investments in venture capital and private company stock

  -   -   3,023   3,023   12   187   365   419   0   0   1,007   1,007   8   3   143   107 

Total assets

 $-  $6,317  $52,657  $58,974  $417  $(19) $1,044  $428  $0  $0  $27,468  $27,418  $(47) $6,953  $2,172  $7,774 

 

(1)(1) Other real estate owned balance of $18.1$5.3 million in the condensed consolidated balance sheetConsolidated Balance Sheets is net of estimated disposal costs.

 

 

December 31, 2016

  

Total Losses

  

As of December 31, 2020

 
 

Fair Value Measurements Using

  

Total at

  

Twelve Months Ended

  

Fair Value Measurements Using

  

Total Fair Value

 
 

Level 1

  

Level 2

  

Level 3

  

Fair Value

  

December 31, 2016

  

December 31, 2015

  

Level 1

  

Level 2

  

Level 3

  

Measurements

 
 

(In thousands)

  

(In thousands)

 

Assets

                                        
             

Impaired loans by type:

                                        

Commercial loans

 $-  $-  $2,813  $2,813  $322  $806  $0  $0  $5,342  $5,342 

Commercial mortgage loans

  -   -   9,444   9,444   -   598  0  0  25,749  25,749 

Residential mortgage loans and equity lines

  -   -   11,679   11,679   -   146   0   0   4,307   4,307 

Total impaired loans

  -   -   23,936   23,936   322   1,550  0  0  35,398  35,398 

Other real estate owned (1)

  -   6,006   4,372   10,378   9   404  0  0  5,141  5,141 

Investments in venture capital and private company stock

  -   -   3,667   3,667   976   553   0   0   1,381   1,381 

Total assets

 $-  $6,006  $31,975  $37,981  $1,307  $2,507  $0  $0  $41,920  $41,920 

 

(1)(1) Other real estate owned balance of $20.1$4.9 million in the condensed consolidated balance sheetConsolidated Balance Sheets is net of estimated disposal costs.

 

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 adjustments0.18% 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,1.16%, and certain money market deposits was assumedstock volatility from 14.86% 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”)20.34%.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.

 

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The following table presentssets forth the carrying and notional amounts and estimated fair value of financial instruments as of September 30, 2017, 2021, and as of December 31, 2016:2020:

 

 

September 30, 2017

  

December 31, 2016

  

September 30, 2021

  

December 31, 2020

 
 

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  $156,287  $156,287  $138,616  $138,616 

Short-term investments

  573,059   573,059   967,067   967,067  1,667,875  1,667,875  1,282,462  1,282,462 

Securities available-for-sale

  1,368,487   1,368,487   1,314,345   1,314,345  1,079,216  1,079,216  1,036,550  1,036,550 

Loans held for sale

  -   -   7,500   7,500 

Loans, net

  12,472,475   12,403,100   11,077,315   11,006,344  15,976,781  16,301,993  15,475,364  16,103,471 

Equity securities

 20,117  20,117  23,744  23,744 

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  22  22  21  21 

 

 

Notional

      

Notional

      

Notional

     

Notional

    
 

Amount

  

Fair Value

  

Amount

  

Fair Value

  

Amount

  

Fair Value

  

Amount

  

Fair Value

 

Foreign exchange contracts

 $69,278  $1,725  $82,439  $1,302  $161,535  $1,319  $151,244  $4,658 

Interest rate swaps

  155,671   2,314   361,526   938  664,288  5,187  96,889  3,409 

 

 

Carrying

      

Carrying

      

Carrying

     

Carrying

    
 

Amount

  

Fair Value

  

Amount

  

Fair Value

  

Amount

 

Fair Value

 

Amount

 

Fair Value

 

Financial Liabilities

                        

Deposits

 $12,561,695  $12,573,127  $11,674,726  $11,680,017  $17,006,870  $17,007,694  $16,109,401  $16,125,808 

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  20,000  20,856  150,000  155,133 

Other borrowings

  153,574   151,643   17,662   15,944  23,197  19,164  23,714  19,632 

Long-term debt

  119,136   68,056   119,136   63,169  119,136  62,274  119,136  65,487 

 

 

Notional

      

Notional

      

Notional

     

Notional

    
 

Amount

  

Fair Value

  

Amount

  

Fair Value

  

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  $70,184  $1,723  $132,813  $2,200 

Interest rate swaps

  510,841   5,049   119,136   3,744  788,802  9,037  679,648  10,286 

 

 

Notional

      

Notional

      

Notional

     

Notional

    
 

Amount

  

Fair Value

  

Amount

  

Fair Value

  

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) $3,255,421  $(11,020) $2,977,528  $(8,432)

Standby letters of credit

  140,682   (1,699)  75,396   (668) 248,958  (2,172) 234,200  (1,630)

Other letters of credit

  41,868   (218)  37,283   (16) 25,205  (15) 16,821  (16)

Bill of lading guarantees

  24   -   75   -  0  0  238  0 

 

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The following tables presenttables set forth the level in the fair value hierarchy for the estimated fair values of financial instruments as of September 30, 2017, 2021, and December 31, 2016.2020.

 

 

September 30, 2017

  

As of September 30, 2021

 
 

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  $-  $-  $156,287  $156,287  $0  $0 

Short-term investments

  573,059   573,059   -   -  1,667,875  1,667,875  0  0 

Securities available-for-sale

  1,368,487   434,453   934,034   -  1,079,216  40,211  1,039,005  0 

Loans held-for-sale

  -   -   -   - 

Loans, net

  12,403,100   -   -   12,403,100  16,301,993  0  0  16,301,993 

Equity securities

 20,117  20,117  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  22  0  0  22 

Financial Liabilities

                        

Deposits

  12,573,127   -   -   12,573,127  17,007,694  0  —  17,007,694 

Securities sold under agreements to repurchase

  100,549   -   100,549   - 

Advances from Federal Home Loan Bank

  595,037   -   595,037   -  20,856  0  20,856  0 

Other borrowings

  151,643   -   -   151,643  19,164  0  0  19,164 

Long-term debt

  68,056   -   68,056   -  62,274  0  62,274  0 

 

  

As of December 31, 2020

 
  

Estimated

             
  

Fair Value

             
  

Measurements

  

Level 1

  

Level 2

  

Level 3

 
  

(In thousands)

 

Financial Assets

                

Cash and due from banks

 $138,616  $138,616  $0  $0 

Short-term investments

  1,282,462   1,282,462   0   0 

Securities available-for-sale

  1,036,550   80,948   955,602   0 

Loans, net

  16,103,471   0   0   16,103,471 

Equity securities

  23,744   23,744   0   0 

Investment in Federal Home Loan Bank stock

  17,250   0   17,250   0 

Warrants

  21   0   0   21 

Financial Liabilities

                

Deposits

  16,125,808   0   0   16,125,808 

Advances from Federal Home Loan Bank

  155,133   0   155,133   0 

Other borrowings

  19,632   0   0   19,632 

Long-term debt

  65,487   0   65,487   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 $372.2 million as of both September 30, 2021 and December 31, 2020. The Company’sCompany’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 completed its annual goodwill impairment testing as of December 31, 2020 and determined there was 0 goodwill impairment.

 

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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.

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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 September 30, 2017,2021, and 2020, 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 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 2016.2021, and December 31, 2020, were as follows:

 

  

September 30, 2021

  

December 31, 2020

 

 

 

(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

  0.15%  0.44%
         

Unrealized loss, net of taxes (1)

 $(4,696) $(6,890)

  

Three months ended

  

Nine months ended

 
  

September 30, 2021

  

September 30, 2020

  

September 30, 2021

  

September 30, 2020

 

Periodic net settlement of swaps (2)

 $754  $702  $2,196  $1,471 

(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, 2021, the Bank has entered intoBank’s outstanding interest rate swap contracts withhad a notional amount of $779.4 million for various terms from fourthree to eightten years. TheseThe Bank entered into these interest rate swap contracts that 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. 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 September 30, 2017, the notional amount of fair value interest rate swaps was $510.6 million 2021, 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, 2017,2020, the ineffective portion of these interest rate swaps was not significant. The notional amount and net unrealized loss of the Company’s fair value derivative financial instruments as of September 30, 2021, and December 31, 2020, were as follows:

 

  

September 30, 2021

  

December 31, 2020

 

 

 

(In thousands)

 
Fair value swap hedges:        

Notional

 $779,392  $478,266 

Weighted average fixed rate-pay

  2.48%  4.56%

Weighted average variable rate spread

  1.22%  2.46%

Weighted average variable rate-receive

  1.31%  3.11%
         

Net unrealized loss (1)

 $(8,255) $(15,082)

  

Three months ended

  

Nine months ended

 
  

September 30, 2021

  

September 30, 2020

  

September 30, 2021

  

September 30, 2020

 

Periodic net settlement of swaps (2)

 $(2,363) $(2,510) $(7,137) $(5,307)

(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 has designated as a partial-term hedging election $404.7 million notional as last-of-layer hedge on pools of loans with a notational value of $816.7 million as of September 30, 2021. 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 $404.7 million portion of $816.7 million fixed rate loan pools in order to reduce the Company’s exposure to higher interest rates for the last-of-layer tranches. As of September 30, 2021, the last-of-layer loan tranche had a fair value basis adjustment of $943 thousand. 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.

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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. Cash posted as collateral by Bancorp related to derivative contracts totaled $6.3$24.3 million as of September 30, 2017.2021 and $11.9 million as of December 31, 2020.

 

TheFrom time to time, the Company enters into foreign exchange forward contracts with various counterparties to mitigate the risk of fluctuations in foreign currency exchange rates for foreign exchange certificates of deposit or foreign exchange contracts entered into with our clients. These contracts are not designated as hedging instruments and are recorded at fair value in our 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, theThe notional amount of option contracts totaled $12.3 million with a net negativeand fair value of $234,000. Asthe Company’s derivative financial instruments not designated as hedging instruments as of September 30, 2017, spot, forward, 2021, 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 million as of September 30, 2017. As of 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 million2020, were as of December 31, 2016.follows:

 

 

 

September 30, 2021

  

December 31, 2020

 

 

 

(In thousands)

 
Derivative financial instruments not designated as hedging instruments:        

Notional amounts:

        

Spot, forward, and swap contracts with positive fair value

 $161,535  $151,244 

Spot, forward, and swap contracts with negative fair value

 $70,184  $132,813 

Fair value:

        

Spot, forward, and swap contracts with positive fair value

 $1,319  $4,658 

Spot, forward, and swap contracts with negative fair value

 $1,723  $(2,200)

45
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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 September 30, 2017, 2021, and December 31, 2016, 2020, 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

Amounts

Recognized

  

Gross Amounts

Offset in the

Balance Sheet

  

Net Amounts

Presented in the

Balance Sheet

  

Financial

Instruments

  

Collateral

Posted

  

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

                        
                        
September 30, 2021             

Assets:

                                                

Derivatives

 $938  $-  $938  $-  $-  $938  $5,187  $—  $5,187  $—  $0  $5,187 
                                     

Liabilities:

                                                

Securities sold under agreements to repurchase

 $350,000  $-  $350,000  $-  $(350,000) $- 

Derivatives

 $3,744  $-  $3,744  $-  $(3,744) $-  $20,107  $(11,067) $9,040  $—  $0  $9,040 
             

December 31, 2020

                        

Assets:

                        

Derivatives

 $3,409  $—  $3,409  $—  $0  $3,409 
             

Liabilities:

                        

Derivatives

 $28,258  $(17,972) $10,286  $—  $0  $10,286 

17. Revenue from Contracts with Customers

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

  

Three months Ended September 30,

  

Nine months Ended September 30,

 
  

2021

  

2020

  

2021

  

2020

 
  

(In thousands)

 

Non-interest income, in-scope:

                

Fees and service charges on deposit accounts

 $2,130  $2,018  $6,386  $5,945 

Wealth management fees

  3,578   2,628   11,074   7,974 

Other service fees(1)

  3,735   3,676   11,109   10,038 

Total noninterest income

  9,443   8,322   28,569   23,957 
                 

Noninterest income, not in-scope(2)

  2,773   1,655   6,230   7,412 

Total noninterest income

 $12,216  $9,977  $34,799  $31,369 

(1)

Other service fees is comprised 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 contracts with customers that are out of the scope of ASC 606.

 

37
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The major revenue streams by fee type that are within the scope of ASC 606 presented in the above table is 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$2.46 billion as of September 30, 2017, 2021, an increase of $140.2$45.1 million, from $1.8$2.42 billion as of December 31, 2016, 2020, primarily due to net income of $150.1$223.0 million, stock-based compensation of $4.1 million, and equity consideration for the acquisitionproceeds from dividend reinvestment of SinoPac Bancorp of $34.9$2.6 million, partially offset by purchases of treasury stock of $100.7 million, common stock cash dividends of $50.5$73.3 million and shares withheld related to net share settlementa decrease in other comprehensive income of RSUs of $5.1$5.7 million.

 

The U.S. Treasury received warrants to purchase common stock

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Table of 1,846,374 shares at an exercise price of $20.96 as part of the Company’s participation in the U.S. Treasury Troubled Asset Relief Program Capital Purchase Program. As a result of the anti-dilution adjustments under the warrant, the exercise price at December 31, 2016 has been adjusted to $20.65 and the number of warrants increased by 1.5%. At September 30, 2017, 932,461 warrants remain exercisable compared to 943,345 warrants at December 31, 2016.

Contents

Activity in accumulated other comprehensive income, net of tax, and reclassification out of accumulated other comprehensive income for the three months and nine months ended September 30, 2017, 2021, and SeptemberJune 30, 2016, 2020, was as follows:

 

 

Three months ended September 30, 2017

  

Three months ended September 30, 2016

  

Three months ended September 30, 2021

  

Three months ended September 30, 2020

 
 

Pre-tax

  

Tax expense/ (benefit)

  

Net-of-tax

  

Pre-tax

  

Tax expense/ (benefit)

  

Net-of-tax

  

Pre-tax

  

Tax expense/

(benefit)

  

Net-of-tax

  

Pre-tax

  

Tax expense/

(benefit)

  

Net-of-tax

 

 

(In thousands)

  

(In thousands)

 

Beginning balance, loss, net of tax

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

Securities available-for-sale

         $1,001          $8,539 

Securities available-for-sale

    $7,560       $16,278 

Cash flow hedge derivatives

          (2,421)          (7,397)

Cash flow hedge derivatives

     (5,188)       (7,925)

Total

         $(1,420)         $1,142          $2,372          $8,353 

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  $(4,588) $(1,356) $(3,232) $(3,543) $(1,047) $(2,496)

Cash flow hedge derivatives

  271   114   157   1,387   583   804   698   206   492   755   223   532 

Total

  2,100   883   1,217   3,005   1,263  $1,742  $(3,890) $(1,150) $(2,740) $(2,788) $(824) $(1,964)
 

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) $(4,588) $(1,356) $(3,232) $(3,543) $(1,047) $(2,496)

Cash flow hedge derivatives

  271   114   157   1,387   583   804   698   206   492   755   223   532 

Total

 $2,076  $873  $1,203  $1,313  $552  $761  $(3,890) $(1,150) $(2,740) $(2,788) $(824) $(1,964)

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

    $4,328       $13,782 

Cash flow hedge derivatives

          (2,264)          (6,593)

Cash flow hedge derivatives

     (4,696)       (7,393)

Total

         $(217)         $1,903          $(368)         $6,389 

  

Nine months ended September 30, 2021

  

Nine months ended September 30, 2020

 
  

Pre-tax

  

Tax expense/

(benefit)

  

Net-of-tax

  

Pre-tax

  

Tax expense/

(benefit)

  

Net-of-tax

 
  

(In thousands)

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

Securities available-for-sale

      $12,200          $5,714 

Cash flow hedge derivatives

       (6,890)          (3,412)

Total

         $5,310          $2,302 
                         

Net unrealized gains/(losses) arising during the period

                        

Securities available-for-sale

 $(10,322) $(3,051) $(7,271) $12,607  $3,727  $8,880 

Cash flow hedge derivatives

  3,115   921   2,194   (5,652)  (1,671)  (3,981)

Total

 $(7,207) $(2,130) $(5,077) $6,955  $2,056  $4,899 
                         

Reclassification adjustment for net losses in net income

                        

Securities available-for-sale

  (853)  (252)  (601)  (1,153)  (341)  (812)

Cash flow hedge derivatives

  0   0   0   0   0   0 

Total

  (853)  (252)  (601)  (1,153)  (341)  (812)
                         

Total other comprehensive income/(loss)

                        

Securities available-for-sale

 $(11,175) $(3,303) $(7,872) $11,454  $3,386  $8,068 

Cash flow hedge derivatives

  3,115   921   2,194   (5,652)  (1,671)  (3,981)

Total

 $(8,060) $(2,382) $(5,678) $5,802  $1,715  $4,087 
                         

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

                        

Securities available-for-sale

      $4,328          $13,782 

Cash flow hedge derivatives

       (4,696)          (7,393)

Total

         $(368)         $6,389 

 

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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 FebruaryApril 1, 2016, 2021, theCompany’s Board of Directors approved a new stock repurchase program to buy back up to $45.0$75.0 million of ourthe Company’s common stock. In 2016, The $75.0 million share repurchase program was completed and terminated on August 5, 2021 with the repurchase of 1,832,481 shares for a total of $74.9 million, at an average cost of $40.93 per share in the nine months ended September 30, 2021.

On September 2, 2021, the Board of Directors approved a new stock repurchase program to buy back up to $125.0 million of the Company’s common stock. During the quarter ended September 30, 2021, the Company repurchased 1,380,578942,613 shares for $37.5 million, or $27.13 per share under the February 2016 repurchase program. The Company did not repurchase any shares under the February 2016 repurchase program for the nine months ended September 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.for a total of $37.1 million, at an average cost of $39.40 per share.

 

120. Subsequent Events9. Subsequent Events

 

The Company has evaluated the effect of the following events that have occurred subsequent to the quarter ended September 30, 2017 2021, 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.

 

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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, 2016.2020.

 

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 2020 Form 10-K. For more information, please also see Note 2 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 judgmentsRecent Developments: Impact of and assumptions by management, which have a material impact on the carrying value of securities and the recognition of any “other-than-temporary” impairmentResponse to our investment securities. The judgments and assumptions used by management are described in “Investment SecuritiesCOVID-19 Pandemic” 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 judgmentsThe ongoing COVID-19 pandemic has significantly heightened the level of challenges, risks and assumptions by management, which have a material impact on the amount of taxes currently payableuncertainties facing our Company 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.its operations.

 

Accounting for goodwillAdditional potential impacts arising from, and goodwill impairment involves significant judgments and assumptions by management, which have a material impact onour anticipated responses to, the amountCOVID-19 pandemic are set forth below. See also the COVID-related risk factors as previously disclosed in Part I, Item 1A, 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 on2020 Form 10-K for the year ended December 31, 2016.10-K.

 

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HighlightsThe below table details our exposure to borrowers in industries generally considered to be the most impacted by the COVID-19 pandemic:

 

September 30, 2021

 

Industry (1)

 

Loan Balance

  

Percent of Total

Loan Portfolio

 
         

Restaurants

 $153.8   0.1

%

Hotels/motels

  299.7   1.1 

Retail businesses/properties

  1,738.7   2.4 
  $2,192.2   3.6

%

 

●(1)

CompletedBalances capture credit exposures in the acquisitionbusiness segments that manage the significant majority of SinoPac Bancorp,industry relationships. Balances consist of commercial real estate secured loans where the holding company for Far East National Bank, (“FENB”) on July 14, 2017.collateral consist of restaurants, hotels/motels or have a retail dependency.

While we have not experienced disproportionate impacts among our business segments as of September 30, 2021, borrowers in the industries detailed in the table above (and potentially other industries) could have greater sensitivity to the economic downturn resulting from the COVID-19 pandemic with potentially longer recovery periods than other business lines.

Loan modifications

We began receiving requests from our borrowers for loan deferrals in March 2020 following the onset of the pandemic. Modifications include the deferral of principal payments or the deferral of principal and interest payments for terms generally 90 - 180 days. Requests are evaluated individually, and approved modifications are based on the unique circumstances of each borrower. We are committed to working with our clients to allow time to work through the challenges of this pandemic. At this time, it is uncertain what future impact loan modifications related to COVID-19 difficulties will have on our financial condition, results of operations and reserve for loan losses.

As of September 30, 2021, there were seven COVID-19 residential mortgage loan modifications outstanding, or $5.1 million, with a weighted average loan to value ratio of 58.6% that represented 0.1% of the total residential mortgage loan portfolio and three, or $2.8 million, in commercial loan balances that represented 0.1% of total commercial loans.

As of September 30, 2021, there were six CRE loan modifications outstanding of $44.8 million, with a weighted average loan to value ratio of 40.1% that represent 0.6% of the total CRE loan portfolio. All of these $44.8 million of real estate loan modifications are paying interests.

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The CARES Act, as extended by the CAA, permits financial institutions to suspend requirements under GAAP for loan modifications to borrowers affected by COVID-19 and is intended to provide interpretive guidance as to conditions that would constitute a short-term modification that would not meet the definition of a TDR. This includes the following (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. The Company is applying this guidance to qualifying loan modifications and anticipates that it will continue to experience an increase in short-term modifications.

Paycheck Protection Program ("PPP")

As part of the CARES Act, the SBA has been authorized to guarantee loans under the PPP through September 30, 2021 for small businesses who meet the necessary eligibility requirements in order to keep their workers on the payroll. One of the notable features of the PPP is that borrowers are eligible for loan forgiveness if borrowers, among other conditions, maintain their staff and payroll and if loan amounts are used to cover payroll, mortgage interest, rents and utilities payments. These loans have a two-to-five-year term and earn interest at a rate of 1%. We began accepting applications on April 3, 2020. As of September 30, 2021, our outstanding PPP loans had a current balance of $169.4 million and $264.4 million of PPP loans had been forgiven by the U.S. Treasury. PPP loans are guaranteed by the SBA and therefore we believe PPP loans generally do not represent a material credit risk.

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Highlights

 

●

Total loans, during the third quarterexcluding PPP loans, increased by $1.0 billion to $12.6 billion.9.1% annualized.

 

●

NetThe net interest margin increased to 3.75%3.22% in the third quarter of 2021 from 3.02% in third quarter of 2020.

●

Quarterly earnings per share increased 31.0% compared to 3.63%the same quarter in the second quarter of 2017.2020.

●

Total deposits, excluding time deposits, increased for the quarter by $686.3 million, or 25.9% annualized.

 

Quarterly Statement of Operations Review

 

Net Income

 

Net income for the quarter ended September 30, 2017,2021, was $49.7$72.4 million, an increase of $3.6$15.6 million, or 7.8%27.5%, compared to net income of $46.1$56.8 million for the same quarter a year ago. Diluted earnings per share for the quarter ended September 30, 2017,2021, was $0.61$0.93 per share compared to $0.58$0.71 per share for the same quarter a year ago.

 

Return on average stockholders’stockholders’ equity was 9.77%11.61% and return on average assets was 1.29%1.45% for the quarter ended September 30, 2017,2021, compared to a return on average stockholders’ equity of 10.30%9.53% and a return on average assets of 1.38%1.18% for the same quarter a year ago.

 

FinancialFinancial Performance

 

 

Three months ended

  

Three months ended

 
 

September 30, 2017

  

September 30, 2016

  

September 30, 2021

  

September 30, 2020

 

Net income

 $49.7 million  $46.1 million 

Net income (in millions)

 $72.4  $56.8 

Basic earnings per common share

 $0.62  $0.58  $0.93  $0.71 

Diluted earnings per common share

 $0.61  $0.58  $0.93  $0.71 

Return on average assets

  1.29%  1.38% 1.45% 1.18%

Return on average total stockholders' equity

  9.77%  10.30% 11.61% 9.53%

Efficiency ratio

  41.91%  45.05% 43.85% 51.53%

 

Net Interest Income Before Provision for Credit Losses

 

NetNet interest income before provision for credit losses increased $29.4$15.0 million, or 28.3%10.9%, to $133.2$152.5 million during the third quarter of 20172021, compared to $103.8$137.5 million during the same quarter a year ago. The increase was due primarily to an increase in interest income from loans and a decrease in interest expense from securities sold under agreements to repurchase.deposits.

 

The net interest margin was 3.75%3.22% for the third quarter of 20172021 compared to 3.36%3.02% for the third quarter of 20162020 and 3.63%3.24% for the second quarter of 2017. The increase from the second quarter of 2017 was primarily the result of interest recoveries and prepayment penalties of $5.6 million.2021.

 

For the third quarter of 2017, 2021, the yield on average interest-earning assets was 4.34%3.56%, the cost of funds on average interest-bearing liabilities was 0.81%0.48%, and the cost of interest-bearing deposits was 0.68%0.44%. In comparison, for the third quarter of 2016,2020, the yield on average interest-earning assets was 4.02%3.78%, the cost of funds on average interest-bearing liabilities was 0.89%1.04%, and the cost of average interest-bearing deposits was 0.70%0.99%. The increasedecrease in the yield on average interest earninginterest-earning assets resulted mainly from lower lending rates. The decrease in average interest-bearing liabilities was a result of the renewal of maturing higher interestrate certificates of deposit at lower rates interest income collected from nonaccrual loans and loan prepayment penalties.the continuing run off of brokered CD’s during the quarter. 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%3.08% for the quarter ended September 30, 2017,2021, compared to 3.13%2.74% for the same quarter a year ago.

 

41
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The following table sets forth information concerning average interest-earning assets, average interest-bearing liabilities, and the average yields and rates paid on those assets and liabilities for the three months ended September 30, 2017,2021, and 2016.2020. 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 September 30,

 
     

Interest

  

Average

      

Interest

  

Average

  

2021

  

2020

 
 

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)

 $15,798,496  $163,948  4.12% $15,592,536  $167,556  4.28%

Investment securities

  1,396,859   5,692   1.62   1,303,598   4,850   1.48  1,058,004  3,707  1.39  1,145,092  4,115  1.43 

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  258  5.93  17,250  216  4.99 

Interest-bearing deposits

  1,893,785   714   0.15   1,385,535   347   0.10 

Total interest-earning assets

  14,075,251   154,078   4.34   12,285,411   124,155   4.02   18,767,535   168,627   3.56   18,140,413   172,234   3.78 

Non-interest earning assets:

                                                

Cash and due from banks

  294,466           223,925          155,604       136,671      

Other non-earning assets

  1,094,648           884,006           1,027,921        1,064,371      

Total non-interest earning assets

  1,389,114           1,107,931          1,183,525       1,201,042      

Less: Allowance for loan losses

  (105,390)          (123,609)         (131,316)      (172,225)     

Deferred loan fees

  (4,852)          (6,348)          (7,302)       (5,010)     

Total assets

 $15,354,123          $13,263,385          $19,812,442          $19,164,220         
                                     

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

 $2,109,632  $524  0.10% $1,695,882  $724  1.74%

Money market accounts

  2,496,548   3,944   0.63   2,117,831   3,511   0.66  4,228,025  4,554  0.43  3,119,091  4,833  0.62 

Savings accounts

  942,452   569   0.24   627,912   260   0.16  914,540  164  0.07  766,521  204  0.11 

Time deposits

  4,939,189   11,678   0.94   4,651,593   10,701   0.92   5,882,576   9,299   0.63   7,281,403   26,247   1.43 

Total interest-bearing deposits

  9,727,697   16,779   0.68   8,457,401   14,913   0.70   13,134,773   14,541   0.44   12,862,897   32,008   0.99 
                                     

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  43,246  146  1.34  263,306  1,266  1.91 

Long-term debt

  119,136   1,456   4.85   119,136   1,456   4.86   119,136   1,455   4.84   119,136   1,456   4.86 

Total interest-bearing liabilities

  10,280,653   20,882   0.81   9,062,001   20,331   0.89   13,297,155   16,142   0.48   13,245,339   34,730   1.04 
             

Non-interest bearing liabilities:

                                                

Demand deposits

  2,714,244           2,254,123          3,830,485       3,301,253      

Other liabilities

  339,001           167,409          211,636       246,811      

Total equity

  2,020,224           1,779,852           2,473,166        2,370,817      

Total liabilities and equity

 $15,354,122          $13,263,385          $19,812,442          $19,164,220         
             

Net interest spread

          3.53%          3.13%       3.08%       2.74%

Net interest income

     $133,196          $103,824         $152,485       $137,504    

Net interest margin

          3.75%          3.36%       3.22%       3.02%

 

(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.

 

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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 September 30, 2021 and 2020:

 

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 September 30,

 
 

2017-2016

  

2021-2020

 
 

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

Volume

  

Changes in

Rate

  

Total

Change

 
               (In thousands)   

Interest-earning assets:

             

Loans and leases

 $19,431  $8,452  $27,883 

Loans

 $2,292  $(5,900) $(3,608)

Investment securities

  368   474   842  (299) (109) (408)

Federal Home Loan Bank and FRB stock

  294   (80)  214 

Federal Home Loan Bank stock

 —  42  42 

Deposits with other banks

  (2)  878   876   155   213   368 

Federal funds sold and securities purchased under agreements to resell

  108   -   108 

Total changes in interest income

  20,199   9,724   29,923   2,148   (5,754)  (3,606)
             

Interest-bearing liabilities:

             

Interest bearing demand accounts

  126   21   147 

Interest-bearing demand accounts

 149  (349) (200)

Money market accounts

  610   (177)  433  1,433  (1,712) (279)

Savings accounts

  162   147   309  34  (74) (40)

Time deposits

  696   281   977  (4,314) (12,634) (16,948)

Securities sold under agreements to repurchase

  (2,277)  (677)  (2,954)

Other borrowed funds

  617   1,022   1,639  (824) (296) (1,120)

Long-term debt

  -   -   -   —    1   1 

Total changes in interest expense

  (66)  617   551   (3,522)  (15,064)  (18,586)

Changes in net interest income

 $20,265  $9,107  $29,372  $5,670  $9,310  $14,980 

 

(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.

(Reversal)/provision for credit losses

As permitted under the CARES Act and as extended by the CAA, the Company adopted the CECL methodology for estimated credit losses effective as of January 1, 2021. The Company recorded a provision for credit losses of $3.1 million in the third quarter of 2021 compared to a reversal for credit losses of $9.0 million in the second quarter of 2021 and a $12.5 million provision for loan losses in the third quarter of 2020. The third quarter provision for credit losses were primarily driven by the net charge-offs during the period and growth of loans. As of September 30, 2021, the allowance for loan losses increased by $689 thousand to $131.9 million, or 0.83% of gross loans, compared to $131.3 million, or 0.84% of gross loans, as of June 30, 2021. The change in the allowance for loan losses included a $3 million provision for loan losses for the third quarter of 2021, and $2.3 million in net charge-offs. In the third quarter of 2020, a provision for loan losses of $12.5 million was recorded under the incurred loss method, which includes management’s projection of the potential impacts from the COVID-19 pandemic at that time. 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.

 

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Provision/(Reversal) for Credit Losses

 

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 September 30,

  

Nine months ended September 30,

 
 

September 30, 2017

  

September 30, 2016

  

2017

  

2016

  

2021

  

2020

  

2021

  

2020

 
 

(In thousands)

  

(In thousands)

 

Charge-offs:

                        

Commercial loans

 $80  $3,278  $1,810  $12,035  $2,649  $6,956  $19,499  $13,383 

Real estate loans (1)

  305   4,626   860   5,830   3   —   3   — 

Total charge-offs

  385   7,904   2,670   17,865   2,652   6,956   19,502   13,383 

Recoveries:

                 

Commercial loans

  575   2,006   1,401   3,720  121  3,796  1,545  6,354 

Construction loans

  47   548   143   7,871  76  —  76  — 

Real estate loans (1)

  5,489   343   6,195   903   144   110   558   435 

Total recoveries

  6,111   2,897   7,739   12,494   341   3,906   2,179   6,789 

Net (recoveries)/charge-offs

 $(5,726) $5,007  $(5,069) $5,371 

Net charge-offs

 $2,311  $3,050  $17,323  $6,594 

 

(1)

Real estate loans include commercial mortgage loans, residential mortgage loans, and equity lines.

 

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$12.2 million for the third quarter of 2017,2021, an increase of $4.2$2.2 million, or 47.1%22.0%, compared to $8.8$10.0 million for the third quarter of 2016.2020. The increase was primarily due to the gain of $5.4a $1.6 million on the acquisition of SinoPac Bancorpdecrease in net loss from equity securities, a $1.0 million increase in wealth management fees and wascommissions offset, in part by, a $1.4 million decrease in securities gains of $1.7 million fromgain on low-income housing investments, when compared to the same quarter a year ago.

 

Non-Interest Expense

 

Non-interest expense increased $10.5decreased $3.8 million, or 20.7%5.0%, to $61.2$72.2 million in the third quarter of 20172021 compared to $50.7$76.0 million in the same quarter a year ago. The increasedecrease in non-interest expense in the third quarter of 20172021 was primarily due to a $5.0 million increase in salary and employee benefit expenses and a $3.3 million increase in acquisition related expense when compared to the same quarter a year ago. Acquisition related expenses during the third quarter totaled approximately, $3.3 million, including $2.8$3.8 million in legalhigher amortization expense of investments in low-income housing and investment banking fees and $0.5 million in severance and retention expenses. The efficiency ratio was 41.9%alternative energy partnerships in the third quarter of 20172020 compared to 45.1%the third quarter of 2021. The efficiency ratio was 43.85% in the third quarter of 2021 compared to 51.53% for the same quarter a year ago.

 

Income Taxes

 

The effective tax rate for the third quarter of 20172021 was 41.4%19.05% compared to 25.5%3.7% for the third quarter of 2016. The third2020. In the second quarter 2017 effective tax rate of 41.4% reflected additional tax expense to increase2020, the Company made a new alternative energy investment which resulted in a lower full year effective tax rate to 34% compared tofor 2020 resulting from tax credits generated from the 29%new alternative energy investment. The effective tax rate forecasted at June 30, 2017. This adjustment inincludes 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 nine months ended September 30, 2017,2021, was $150.1$223.0 million, an increase of $23.0$65.0 million, or 18.1%41.1%, compared to net income of $127.1$158.0 million for the same period a year ago. Diluted earnings per share was $1.86$2.82 compared to $1.59$1.98 per share for the same period a year ago. The net interest margin for the nine months ended September 30, 2017,2021, was 3.63%3.22% compared to 3.39%3.12% for the same period a year ago.

 

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Return on average stockholders’stockholders’ equity was 10.46%12.11% and return on average assets was 1.39%1.54% for the nine months ended September 30, 2017,2021, compared to a return on average stockholders’ equity of 9.66%8.99% and a return on average assets of 1.29%1.13% for the same period of 2016.a year ago. The efficiency ratio for the nine months ended September 30, 2017,2021, was 43.71%44.71% compared to 51.35%46.98% 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 nine months ended September 30, 2017,2021, and 2016.2020. 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

  

Nine months ended September 30,

 
     

Interest

  

Average

      

Interest

  

Average

  

2021

  

2020

 
 

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)

 $15,725,324  $485,159  4.12% $15,477,883  $513,575  4.43%

Investment securities

  1,297,789   14,817   1.53   1,384,019   16,974   1.64  1,010,328  9,963  1.32  1,263,937  17,130  1.81 

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  730  5.66  17,317  735  5.67 

Interest-bearing deposits

  1,605,851   1,467   0.12   894,302   1,538   0.23 

Total interest-earning assets

  13,360,561   420,511   4.21   12,142,293   368,402   4.05   18,358,753   497,319   3.62   17,653,439   532,978   4.03 

Non-interest earning assets:

                                                

Cash and due from banks

  235,097           215,415          153,790       149,777      

Other non-earning assets

  965,906           891,974           1,034,752        1,048,008      

Total non-interest earning assets

  1,201,003           1,107,389          1,188,542       1,197,785      

Less: Allowance for loan losses

  (113,299)          (133,232)         (146,640)      (148,437)     

Deferred loan fees

  (4,531)          (7,225)          (6,224)       (1,787)     

Total assets

 $14,443,734          $13,109,225          $19,394,431          $18,701,000         
                                     

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

 $1,989,833  $1,819  0.12% $1,557,371  $2,176  0.19%

Money market accounts

  2,359,871   11,362   0.64   2,020,725   9,768   0.65  3,913,073  13,893  0.47  2,772,463  16,712  0.81 

Savings accounts

  817,540   1,244   0.20   626,200   759   0.16  885,863  590  0.09  746,870  783  0.14 

Time deposits

  4,840,293   33,429   0.92   4,752,938   32,177   0.90   6,105,604   33,362   0.73   7,463,821   92,213   1.65 

Total interest-bearing deposits

  9,300,608   47,674   0.69   8,412,992   43,960   0.70   12,894,373   49,664   0.51   12,540,525   111,884   1.19 
                                     

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  86,410  1,037  1.60  355,758  4,468  1.68 

Long-term debt

  119,136   4,320   4.85   119,136   4,336   4.86   119,136   4,318   4.85   119,136   4,336   4.86 

Total interest-bearing liabilities

  9,746,383   57,849   0.79   9,044,177   60,434   0.89   13,099,919   55,019   0.56   13,015,419   120,688   1.24 
             

Non-interest bearing liabilities:

                                                

Demand deposits

  2,542,754           2,131,742          3,613,026       3,089,578      

Other liabilities

  236,332           175,714          219,591       249,954      

Total equity

  1,918,265           1,757,592           2,461,895        2,346,049      

Total liabilities and equity

 $14,443,734          $13,109,225          $19,394,431          $18,701,000         
             

Net interest spread

          3.42%          3.16%       3.06%       2.79%

Net interest income

     $362,662          $307,968         $442,300       $412,290    

Net interest margin

          3.63%          3.39%       3.22%       3.12%

 

(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.

 

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The following table summarizes the changes in interest income and interest expense attributable to changes in volume and changes in interest rates:

 

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,

  

Nine months ended September 30,

 
 

2017-2016

  

2021-2020

 
 

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

 $8,044  $(36,458) $(28,414)

Investment securities

  (1,030)  (1,127)  (2,157) (3,044) (4,123) (7,167)

Federal Home Loan Bank and FRB stock

  307   (112)  195 

Federal Home Loan Bank stock

 (3) (2) (5)

Deposits with other banks

  435   1,611   2,046   864   (935)  (71)

Federal funds sold and securities purchased under agreements to resell

  108   -   108 

Total changes in interest income

  40,565   11,544   52,109   5,861   (41,518)  (35,657)
             

Interest-bearing liabilities:

             

Interest bearing demand accounts

  343   40   383 

Interest-bearing demand accounts

 512  (869) (357)

Money market accounts

  1,624   (30)  1,594  5,469  (8,288) (2,819)

Savings accounts

  264   221   485  128  (321) (193)

Time deposits

  583   669   1,252  (14,486) (44,365) (58,851)

Securities sold under agreements to repurchase

  (6,097)  (2,110)  (8,207)

Other borrowed funds

  303   1,621   1,924  (3,243) (188) (3,431)

Long-term debt

  -   (16)  (16)  —   (18)  (18)

Total changes in interest expense

  (2,980)  395   (2,585)  (11,620)  (54,049)  (65,669)

Changes in net interest income

 $43,545  $11,149  $54,694  $17,481  $12,531  $30,012 

 

(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.

 

 

Non-Interest Income

Non-interest income, which includes revenues from depository service fees, letters of credit commissions, equity securities gains (losses), wire transfer fees, and other sources of fee income, was $34.8 million for the nine months ended September 30, 2021, an increase of $3.4 million, or 10.8%, compared to $31.4 million for the nine months ended September 30, 2020. The increase was primarily due to a $3.1 million increase in wealth management fees and commissions, a $1.9 million increase in derivative fees, offset, in part, by a $2.0 million increase in net losses from equity securities when compared to the same period a year ago.

Non-Interest Expense

Non-interest expense increased $4.9 million, or 2.4%, to $213.3 million for the nine months ended September 30, 2021, compared to $208.4 million for the same period a year ago. The increase was primarily due to a $6.4 million increase in salaries and employee benefits, a $3.4 million decrease in other real estate owned income, a $1.9 million increase in computer and equipment expense and a $1.4 million increase in marketing expense, offset, in part, by a decrease of $8.3 million in amortization expense of investments in low-income housing and alternative energy partnerships, when compared to the same period a year ago.

Income Taxes

The effective tax rate for the nine months ended September 30, 2021 was 21.3% compared to 8.6% for the nine months ended September 30, 2020. The effective tax rate was lower in 2020 due to the impact of higher tax credits from alternative energy investment tax credits.

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Balance Sheet Review

Assets

 

Total assets were $15.7$19.9 billion as of September 30, 2017,2021, an increase of $1.2 billion,$817.3 million, or 8.3%4.3%, from $14.5$19.0 billion as of December 31, 2016,2020, primarily due to the acquisition of SinoPac Bancorp which had total assets of $1.2 billion.an increase in short-term investments and commercial mortgage loans.

 

Investment SecuritiesSecurities Available-for-Sale

 

InvestmentPrior to January 1, 2021, debt securities available-for-sale were measured at fair value and declines in the fair value were reviewed to determine whether the impairment was other-than-temporary. If we did not expect to recover the entire amortized cost basis of the security, then an other-than-temporary impairment (“OTTI”) was considered to have occurred. The cost basis of the security was written down to its estimated fair value and the amount of the write-down was recognized through a charge to earnings. If the amount of the amortized cost basis expected to be recovered increased in a future period, the cost basis of the security was not increased but rather recognized prospectively through interest income.

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

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Securities available-for-sale represented 8.7%5.4% of total assets as of September 30, 2017,2021, compared to 9.1%5.4% of total assets as of December 31, 2016. The carrying value of investment securities2020. Securities available-for-sale were $1.1 billion as of September 30, 2017, was $1.4 billion2021, compared to $1.3$1.0 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, 2016.2020.

 

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 September 30, 2017,2021, and December 31, 2016:2020:

 

 

September 30, 2017

 
     

Gross

  

Gross

      

September 30, 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

 $399,741  $-  $305  $399,436  $40,206  $5  $—  $40,211 

U.S. government agency entities

  9,679   27   6   9,700  89,823  1,255  135  90,943 

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  798,905  12,490  6,328  805,067 

Collateralized mortgage obligations

  1,715   -   5   1,710  9,792  —  231  9,561 

Corporate debt securities

  80,007   904   5   80,906   134,348   514   1,428   133,434 

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  $1,073,074  $14,264  $8,122  $1,079,216 

 

 

December 31, 2016

 
     

Gross

  

Gross

      

December 31, 2020

 
 

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  $80,948  $6  $6  $80,948 

U.S. government sponsored entities

  400,000   -   9,669   390,331 

U.S. government agency entities

 99,944  441  546  99,839 

Mortgage-backed securities

  339,241   309   3,290   336,260  709,709  17,965  606  727,068 

Collateralized mortgage obligations

  48   -   20   28  10,358  —  34  10,324 

Corporate debt securities

  74,965   247   862   74,350   118,271   367   267   118,371 

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  $1,019,230  $18,779  $1,459  $1,036,550 

 

 

For additional information, see Note 7 to the Company’s unaudited condensed consolidated financial statements.Consolidated Financial Statements.

 

Investment securitiesSecurities available-for-sale having a carrying value of $291.4$30.1 million as of September 30, 2017,2021, and $649.1$22.7 million as of December 31, 2016,2020, were pledged to secure public deposits, other borrowings and treasury tax and loan and securities sold under agreements to repurchase. loan.

 

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Equity Securities

The Company recognized a net gain of $3 thousand for the three months ended September 30, 2021, due to the increase in fair value of equity investments with readily determinable fair values compared to a net loss of $1.6 million for the three months ended September 30, 2020. The Company recognized a net loss of $3.7 million for the nine months ended September 30, 2021, due to the decrease in fair value of equity investments with readily determinable fair values compared to a net loss of $1.9 million for the six months ended September 30, 2020. Equity securities were $20.1 million and $23.7 million as of September 30, 2021, and December 31, 2020, respectively.

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

The amortized cost of the Company’s AFS debt securities 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 September 30, 2021, no AFS debt securities were in default.

 

Loans

 

Gross loans excluding loans held for sale, were $12.6$16.0 billion at September 30, 2017,2021, an increase of $1.4 billion,$332.4 million, or 12.5%2.1%, from $11.2$15.6 billion at December 31, 2016.2020. The increase was primarily due to increases of $591.8$280.5 million, or 10.2%3.71%, in commercial mortgage loans, $478.5and a $106.4 million increase, or 19.6%, in residential mortgage loans, $171.7 million, or 7.6%4.1%, in commercial loans, and $143.4 million, or 26.2%, in real estate construction loans. The loan balances and composition at September 30, 2017,2021, compared to December 31, 2016, and to September 30, 2016,2020 are presentedset forth below:

 

 

September 30, 2017

  

% of Gross Loans

  

December 31, 2016

  

% of Gross Loans

  

% Change

  

September 30, 2021

  

% of Gross

Loans

  

December 31, 2020

  

% of Gross

Loans

  

%

Change

 

Type of Loans

 

(Dollars in thousands)

 
 

(in thousands)

 
           

Commercial loans

 $2,419,891   19.2% $2,248,187   20.1%  7.6% $2,871,693  18.0% $2,836,833  18.1% 1.2%

Residential mortgage loans

  2,922,537   23.3   2,444,048   21.8   19.6  4,144,789  25.9  4,145,389  26.5  (0.0)

Commercial mortgage loans

  6,377,047   50.6   5,785,248   51.7   10.2  7,835,528  49.1  7,555,027  48.3  3.7 

Real estate construction loans

 688,195  4.3  679,492  4.4  1.3 

Equity lines

  181,751   1.4   171,711   1.5   5.8  433,206  2.7  424,555  2.7  2.0 

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   3,370   0.0   3,100   0.0   8.7 

Gross loans

 $12,597,434   100% $11,201,275   100%  12.5% $15,976,781  100% $15,644,396  100%  2.1%
                    

Allowance for loan losses

  (121,535)      (118,966)      2.2  (131,945)    (166,538)    (20.8)

Unamortized deferred loan fees

  (3,424)      (4,994)      (31.4)  (3,835)     (2,494)     53.8 
                    

Total loans, net

 $12,472,475      $11,077,315       12.6% $15,841,001      $15,475,364       2.4%
                    

Loans held for sale

 $-      $7,500       (100.0%)

 

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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”).OREO. The Company’s 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. DuringFrom time to time 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%0.4% at September 30, 2017,2021, compared to 0.5%0.4% at December 31, 2016.2020. Total non-performing assets increased $17.6$0.7 million, or 25.2%0.9%, to $87.4$78.3 million at September 30, 2017,2021, compared to $69.8$77.6 million at December 31, 2016,2020, primarily due to an increase of $15.7$1.0 million, or 31.6%1.5%, in non-accrual loans offset by a decrease of $2.0 million, or 9.7%, in other real estate owned.non-accruing loans.

 

As a percentage of gross loans, excluding loans held for sale, plus OREO, our non-performing assets was 0.69%were 0.49% as of September 30, 2017,2021, compared to 0.62%0.50% as of December 31, 2016.2020. The non-performing loan portfolio loan coverage ratio, defined as the allowance for credit losses to non-performing loans, decreased to 181.6%191.8% as of September 30, 2017,2021, from 245.9%237.3% as of December 31, 2016.2020.

 

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The following table presentssets forth the changes in non-performing assets and troubled debt restructurings (“TDRs”)TDRs as of September 30, 2017,2021, compared to December 31, 2016,2020, and to September 30, 2016:2020:

 

(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%    

(1) Excludes loans held for sale at period-end.

(2) Excludes non-accrual loans held for sale at period-end.

  

September 30, 2021

  

December 31, 2020

  

% Change

  

September 30, 2020

  

% Change

 
  

(in thousands)

 

Non-performing assets

                    

Accruing loans past due 90 days or more

 $4,333  $4,982   (13) $2,868   51 

Non-accrual loans:

                    

Construction loans

  5,491   4,286   28   4,335   27 

Commercial mortgage loans

  36,968   33,715   10   33,782   9 

Commercial loans

  17,098   23,087   (26)  29,757   (43)

Residential mortgage loans

  9,125   6,596   38   9,317   (2)

Total non-accrual loans

 $68,682  $67,684   1  $77,191   (11)

Total non-performing loans

  73,015   72,666   0   80,059   (9)

Other real estate owned

  5,251   4,918   7   4,918   7 

Total non-performing assets

 $78,266  $77,584   1  $84,977   (8)

Accruing troubled debt restructurings

 $24,406  $27,721   (12) $28,587   (15)
                     

Allowance for loan losses

 $131,945  $166,538   (21) $179,130   (26)
                     

Total gross loans outstanding, at period-end

 $15,976,781  $15,644,396   2  $15,565,779   3 
                     

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

  180.71%  229.18%      223.75%    

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

  0.83%  1.06%      1.15%    

 

Non-accrual Loans

 

At September 30, 2017,2021, total non-accrual loans were $65.4$68.7 million, an increase of $15.7$1.0 million, or 31.6%1.5%, resulting from several construction and commercial real estate loans placed on nonaccrual, from $49.7$67.7 million at December 31, 2016,2020, and an increasea decrease of $21.0$8.5 million, or 47.3%11.0%, from $44.4$77.2 million at September 30, 2016.2020. 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.

 

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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

  

September 30, 2021

  

December 31, 2020

 
 

Real

      

Real

      

Real

     

Real

    
 

Estate (1)

  

Commercial

  

Estate (1)

  

Commercial

  

Estate (1)

  

Commercial

  

Estate (1)

  

Commercial

 
 

(In thousands)

  

(In thousands)

 

Type of Collateral

                        

Single/multi-family residence

 $23,780  $7,742  $9,368  $218  $12,148  $7,707  $7,126  $9,031 

Commercial real estate

  25,591   -   24,321   -  39,436  338  37,471  338 

Land

  -   -   283   -  —  2,734  —  2,634 

Personal property (UCC)

  -   8,200   -   15,492   —   6,318   —   11,084 

Total

 $49,371  $15,942  $33,972  $15,710  $51,584  $17,097  $44,597  $23,087 

 

(1)

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

 

 

September 30, 2017

  

December 31, 2016

  

September 30, 2021

  

December 31, 2020

 
 

Real

      

Real

      

Real

     

Real

    
 

Estate (1)

  

Commercial

  

Estate (1)

  

Commercial

  

Estate (1)

  

Commercial

  

Estate (1)

  

Commercial

 
 

(In thousands)

  

(In thousands)

 

Type of Business

                        

Real estate development

 $31,890  $20  $13,804  $-  $15,523  $—  $12,875  $33 

Wholesale/Retail

  10,807   7,924   12,312   9,213  26,958  13,006  25,291  11,290 

Food/Restaurant

  140   -   153   - 

Import/Export

  -   7,998   -   6,174  —  3,190  —  6,191 

Other

  6,534   -   7,703   323   9,103   901   6,431   5,573 

Total

 $49,371  $15,942  $33,972  $15,710  $51,584  $17,097  $44,597  $23,087 

 

(1)

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

 

 

Impaired Loans

 

APrior to January 1, 2021, a loan iswas considered to be impaired when it iswas probable that a creditorwe will be unable to collect all amounts due according to the contractual terms 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 delinquencydelinquency status of over 90 days or our receipt of information otherwise indicating that full collection of principal is doubtful, or when the loan has been restructured in a troubled debt restructuring (TDRs).TDRs. Those loans with a balance less than our defined selection criteria, generally a loan amount less than $500,000,$500 thousand, 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 generally obtain an appraisal to determine the amount of impairment at the date that the loan becomes impaired. The appraisals are generally 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(which generally range between 3% to 6% of the fair value, depending on the size of the impaired loan,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.

 

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AsAs of September 30, 2017,2021, recorded investment in non-accrual loans was $68.7 million. As of December 31, 2020, recorded investment in impaired loans totaled $127.7$95.4 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 $62.4 million. As of December 31, 2016, recorded investment in impaired loans totaled $115.1 million and was comprised of non-accrual loans, excluding loans held for sale, of $49.7$67.7 million and accruing TDRs of $65.4$27.7 million. For non-accrual loans, the amounts previously charged off represent 10.6% of the contractual balances for non-accrual loans as of September 30, 2021. For impaired loans, the amounts previously charged off represent 7.1% as of September 30, 2017, and 8.4% as of December 31, 2016,2020, of the contractual balances for impaired loans. As of September 30, 2017, $49.42021, $51.6 million, or 75.7%75.1%, of the $65.3$68.7 million of non-accrual loans excluding loans held for sale, waswere secured by real estate compared to $34.0$44.6 million, or 68.4%65.9%, of the $49.7$67.7 million of non-accrual loans excluding loans held for sale, that waswere secured by real estate as of December 31, 2016.2020. 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 September 30, 2017, $2.12021, $6.5 million of the $121.5$131.9 million allowance for loan losses was allocated for non-accrual loans and $125.4 million was allocated to the general allowance. As of December 31, 2020, $6.4 million of the $166.5 million allowance for loan losses was allocated for impaired loans and $119.4$160.1 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%180.7% as of September 30, 2017, from 239.5%2021, compared to 229.2% as of December 31, 2016,2020, primarily due to an increase in the non-accrual loans. Non-accrual loans also include those TDRs that do not qualify for accrual status.

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

  

September 30, 2021

 
  

Unpaid

Principal

Balance

  

Recorded

Investment

  

Allowance

 
  

(In thousands)

 
             

With no allocated allowance

            

Commercial loans

 $13,897  $10,442  $— 

Real estate construction loans

  7,201   5,491   — 

Commercial mortgage loans

  19,356   18,407   — 

Residential mortgage loans and equity lines

  6,989   6,813   — 

Subtotal

 $47,443  $41,153  $— 
             

With allocated allowance

            

Commercial loans

 $16,739  $6,656  $1,301 

Commercial mortgage loans

  18,664   18,561   5,229 

Residential mortgage loans and equity lines

  2,892   2,312   — 

Subtotal

 $38,295  $27,529  $6,530 

Total non-accrual loans

 $85,738  $68,682  $6,530 

 

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In connection with the adoption of ASU 2016-13, the Company no longer provides information on impaired loans. The following table presents impaired loans and the related allowance as of the dates indicated:December 31, 2020:

 

 

Impaired Loans

 
 

September 30, 2017

  

December 31, 2016

 
              

December 31, 2020

 
 

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  $-  $23,784  $20,698  $— 

Real estate construction loans

  22,309   21,748   -   5,776   5,458   -  5,776  4,286  — 

Commercial mortgage loans

  39,154   32,370   -   60,522   54,453   -  22,877  22,287  — 

Residential mortgage loans and equity lines

  2,264   2,264   -   5,472   5,310   -   6,379   6,307   — 

Subtotal

 $87,680  $79,755  $-  $95,807  $88,342  $-  $58,816  $53,578  $— 
 

With allocated allowance

                              

Commercial loans

 $14,082  $13,985  $1,461  $5,216  $4,640  $1,827  $13,703  $6,372  $1,030 

Commercial mortgage loans

  23,061   22,820   823   10,158   10,017   573  31,134  31,003  5,254 

Residential mortgage loans and equity lines

  12,461   11,111   322   13,263   12,075   396   5,005   4,452   145 

Subtotal

 $49,604  $47,916  $2,606  $28,637  $26,732  $2,796  $49,842  $41,827  $6,429 

Total impaired loans

 $137,284  $127,671  $2,606  $124,444  $115,074  $2,796  $108,658  $95,405  $6,429 

 

Loan Interest Reserves

 

In accordance with customary banking practice, we originate construction loans and land development loans 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 September 30, 2017,2021, construction loans of $515.4$583.4 million were disbursed with pre-established interest reserves of $61.8$48.0 million, compared to $500.2$643.5 million of such loans disbursed with pre-established interest reserves of $58.9$71.0 million at December 31, 2016.2020.  The balance for construction loans with interest reserves whichthat have been extended was $81.3$50.2 million with pre-established interest reserves of $1.8$1.9 million at September 30, 2017,2021, compared to $113.1$127.0 million with pre-established interest reserves of $2.1$4.4 million at December 31, 2016.2020.  Land loans of $23.2$38.5 million were disbursed with pre-established interest reserves of $680,000$1.4 million at September 30, 2017,2021, compared to $51.3$24.7 million of land loans disbursed with pre-established interest reserves of $1.0 million$486 thousand at December 31, 2016.2020.  The balance for land loans with interest reserves whichthat have been extended was $5.9 million$942 thousand at September 30, 20172021 with pre-established interest reserves of $360,000$58 thousand, compared to $2.0 million$942 thousand in land loans with pre-established interest reserves of $40,000$58 thousand at December 31, 2016. 2020. 

 

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At September 30, 20172021 and December 31, 2016,2020, the Bank had no loans on non-accrual status with available interest reserves.  At September 30, 2017, $14.32021 and December 31, 2020, there was $4.1 million and $4.3 million of non-accrual non-residential construction loans and $8.0 million land loans had beenthat were originated with pre-established interest reserves.  At December 31, 2016, $5.5 million of non-accrual non-residential construction loans, and $7.8 million of non-accrual land loans had been originated with pre-established interest reserves.reserves, respectively.  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 its loans, when secured, are collateralized with real property or other pledged collateral of the borrowers. The Company generally expects loans to be paid off from the operating profits of the borrowers, refinancing by another lender, or through sale by the borrowers of the collateral. There were no loan concentrations to multiple borrowers in similar activities that exceeded 10% of total loans as of September 30, 2017,2021, or as of December 31, 2016.2020.

 

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”)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) 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. Total loans for construction, land development, and other land represented 40.7%34% of the Bank’s total risk-based capital as of September 30, 2017,2021, and 40.4%35% as of December 31, 2016.2020. Total CRE loans represented 305%276% of total risk-based capital as of September 30, 2017,2021, and 300%273% as of December 31, 20162020 and were below the Bank’s internal limit for CRE loans of 400% of total capital at both dates.

 

Allowance for Credit Losses

 

The Bank maintains the allowance for credit losses at a level that the Bank considers appropriate to absorb 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 it believes 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.

 

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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 Directors 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 to the allowance for credit losses are made by charges 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.

 

The allowance for loan losses was $121.5$131.9 million and the allowance for off-balance sheet unfunded credit commitments was $4.3$8.1 million at September 30, 2017,2021, 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 loan losses represented 0.96%0.83% of period-end gross loans excluding loans held for sale, and 175.5%180.7% of non-performing loans at September 30, 2017.2021. The comparable ratios were 1.06% of period-end gross loans excluding loans held for sale, and 239.5%229.18% of non-performing loans at December 31, 2016. 2020.

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 relate 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 2020 Form 10-K. For more information, please also see Note 2 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 effective January 1, 2021, see Notes 2 and 3 to the unaudited Consolidated Financial Statements contained in "Item 1. Consolidated Financial Statements."

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In calculating our allowance for credit losses in the third quarter of 2021, the change in Moody��s forecast of future GDP, unemployment rates, CRE and home price indexes, resulted in a small increase in the allowance for credit losses.  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.

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.

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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,

 
 

Three months ended September 30,

  

Nine months ended September 30,

  

2021

  

2020

  

2021

  

2020

 
 

2017

  

2016

  

2017

  

2016

  

(In thousands)

 

Allowance for loan losses

 

(Dollars in thousands)

         

Balance at beginning of period

 $115,809  $122,948  $118,966  $138,963  $131,256  $169,680  $166,538  $123,224 

Reversal for credit losses

  -   -   (2,500)  (15,650)

Charge-offs :

                

Impact of ASU 2016-13 adoption

  —   —   (1,560)  — 

Adjusted beginning balance

 131,256  169,680  164,978  123,224 

(Reversal)/provision for credit losses

 3,000  12,500  (15,710) 62,500 

Charge-offs:

 

Commercial loans

  (80)  (3,278)  (1,810)  (12,036) (2,649) (6,956) (19,499) (13,383)

Real estate loans

  (305)  (4,625)  (860)  (5,829)  (3)  —   (3)  — 

Total charge-offs

  (385)  (7,903)  (2,670)  (17,865) (2,652) (6,956) (19,502) (13,383)

Recoveries:

                 

Commercial loans

  575   2,006   1,401   3,720  121  3,796  1,545  6,354 

Construction loans

  47   548   143   7,871  76  —  76  — 

Real estate loans

  5,489   343   6,195   903   144   110   558   435 

Total recoveries

  6,111   2,897   7,739   12,494   341   3,906   2,179   6,789 

Balance at end of period

 $131,945  $179,130  $131,945  $179,130 
                 

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  $8,050  $4,663  $5,880  $3,855 

Provision for credit losses

  (259)  100   1,030   730 

Impact of ASU 2016-13 adoption

  —   —   6,018   — 

Adjusted beginning balance

 8,050  4,663  11,898  3,855 

(Reversal)/provision for credit losses

  50   1,000   (3,798)  1,808 

Balance at end of period

 $4,254  $2,224  $4,254  $2,224  $8,100  $5,663  $8,100  $5,663 
                 

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%

Average loans outstanding during the period

 $15,798,261  $15,592,536  $15,725,324  $15,477,883 

Total gross loans outstanding, at period-end

 $15,976,781  $15,565,779  $15,976,781  $15,565,779 

Total non-performing loans, at period-end

 $73,015  $80,059  $73,015  $80,059 

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

 0.06% (0.08%) 0.15% (0.06%)

Provision for credit losses to average loans outstanding during the period

 0.08% 0.34% (0.17%) 0.55%

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

 191.80% 230.82% 191.80% 230.82%

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

  0.88%  1.19%  0.88%  1.19%

 

(1) Excluding loans held for sale.

(2) Excluding non-accrual loans held for sale.

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OurPrior to January 1, 2021, our allowance for loan losses consists of the following:

 

 

•

Specific allowance: For impaired loans, we provide specific allowances for loans that are not collateral dependent based on an evaluation of the present value of the expected future cash flows discounted at the loan’s effective interest rate and for loans that are collateral dependent based on the fair value of the underlying collateral determined by the most recent valuation information received, which may be adjusted based on factors such as changes in market conditions from the time of valuation. If the measure of the impaired loan is less than the recorded investment in the loan, the deficiency will be charged off against the allowance for loan losses or, alternatively, a specific allocation will be established.

•

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 CRE 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, among other things, the current financial condition of the borrowers and guarantors, the prevailing value of the underlying collateral determined byif collateral dependent, charge-off history, management’s knowledge of the most recent valuation information received, which may be adjusted based onportfolio, general economic conditions, environmental factors, trends in delinquency and non-accrual, and other significant factors, such as changes in market conditions from the time of valuation. If the measurenational and local economy, volume and composition of the impairedportfolio, strength of management and loan is less than the recorded investment in the loan, the deficiency will be charged off against the allowancestaff, underwriting standards, and concentration of credit. In addition, management reviews reports on past-due loans to check for loan losses or, alternatively, a specific allocation will be established.appropriate classification.

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.

 

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%

(1) Residential mortgage loans includes equity lines.

  

September 30, 2021

  

December 31, 2020

 
      

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

 $38,213   18.5% $68,742   18.8%

Real estate construction loans

  6,344   4.3   30,854   4.0 

Commercial mortgage loans

  60,956   48.4   49,205   47.8 

Residential mortgage loans and equity lines

  26,431   28.8   17,737   29.4 

Installment and other loans

  1   0.0   —   — 

Total loans

 $131,945   100% $166,538   100%

 

The allowance allocated to commercial loans increased $1.8decreased $30.5 million, or 3.7%44.4%, to $51.0$38.2 million at September 30, 2017,2021, from $49.2$68.7 million at December 31, 2016.2020. The increasedecrease is due primarily to 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 amountallowance of general allowance determined to be required$31.5 million from the adoption of ASU 2016-13 and net charge-offs of $18.0 million offset by a provision for residential mortgage loans. .loan losses of $18.9 million.

 

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

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Table of the increase in the amount of general allowance determined to be required for commercial mortgage loans.

Contents

 

The allowance allocated to real estate construction loans decreased $1.3$24.5 million, or 5.6%79.3%, to $22.0$6.3 million at September 30, 20172021, from $23.3$30.9 million at December 31, 2016.2020. The decrease is due primarily to thea decrease in the amountallowance of specific reserves and general$24.3 million from the adoption of ASU 2016-13. The $24.3 million decrease in allowance was primarily due to a change in methodology from the incurred loss model in 2020 to CECL based modeling in 2021. Under the CECL based modeling, the allowance is determined using actual loss experience, average life of loans, loan-to-collateral value among other factors, as compared to be required for construction loans.only historical loss experience used in incurred loss model.

 

$35.0 million from the adoption of ASU 2016-13 offset by a reversal for loan losses of $23.4 million related to the improvements in projected future macro-economic conditions in the nine months ended September 30, 2021.

The allowance allocated for residential mortgage loans and equity lines increased by $8.7 million, or 49.0%, to $26.4 million as of September 30, 2021, from $17.7 million at December 31, 2020. The increase is due primarily to an increase in the allowance of $19.2 million from the adoption of ASU 2016-13 offset by a reversal for loan losses of $10.9 million related to improvements in projected future macro-economic conditions in the nine months ended September 30, 2021.

 

Deposits

 

Total deposits were $12.6$17.0 billion at September 30, 2017,2021, an increase of $887$897.5 million, or 7.6%5.6%, from $11.7$16.1 billion at December 31, 2016.2020. The following table displayssets forth the deposit mix as of the dates indicated:

 

 

September 30, 2021

  

December 31, 2020

 
 

September 30, 2017

  

December 31, 2016

  

Amount

  

Percentage

  

Amount

  

Percentage

 
 

Amount

  

Percentage

  

Amount

  

Percentage

  (In thousands) 

Deposits

 

(Dollars in thousands)

  

 

 

Non-interest-bearing demand deposits

 $2,730,006   21.7% $2,478,107   21.2% $4,024,504  23.7% $3,365,086  20.9%

Interest bearing demand deposits

  1,379,100   11.0   1,230,445   10.6  2,202,956  13.0  1,926,135  12.0 

Money market deposits

  2,370,724   18.9   2,198,938   18.8  4,132,912  24.3  3,359,191  20.8 

Savings deposits

  925,312   7.4   719,949   6.2  920,138  5.4  785,672  4.9 

Time deposits

  5,156,553   41.0   5,047,287   43.2   5,726,360   33.6   6,673,317   41.4 

Total deposits

 $12,561,695   100.0% $11,674,726   100.0% $17,006,870   100.0% $16,109,401   100.0%

 

 

The following table showssets forth the maturity distribution of time deposits as ofat September 30, 2017:2021:

 


 

At September 30, 2021

 
 

Time Deposits -under $100,000

  

Time Deposits -

$100,000 and over

  

Total Time

Deposits

  

Time Deposits -

under $100,000

  

Time Deposits -

$100,000 and over

  

Total Time

Deposits

 
 

(In thousands)

  

(In thousands)

 

Less than three months

 $320,157  $921,819  $1,241,976  $187,913  $1,331,317  $1,519,230 

Three to six months

  320,580   836,506   1,157,086  398,779  1,641,597  2,040,376 

Six to twelve months

  371,407   1,704,311   2,075,718  184,602  1,771,945  1,956,547 

Over one year

  224,168   457,605   681,773   68,130   142,077   210,207 

Total

 $1,236,312  $3,920,241  $5,156,553  $839,424  $4,886,936  $5,726,360 
 

Percent of total deposits

  9.8%  31.2%  41.0% 4.9% 28.7% 33.7% 

 

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Borrowings

 

Borrowings include federal funds purchased, securities sold under agreements to repurchase, 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 September 30, 2021, and December 31, 2020. Advances from the FHLB were $20.0 million at an average rate of 2.89% as of September 30, 2021, compared to Repurchase. $150.0 million at an average rate of 2.15% as of December 31, 2020. As of September 30, 2021, FHLB advances of $20.0 million will mature in May 2023.

Junior Subordinated NotesSecurities sold under agreements – At September 30, 2021, Junior Subordinated Notes totaled $119.1 million with a weighted average interest rate of 2.36%, 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 of2.40% at December 31, 2016. Final 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.2020. 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.

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, issuedhave a stated maturity term of 30 years. The trusts are not consolidated with the Company in connectionaccordance with our various pooled trust preferred securities offerings, and $136.1 million of deferred payments to Bank SinoPac.an accounting pronouncement that took effect in December 2003.

 

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

Off-Balance-Sheet Arrangements and Contractual Obligations

 

The following table summarizes the Company’sCompany’s contractual obligations to make future payments as of September 30, 2017.2021. 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  $5,516,154  $203,360  $6,833  $13  $5,726,360 

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  —  20,000  —  —  20,000 

Other borrowings

  -   -   -   17,518   17,518  —  —  —  23,197  23,197 

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   9,577   14,696   6,452   3,338   34,063 

Total contractual obligations and other commitments

 $5,124,599  $748,756  $145,707  $144,717  $6,163,779  $5,525,731  $238,056  $13,285  $145,684  $5,922,756 

 

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 typically 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 seek to 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.

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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$2.46 billion as of September 30, 2017,2021, an increase of $140.2$45.1 million, from $1.8$2.42 billion as of December 31, 2016,2020, primarily due to net income of $150.1$223.0 million, stock-based compensation of $4.1 million, and $34.9proceeds from dividend reinvestment of $2.6 million, offset, in part, by purchases of commontreasury stock issued for the acquisition of SinoPac Bancorp partially offset by$100.7 million, common stock cash dividends of $50.5$73.3 million and shares withheld related to net share settlementa decrease in other comprehensive income of RSUs of $5.1$5.7 million.

 

The following table summarizes changes in total equity for the nine months ended September 30, 2017:2021:

 

  

Nine months ended

 
  

September 30, 2021

 
  

(In thousands)

 

Net income

 $222,980 

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

  (3,139)

Proceeds from shares issued through the Dividend Reinvestment Plan

  2,619 

RSUs distributed

  1 

Shares withheld related to net share settlement of RSUs

  (2,632)

Stock issued to directors

  850 

Purchase of treasury stock

  (100,668)

Share-based compensation

  4,149 

Cash dividends paid to common stockholders

  (73,335)

Other comprehensive income

  (5,678)

Net increase in total equity

 $45,147 

 

  

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 

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Capital Adequacy Review

Management seeks to maintain the Company’sCompany’s capital at a level sufficient to support future growth, protect depositors and stockholders, and comply with various regulatory requirements.

 

Both Bancorp’sThe following tables set forth actual and the Bank’s regulatoryrequired capital continued to exceed the regulatory minimum requirements under Basel III rules that became effective January 1, 2015, with transitional provisionsratios as of September 30, 2017. In addition,2021 and December 31, 2020 for Bancorp and the capital ratiosBank 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 2020 Form 10-K for a more detailed discussion of the Basel III Capital Rules.

  

Actual

  

Minimum Capital

Required - Basel III

  

Required to be Considered

Well Capitalized

 
  

Capital Amount

  

Ratio

  

Capital Amount

  

Ratio

  

Capital Amount

  

Ratio

 

 

 

(In thousands)

 
September 30, 2021                        
                         

Common Equity Tier 1 to Risk-Weighted Assets

                     

Cathay General Bancorp

 $2,070,291   13.29  $1,090,278   7.00  $1,012,401   6.50 

Cathay Bank

  2,137,383   13.73   1,089,593   7.00   1,011,765   6.50 
                         

Tier 1 Capital to Risk-Weighted Assets

                        

Cathay General Bancorp

  2,070,291   13.29   1,323,909   8.50   1,246,032   8.00 

Cathay Bank

  2,137,383   13.73   1,323,078   8.50   1,245,250   8.00 
                         

Total Capital to Risk-Weighted Assets

                        

Cathay General Bancorp

  2,325,836   14.93   1,635,417   10.50   1,557,540   10.00 

Cathay Bank

  2,277,428   14.63   1,634,390   10.50   1,556,562   10.00 
                         

Leverage Ratio

                        

Cathay General Bancorp

  2,070,291   10.67   776,410   4.00   970,513   5.00 

Cathay Bank

  2,137,383   11.02   775,500   4.00   969,375   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)

 
December 31, 2020                        
                         

Common Equity Tier 1 to Risk-Weighted Assets

                     

Cathay General Bancorp

 $2,016,448   13.53  $1,042,967   7.00  $968,470   6.50 

Cathay Bank

  2,059,056   13.83   1,041,911   7.00   967,489   6.50 
                         

Tier 1 Capital to Risk-Weighted Assets

                        

Cathay General Bancorp

  2,016,448   13.53   1,266,460   8.50   1,191,963   8.00 

Cathay Bank

  2,059,056   13.83   1,265,178   8.50   1,190,755   8.00 
                         

Total Capital to Risk-Weighted Assets

                        

Cathay General Bancorp

  2,304,366   15.47   1,564,451   10.50   1,489,953   10.00 

Cathay Bank

  2,231,474   14.99   1,562,866   10.50   1,488,444   10.00 
                         

Leverage Ratio

                        

Cathay General Bancorp

  2,016,448   10.94   737,382   4.00   921,727   5.00 

Cathay Bank

  2,059,056   11.19   736,317   4.00   920,396   5.00 

As of September 30, 2021, capital levels at Bancorp and the Bank place it inexceed all capital adequacy requirements under the fully phased-in Basel III Capital Rules. Based on the ratios presented above, capital levels as of September 30, 2021 at Bancorp and the Bank exceed the minimum levels necessary to be considered “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%.capitalized.”

 

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The following table presents Bancorp’s and the Bank’s capital and leverage ratios as of September 30, 2017, and December 31, 2016:

  

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     

(1)

The quarterly total average assets reflect all debt securities at amortized cost, equity securities with readily determinable fair values at the lower of cost or fair value, and equity securities without readily determinable fair values at historical cost.

 

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. 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 Board of DirectorsWe increased the common stock dividend tofrom $0.21 per share in December 2016. The termsthe fourth quarter of our Junior Subordinated Notes also limit our ability2016, to pay dividends.$0.24 per share in the fourth quarter of 2017, and to $0.31 per share in the fourth quarter of 2018.

 

The Company declared a cash dividend of $0.21$0.31 per share on 80,795,51277,860,539 shares outstanding on September 1, 2017,August 19, 2021 for distribution to holders of our common stock on September 11, 2017, $0.219, 2021. The Company declared a cash dividend of $0.31 per share on 79,847,12479,188,570 shares outstanding on June 1, 2017,May 28, 2021, for distribution to holders of our common stock on June 12, 2017, and $0.217, 2021. The Company declared a cash dividend of $0.31 per share on 79,788,54179,514,076 shares outstanding on March 1, 2017,2021, for distribution to holders of our common stock on March 10, 2017.11, 2021. The Company paid total cash dividends of $50.5$73.3 million duringin the first nine months of 2017.2021.

 

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.

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 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.

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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 September 30, 2017,2021, and 2020, 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 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 2016.2021, and December 31, 2020, were as follows:

  

September 30, 2021

  

December 31, 2020

 

 

 

(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

  0.15%  0.44%
         

Unrealized loss, net of taxes (1)

 $(4,696) $(6,890)

  

Three months ended

  

Nine months ended

 
  

September 30, 2021

  

September 30, 2020

  

September 30, 2021

  

September 30, 2020

 

Periodic net settlement of swaps (2)

 $754  $702  $2,196  $1,471 

(1) Included in other comprehensive income.

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

 

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As of September 30, 2017,2021, the Bank has entered intoBank’s outstanding interest rate swap contracts withhad a notional amount of $779.4 million for various terms from fourthree to eightten years. TheseThe Bank entered into these interest rate swap contracts that 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. 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 September 30, 2017, the notional amount of fair value interest rate swaps was $510.6 million2021, 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, 2017,2020, the ineffective portion of these interest rate swaps was not significant. The notional amount and net unrealized loss of the Company’s fair value derivative financial instruments as of September 30, 2021, and December 31, 2020, were as follows:

  

September 30, 2021

  

December 31, 2020

 

 

 

(In thousands)

 
Fair value swap hedges:        

Notional

 $779,392  $478,266 

Weighted average fixed rate-pay

  2.48%  4.56%

Weighted average variable rate spread

  1.22%  2.46%

Weighted average variable rate-receive

  1.31%  3.11%
         

Net unrealized loss (1)

 $(8,255) $(15,082)

  

Three months ended

  

Nine months ended

 
  

September 30, 2021

  

September 30, 2020

  

September 30, 2021

  

September 30, 2020

 

Periodic net settlement of swaps (2)

 $(2,363) $(2,510) $(7,137) $(5,307)

(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 has designated as a partial-term hedging election $404.7 million notional as last-of-layer hedge on pools of loans with a notational value of $816.7 million as of September 30, 2021. 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 $404.7 million portion of $816.7 million fixed rate loan pools in order to reduce the Company’s exposure to higher interest rates for the last-of-layer tranches. As of September 30, 2021, the last-of-layer loan tranche had a fair value basis adjustment of $943 thousand. 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. Cash posted as collateral by Bancorp related to derivative contracts totaled $6.3$24.3 million as of September 30, 2017.2021 and $11.9 million as of December 31, 2020.

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The Company from time to time 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, theThe 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 September 30, 2017. As of2021, 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 million2020, were as of December 31, 2016.follows:

 

 

 

September 30, 2021

  

December 31, 2020

 

 

 

(In thousands)

 
Derivative financial instruments not designated as hedging instruments:        

Notional amounts:

        

Spot, forward, and swap contracts with positive fair value

 $161,535  $151,244 

Spot, forward, and swap contracts with negative fair value

 $70,184  $132,813 

Fair value:

        

Spot, forward, and swap contracts with positive fair value

 $1,319  $4,658 

Spot, forward, and swap contracts with negative fair value

 $1,723  $(2,200)

 

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, federal funds purchased, securities sold under agreements to repurchase, and advances from the FHLB. As of September 30, 2017,2021, 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%18.1% compared to 12.6%14.7% as of December 31, 2016.2020.

 

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 ofAt September 30, 2017,2021, the two subsidiary banks’Bank had an approved credit line with the FHLB totaled $5.5of San Francisco totaling $4.8 billion. AdvancesTotal advances from the FHLB of San Francisco were $595.0$20.0 million and standby letter of credits issued by the FHLB on the Company’s behalf were $100.7$675.4 million as of September 30, 2017. The2021. These borrowings bear fixed rates and are secured by the Bank’s loans. See Note 11 to the Consolidated Financial Statements. At September 30, 2021, 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$820 thousand of its commercial loans and $1.9 million of securities to the Federal Reserve Bank’s Discount Window under the Borrower-in-Custody program to secure these borrowings. Asprogram. The Bank had borrowing capacity of $2.6 million from the Federal Reserve Bank Discount Window at September 30, 2017, the borrowing capacity under the Borrower-in-Custody program was $47.3 million.2021.

 

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 ofsecurities available-for-sale. At September 30, 2017,2021, investment securities totaled $1.4$1.1 billion, with $291.4$30.9 million pledged as collateral for borrowings and other commitments. The remaining $1.1$1.0 billion was available as additional liquidity or to be pledged as collateral for additional borrowings.

 

Approximately 87.0%96% of the Company’sour time deposits mature within one year or less as of September 30, 2017.2021. 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 September 30, 2021, 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.

 

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$155 million in 2016 and $208.2$96.0 million induring the first nine months of 2017.2021 and 2020, respectively.

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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 September 30, 2017:2021:

 

  

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   18.2  14.5 

+100

   4.5   1.8   8.6  7.0 
-100   -1.9   4.9   -0.8  -3.7 
-200   -4.7   -0.9   -0.9  -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.

 

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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 third quarter of 20172021 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

PART II– OTHER INFORMATION

 

Item 1.LEGAL PROCEEDINGS.

 

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.

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Item 1A.     1A.RISK FACTORS.

 

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 Annual2020 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 2020 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 2020 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

(July 1, 2021 - July 31, 2021)

90,000

$38.26

90,000

$8,028,035

(August 1, 2021 - August 31, 2021)

210,075

$38.21

210,075

$0

(September 1, 2021 - September 30, 2021)

642,538

$39.95

642,538

$99,331,597

Total

942,613

$39.40

942,613

$99,331,597

 

 

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 

 

 

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.”

 

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Item 3.DEFAULTS UPON SENIOR SECURITIES.

 

Not applicable.

 

Item 4.MINE SAFETY DISCLOSURES.

 

Not applicable.

 

Item 5.OTHER INFORMATION.

 

None.

None.

 

Item 6.EXHIBITS.

 

Exhibit 31.1

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

Exhibit 31.2

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

Exhibit 32.1

Certification of the Chief Executive Officer pursuant to Section 302906 of the Sarbanes-Oxley Act of 2002.++

 

Exhibit 31.2

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

Exhibit 32.1

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

Exhibit 32.2

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

Exhibit 101.INS

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

Exhibit 101.SCH

Inline XBRL Taxonomy Extension Schema Document*

 

Exhibit 101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document*

 

Exhibit 101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document*

 

Exhibit 101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document*

 

Exhibit 101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document*

Exhibit 104

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

 

____________________

+

Filed herewith.

++

FiledFurnished herewith.

 

++

Furnished herewith.

*

XBRL (Extensible Business Reporting Language) information shall not be deemed to be filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, shall not be deemed to be filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise shall not be subject to liability under these sections, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, except as expressly set forth by specific reference in such filing.

Filed electronically herewith.

 

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SIGNATURES

 

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

 

 

Cathay General Bancorp

(Registrant)

 

Date: November 7, 2017
8, 2021  

 

/s/ Pin TaiChang M. Liu

Pin Tai

Chang M. Liu

President and Chief Executive Officer and President

 

Date: November 8, 2021  

Date: November 7, 2017

/s/ Heng W. Chen

 
 /s/ Heng W. Chen 
 

Heng W. Chen

Executive Vice President and

Chief Financial Officer

 

 

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