CATHAY GENERAL BANCORP 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
Critical Accounting Policies
The discussion and analysis of the Company's financial condition and results of operations are based upon its unaudited Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted inthe United States of America . The preparation of these Consolidated Financial Statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues, and expenses, and related disclosures of contingent assets and liabilities at the date of the Consolidated Financial Statements. Actual results may differ from these estimates under different assumptions or conditions.
Critical accounting policies involve significant judgments, assumptions and uncertainties and are essential to understanding the Company's results of operations and financial condition. Management of the Company considers the following to be critical accounting policies:
Accounting for the allowance for loan losses involves significant judgments and assumptions by management, which have a material impact on, among other things, the carrying value of net loans. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances as described in "Allowance for Credit Losses" under "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies" in the 2020 Form 10-K. For more information, please also see Note 2 to the Company's unaudited Consolidated Financial Statements.
Recent Developments: Impact of and Response to COVID-19 Pandemic
The ongoing COVID-19 pandemic has significantly heightened the level of challenges, risks and uncertainties facing our Company and its operations.
Additional potential impacts arising from, and our anticipated responses to, the
COVID-19 pandemic are set forth below. See also the COVID-related risk factors
as previously disclosed in Part I, Item 1A, of the 2020 Form 10-K.
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The below table details our exposure to borrowers in industries generally considered to be the most impacted by the COVID-19 pandemic:
September 30, 2021
Percent of Total
Industry (1) Loan Balance 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) Balances capture credit exposures in the business segments that manage the
significant majority of industry relationships. Balances consist of
commercial real estate secured loans where the 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 betweenMarch 1, 2020 , and the earlier ofJanuary 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 ofDecember 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 throughSeptember 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 onApril 3, 2020 . As ofSeptember 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 theU.S. Treasury . PPP loans are guaranteed by the SBA and therefore we believe PPP loans generally do not represent a material credit risk. 52
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Table of Contents Highlights ? Total loans, excluding PPP loans, increased by 9.1% annualized.
? The net interest margin increased to 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 the same quarter in
2020.
? Total deposits, excluding time deposits, increased for the quarter by
million, or 25.9% annualized.
Quarterly Statement of Operations Review
Net Income Net income for the quarter endedSeptember 30, 2021 , was$72.4 million , an increase of$15.6 million , or 27.5%, compared to net income of$56.8 million for the same quarter a year ago. Diluted earnings per share for the quarter endedSeptember 30, 2021 , was$0.93 per share compared to$0.71 per share for the same quarter a year ago. Return on average stockholders' equity was 11.61% and return on average assets was 1.45% for the quarter endedSeptember 30, 2021 , compared to a return on average stockholders' equity of 9.53% and a return on average assets of 1.18% for the same quarter a year ago. Financial Performance Three months ended September 30, 2021 September 30, 2020 Net income (in millions) $ 72.4 $ 56.8 Basic earnings per common share $ 0.93 $ 0.71 Diluted earnings per common share $ 0.93 $ 0.71 Return on average assets 1.45 % 1.18 % Return on average total stockholders' equity 11.61 % 9.53 % Efficiency ratio 43.85 % 51.53 %
Net Interest Income Before Provision for Credit Losses
Net interest income before provision for credit losses increased$15.0 million , or 10.9%, to$152.5 million during the third quarter of 2021, compared to$137.5 million during the same quarter a year ago. The increase was due primarily to a decrease in interest expense from deposits.
The net interest margin was 3.22% for the third quarter of 2021 compared to 3.02% for the third quarter of 2020 and 3.24% for the second quarter of 2021.
For the third quarter of 2021, the yield on average interest-earning assets was 3.56%, the cost of funds on average interest-bearing liabilities was 0.48%, and the cost of interest-bearing deposits was 0.44%. In comparison, for the third quarter of 2020, the yield on average interest-earning assets was 3.78%, the cost of funds on average interest-bearing liabilities was 1.04%, and the cost of interest-bearing deposits was 0.99%. The decrease in the yield on average interest-earning assets resulted mainly from lower lending rates. The decrease in average interest-bearing liabilities was a result of the renewal of maturing higher rate certificates of deposit at lower rates and 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 3.08% for the quarter endedSeptember 30, 2021 , compared to 2.74% for the same quarter a year ago. 53
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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 endedSeptember 30, 2021 , and 2020. Average outstanding amounts included in the table are daily averages. Interest-Earning
Assets and Interest-Bearing Liabilities
Three
months ended
2021 2020
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate (1)(2) Balance Expense Rate (1)(2)
(In thousands)
Interest-earning assets:
Total loans (1) $ 15,798,496 $ 163,948 4.12 % $ 15,592,536 $ 167,556 4.28 %
Investment securities 1,058,004 3,707 1.39 1,145,092 4,115 1.43
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 18,767,535 168,627 3.56 18,140,413 172,234 3.78
Non-interest earning assets:
Cash and due from banks 155,604 136,671
Other non-earning assets 1,027,921 1,064,371
Total non-interest earning assets 1,183,525 1,201,042
Less: Allowance for loan losses (131,316 ) (172,225 )
Deferred loan fees (7,302 ) (5,010 )
Total assets $ 19,812,442 $ 19,164,220
Interest-bearing liabilities:
Interest-bearing demand accounts $ 2,109,632 $ 524 0.10 % $ 1,695,882 $ 724 1.74 %
Money market accounts 4,228,025 4,554 0.43 3,119,091 4,833 0.62
Savings accounts 914,540 164 0.07 766,521 204 0.11
Time deposits 5,882,576 9,299 0.63 7,281,403 26,247 1.43
Total interest-bearing deposits 13,134,773 14,541 0.44 12,862,897 32,008 0.99
Other borrowings 43,246 146 1.34 263,306 1,266 1.91
Long-term debt 119,136 1,455 4.84 119,136 1,456 4.86
Total interest-bearing liabilities 13,297,155 16,142 0.48 13,245,339 34,730 1.04
Non-interest bearing liabilities:
Demand deposits 3,830,485 3,301,253
Other liabilities 211,636 246,811
Total equity 2,473,166 2,370,817
Total liabilities and equity $ 19,812,442 $ 19,164,220
Net interest spread 3.08 % 2.74 %
Net interest income $ 152,485 $ 137,504
Net interest margin 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 following table summarizes the changes in interest income and interest
expense attributable to changes in volume and changes in interest rates for the
three months ended
Taxable-Equivalent Net Interest Income - Changes Due to Volume and Rate(1)
Three months ended September 30,
2021-2020
Increase/(Decrease) in
Net Interest Income Due to:
Changes in Changes in Total
Volume Rate Change
(In thousands)
Interest-earning assets:
Loans $ 2,292 $ (5,900 ) $ (3,608 )
Investment securities (299 ) (109 ) (408 )
Federal Home Loan Bank stock - 42 42
Deposits with other banks 155 213 368
Total changes in interest income 2,148 (5,754 ) (3,606 )
Interest-bearing liabilities: Interest-bearing demand accounts 149 (349 ) (200 ) Money market accounts 1,433 (1,712 ) (279 ) Savings accounts 34 (74 ) (40 ) Time deposits (4,314 ) (12,634 ) (16,948 ) Other borrowed funds (824 ) (296 ) (1,120 ) Long-term debt - 1 1 Total changes in interest expense (3,522 ) (15,064 ) (18,586 ) Changes in net interest income$ 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 ofJanuary 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 ofSeptember 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 ofJune 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. 55
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The following table sets forth the charge-offs and recoveries for the periods
indicated:
Three months ended September 30, Nine months ended September 30,
2021 2020 2021 2020
(In thousands)
Charge-offs:
Commercial loans $ 2,649 $
6,956
3 - 3 -
Total charge-offs 2,652 6,956 19,502 13,383
Recoveries:
Commercial loans 121 3,796 1,545 6,354
Construction loans 76 - 76 -
Real estate loans (1) 144 110 558 435
Total recoveries 341 3,906 2,179 6,789
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-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 $12.2 million for the third quarter of
2021, an increase of $2.2 million , or 22.0%, compared to $10.0 million for the
third quarter of 2020. The increase was primarily due to a $1.6 million decrease
in net loss from equity securities, a $1.0 million increase in wealth management
fees and commissions offset, in part by, a $1.4 million decrease in gain on
low-income housing investments, when compared to the same quarter a year ago.
Non-Interest Expense
Non-interest expense decreased $3.8 million , or 5.0%, to $72.2 million in the
third quarter of 2021 compared to $76.0 million in the same quarter a year ago.
The decrease in non-interest expense in the third quarter of 2021 was primarily
due to $3.8 million in higher amortization expense of investments in low-income
housing and alternative energy partnerships in the third quarter of 2020
compared to 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 2021 was 19.05% compared to 3.7%
for the third quarter of 2020. In the second quarter of 2020, the Company made a
new alternative energy investment which resulted in a lower full year effective
tax rate for 2020 resulting from tax credits generated from the new alternative
energy investment. The effective tax rate includes the impact of alternative
energy investments and low-income housing tax credits.
Year-to-Date Statement of Operations Review
Net income for the nine months endedSeptember 30, 2021 , was$223.0 million , an increase of$65.0 million , or 41.1%, compared to net income of$158.0 million for the same period a year ago. Diluted earnings per share was$2.82 compared to$1.98 per share for the same period a year ago. The net interest margin for the nine months endedSeptember 30, 2021 , was 3.22% compared to 3.12% for the same period a year ago. 56
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Return on average stockholders' equity was 12.11% and return on average assets was 1.54% for the nine months endedSeptember 30, 2021 , compared to a return on average stockholders' equity of 8.99% and a return on average assets of 1.13% for the same period a year ago. The efficiency ratio for the nine months endedSeptember 30, 2021 , was 44.71% compared to 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 assets and liabilities for the nine months endedSeptember 30, 2021 , and 2020. Average outstanding amounts included in the table are daily averages. Interest-Earning
Assets and Interest-Bearing Liabilities
Nine
months ended
2021 2020
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate (1)(2) Balance Expense Rate (1)(2)
(In thousands)
Interest-earning assets:
Total loans (1) $ 15,725,324 $ 485,159 4.12 % $ 15,477,883 $ 513,575 4.43 %
Investment securities 1,010,328 9,963 1.32 1,263,937 17,130 1.81
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 18,358,753 497,319 3.62 17,653,439 532,978 4.03
Non-interest earning assets:
Cash and due from banks 153,790 149,777
Other non-earning assets 1,034,752 1,048,008
Total non-interest earning assets 1,188,542 1,197,785
Less: Allowance for loan losses (146,640 ) (148,437 )
Deferred loan fees (6,224 ) (1,787 )
Total assets $ 19,394,431 $ 18,701,000
Interest-bearing liabilities:
Interest-bearing demand accounts $ 1,989,833 $ 1,819 0.12 % $ 1,557,371 $ 2,176 0.19 %
Money market accounts 3,913,073 13,893 0.47 2,772,463 16,712 0.81
Savings accounts 885,863 590 0.09 746,870 783 0.14
Time deposits 6,105,604 33,362 0.73 7,463,821 92,213 1.65
Total interest-bearing deposits 12,894,373 49,664 0.51 12,540,525 111,884 1.19
Other borrowings 86,410 1,037 1.60 355,758 4,468 1.68
Long-term debt 119,136 4,318 4.85 119,136 4,336 4.86
Total interest-bearing liabilities 13,099,919 55,019 0.56 13,015,419 120,688 1.24
Non-interest bearing liabilities:
Demand deposits 3,613,026 3,089,578
Other liabilities 219,591 249,954
Total equity 2,461,895 2,346,049
Total liabilities and equity $ 19,394,431 $ 18,701,000
Net interest spread 3.06 % 2.79 %
Net interest income $ 442,300 $ 412,290
Net interest margin 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 Volume and Rate(1)
Nine months ended September 30,
2021-2020
Increase/(Decrease) in
Net Interest Income Due to:
Changes in Changes in Total
Volume Rate Change
(In thousands)
Interest-earning assets:
Loans $ 8,044 $ (36,458 ) $ (28,414 )
Investment securities (3,044 ) (4,123 ) (7,167 )
Federal Home Loan Bank stock (3 ) (2 ) (5 )
Deposits with other banks 864 (935 ) (71 )
Total changes in interest income 5,861 (41,518 ) (35,657 )
Interest-bearing liabilities: Interest-bearing demand accounts 512 (869 ) (357 ) Money market accounts 5,469 (8,288 ) (2,819 ) Savings accounts 128 (321 ) (193 ) Time deposits (14,486 ) (44,365 ) (58,851 ) Other borrowed funds (3,243 ) (188 ) (3,431 ) Long-term debt - (18 ) (18 ) Total changes in interest expense (11,620 ) (54,049 ) (65,669 ) Changes in net interest income$ 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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Table of Contents Balance Sheet Review Assets Total assets were$19.9 billion as ofSeptember 30, 2021 , an increase of$817.3 million , or 4.3%, from$19.0 billion as ofDecember 31, 2020 , primarily due to an increase in short-term investments and commercial mortgage loans.
Securities Available-for-Sale
Prior toJanuary 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. EffectiveJanuary 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. 59
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Securities available-for-sale represented 5.4% of total assets as ofSeptember 30, 2021 , compared to 5.4% of total assets as ofDecember 31, 2020 . Securities available-for-sale were$1.1 billion as ofSeptember 30, 2021 , compared to$1.0 billion as ofDecember 31, 2020 .
The following tables set forth the amortized cost, gross unrealized gains, gross
unrealized losses, and fair value of securities available-for-sale as of
September 30, 2021
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
(In thousands)
Securities Available-for-Sale
U.S. treasury securities $ 40,206 $ 5 $ - $ 40,211
U.S. government agency entities 89,823 1,255 135 90,943
Mortgage-backed securities 798,905 12,490 6,328 805,067
Collateralized mortgage obligations 9,792 - 231 9,561
Corporate debt securities 134,348 514 1,428 133,434
Total $ 1,073,074 $ 14,264 $ 8,122 $ 1,079,216
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 - 34 10,324
Corporate debt securities 118,271 367 267 118,371
Total $ 1,019,230 $ 18,779 $ 1,459 $ 1,036,550 For additional information, see Note 7 to the Company's unaudited Consolidated Financial Statements.
Securities available-for-sale having a carrying value of$30.1 million as ofSeptember 30, 2021 , and$22.7 million as ofDecember 31, 2020 , were pledged to secure public deposits, other borrowings and treasury tax and loan. 60
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Table of ContentsEquity Securities The Company recognized a net gain of$3 thousand for the three months endedSeptember 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 endedSeptember 30, 2020 . The Company recognized a net loss of$3.7 million for the nine months endedSeptember 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 endedSeptember 30, 2020 . Equity securities were$20.1 million and$23.7 million as ofSeptember 30, 2021 , andDecember 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. AtSeptember 30, 2021 , no AFS debt securities were in default. Loans Gross loans were$16.0 billion atSeptember 30, 2021 , an increase of$332.4 million , or 2.1%, from$15.6 billion atDecember 31, 2020 . The increase was primarily due to increases of$280.5 million , or 3.71%, in commercial mortgage loans, and a$106.4 million increase, or 4.1%, in commercial loans. The loan balances and composition atSeptember 30, 2021 , compared toDecember 31, 2020 are set forth below: September 30, % of Gross December 31, % of Gross % 2021 Loans 2020 Loans Change (in thousands) Commercial loans$ 2,871,693 18.0 %$ 2,836,833 18.1 % 1.2 % Residential mortgage loans 4,144,789 25.9 4,145,389 26.5 (0.0 ) Commercial mortgage loans 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 433,206 2.7 424,555 2.7 2.0 Installment and other loans 3,370 0.0 3,100 0.0 8.7 Gross loans$ 15,976,781 100 %$ 15,644,396 100 % 2.1 % Allowance for loan losses (131,945 ) (166,538 ) (20.8 ) Unamortized deferred loan fees (3,835 ) (2,494 ) 53.8 Total loans, net$ 15,841,001 $ 15,475,364 2.4 % 61
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Table of Contents Non-performing Assets Non-performing assets include loans past due 90 days or more and still accruing interest, non-accrual loans, and 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 to seek to identify problem loans. From time to time during the ordinary course of business, management may become aware of borrowers that may not be able to meet the contractual requirements of their loan agreements. Such loans generally are placed under closer supervision with consideration given to placing the loans on non-accrual status, the need for an additional allowance for loan losses, and (if appropriate) partial or full charge-off. The ratio of non-performing assets to total assets was 0.4% atSeptember 30, 2021 , compared to 0.4% atDecember 31, 2020 . Total non-performing assets increased$0.7 million , or 0.9%, to$78.3 million atSeptember 30, 2021 , compared to$77.6 million atDecember 31, 2020 , primarily due to an increase of$1.0 million , or 1.5%, in non-accruing loans. As a percentage of gross loans plus OREO, our non-performing assets were 0.49% as ofSeptember 30, 2021 , compared to 0.50% as ofDecember 31, 2020 . The non-performing loan portfolio coverage ratio, defined as the allowance for credit losses to non-performing loans, decreased to 191.8% as ofSeptember 30, 2021 , from 237.3% as ofDecember 31, 2020 . 62
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The following table sets forth the changes in non-performing assets and TDRs as ofSeptember 30, 2021 , compared toDecember 31, 2020 , and toSeptember 30, 2020 : September 30, December 31, September 30, 2021 2020 % Change 2020 % Change (in thousands) Non-performing assets Accruing loans past due 90 days or more$ 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 AtSeptember 30, 2021 , total non-accrual loans were$68.7 million , an increase of$1.0 million , or 1.5%, from$67.7 million atDecember 31, 2020 , and a decrease of$8.5 million , or 11.0%, from$77.2 million atSeptember 30, 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, 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. 63
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The following tables set forth the type of properties securing the non-accrual
portfolio loans and the type of businesses the borrowers engaged in as of the
dates indicated:
September 30, 2021 December 31, 2020
Real Real
Estate (1) Commercial Estate (1) Commercial
(In thousands)
Type of Collateral
Single/multi-family residence $ 12,148 $ 7,707 $ 7,126 $ 9,031
Commercial real estate 39,436 338 37,471 338
Land - 2,734 - 2,634
Personal property (UCC) - 6,318 - 11,084
Total $ 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, 2021 December 31, 2020
Real Real
Estate (1) Commercial Estate (1) Commercial
(In thousands)
Type of Business
Real estate development $ 15,523 $ - $ 12,875 $ 33
Wholesale/Retail 26,958 13,006 25,291 11,290
Import/Export - 3,190 - 6,191
Other 9,103 901 6,431 5,573
Total $ 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
Prior to January 1, 2021 , a loan was considered to be impaired when it was
probable that we 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 delinquency 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 TDRs. Those loans with a balance
less than our defined selection criteria, generally a loan amount less than $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 generally range
between 3% to 6% of the fair value, depending on the size of the impaired loan),
is charged off against the allowance for loan losses. Non-accrual impaired
loans, including TDRs, are not returned to accrual status unless the unpaid
interest has been brought current and full repayment of the recorded balance is
expected or if the borrower has made six consecutive monthly payments of the
scheduled amounts due, and TDRs are reviewed for continued impairment until they
are no longer reported as TDRs.
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As ofSeptember 30, 2021 , recorded investment in non-accrual loans was$68.7 million . As ofDecember 31, 2020 , recorded investment in impaired loans totaled$95.4 million and was comprised of non-accrual loans of$67.7 million and accruing TDRs of$27.7 million . For non-accrual loans, the amounts previously charged off represent 10.6% of the contractual balances for non-accrual loans as ofSeptember 30, 2021 . For impaired loans, the amounts previously charged off represent 7.1% as ofDecember 31, 2020 , of the contractual balances for impaired loans. As ofSeptember 30, 2021 ,$51.6 million , or 75.1%, of the$68.7 million of non-accrual loans were secured by real estate compared to$44.6 million , or 65.9%, of the$67.7 million of non-accrual loans that were secured by real estate as ofDecember 31, 2020 . The Bank generally seeks to obtain current appraisals, sales contracts, or other available market price information intended to provide updated factors in evaluating potential loss. As ofSeptember 30, 2021 ,$6.5 million of the$131.9 million allowance for loan losses was allocated for non-accrual loans and$125.4 million was allocated to the general allowance. As ofDecember 31, 2020 ,$6.4 million of the$166.5 million allowance for loan losses was allocated for impaired loans and$160.1 million was allocated to the general allowance. The allowance for loan losses to non-performing loans was 180.7% as ofSeptember 30, 2021 , compared to 229.2% as ofDecember 31, 2020 , primarily due to an increase in the non-accrual loans. Non-accrual loans also include those TDRs that do not qualify for accrual status. The following table presents non-accrual loans and the related allowance as ofSeptember 30, 2021 : September 30, 2021 Unpaid Principal Recorded Balance Investment Allowance (In thousands) With no allocated allowance Commercial loans$ 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 65
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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 ofDecember 31, 2020 : December 31, 2020 Unpaid Principal Recorded Balance 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 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 50% in the case of land to 85% in the case of one to four family residential construction projects. As ofSeptember 30, 2021 , construction loans of$583.4 million were disbursed with pre-established interest reserves of$48.0 million , compared to$643.5 million with pre-established interest reserves of$71.0 million atDecember 31, 2020 . The balance for construction loans with interest reserves that have been extended was$50.2 million with pre-established interest reserves of$1.9 million atSeptember 30, 2021 , compared to$127.0 million with pre-established interest reserves of$4.4 million atDecember 31, 2020 . Land loans of$38.5 million were disbursed with pre-established interest reserves of$1.4 million atSeptember 30, 2021 , compared to$24.7 million of land loans disbursed with pre-established interest reserves of$486 thousand atDecember 31, 2020 . The balance for land loans with interest reserves that have been extended was$942 thousand atSeptember 30, 2021 with pre-established interest reserves of$58 thousand , compared to$942 thousand in land loans with pre-established interest reserves of$58 thousand atDecember 31, 2020 . 66
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AtSeptember 30, 2021 andDecember 31, 2020 , the Bank had no loans on non-accrual status with available interest reserves. AtSeptember 30, 2021 andDecember 31, 2020 , there was$4.1 million and$4.3 million of non-accrual non-residential construction loans that were originated with pre-established interest 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's business activities are with customers located in the high-density Asian-populated areas of Southern andNorthern California ;New York City ,New York ;Dallas andHouston, Texas ;Seattle, Washington ;Boston, Massachusetts ;Chicago, Illinois ;Edison, New Jersey ;Rockville, Maryland ; andLas Vegas, Nevada . The Company also has loan customers inHong 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 ofSeptember 30, 2021 , or as ofDecember 31, 2020 . The federal banking regulatory agencies issued final guidance onDecember 6, 2006 , regarding risk management practices for financial institutions with high or increasing concentrations of 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 34% of the Bank's total risk-based capital as ofSeptember 30, 2021 , and 35% as ofDecember 31, 2020 . Total CRE loans represented 276% of total risk-based capital as ofSeptember 30, 2021 , and 273% as ofDecember 31, 2020 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 individually evaluated and potential problem loans, and to permit periodic evaluation of impairment and the appropriate level of the allowance for credit losses in a timely manner. 67
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In addition, the Company'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 take into consideration known relevant internal and external factors that affect collectability when determining the appropriate level for the allowance for credit losses. The nature of the process by which the Bank determines the appropriate allowance for credit losses requires the exercise of considerable judgment. Additions to the allowance for credit losses are made by charges to the provision for credit losses. While management utilizes its business judgment based on the information available, the ultimate appropriateness of the allowance is dependent upon a variety of factors, many of which are beyond the Bank's control, including but not limited to the performance of the Bank's loan portfolio, the economy and market conditions, changes in interest rates, and the view of the regulatory authorities toward loan classifications. Identified credit exposures that are determined to be uncollectible are charged against the allowance for credit losses. Recoveries of previously charged off amounts, if any, are credited to the allowance for credit losses. A weakening of the economy or other factors that adversely affect asset quality could result in an increase in the number of delinquencies, bankruptcies, or defaults, and a higher level of non-performing assets, net charge-offs, and provision for credit losses in future periods. The allowance for loan losses was$131.9 million and the allowance for off-balance sheet unfunded credit commitments was$8.1 million atSeptember 30, 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 allowance for loan losses represented 0.83% of period-end gross loans and 180.7% of non-performing loans atSeptember 30, 2021 . The comparable ratios were 1.06% of period-end gross loans and 229.18% of non-performing loans atDecember 31, 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 effectiveJanuary 1, 2021 , see Notes 2 and 3 to the unaudited Consolidated Financial Statements contained in "Item 1. Consolidated Financial Statements." 68
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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 onJanuary 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,
2021 2020 2021 2020
(In thousands)
Allowance for loan losses
Balance at beginning of period $ 131,256 $ 169,680 $ 166,538 $ 123,224
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 (2,649 ) (6,956 ) (19,499 ) (13,383 )
Real estate loans (3 ) - (3 ) -
Total charge-offs (2,652 ) (6,956 ) (19,502 ) (13,383 )
Recoveries:
Commercial loans 121 3,796 1,545 6,354
Construction loans 76 - 76 -
Real estate loans 144 110 558 435
Total recoveries 341 3,906 2,179 6,789
Balance at end of period $ 131,945 $
179,130
Reserve for off-balance sheet credit commitments Balance at beginning of period $ 8,050$ 4,663 $ 5,880$ 3,855 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 $ 8,100 $
5,663 $ 8,100
Average loans outstanding during the period$ 15,798,261 $
15,592,536
$ 15,976,781 $
15,565,779
$ 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 %
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Prior to
• 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 if collateral dependent, charge-off history,
management's knowledge of the portfolio, general economic conditions,
environmental factors, 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 check for appropriate classification.
The table set forth below reflects management's allocation of the allowance for
loan losses by loan category and the ratio of each loan category to the average
gross loans as of the dates indicated:
September 30, 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 decreased $30.5 million , or 44.4%,
to $38.2 million at September 30, 2021 , from $68.7 million at December 31, 2020 .
The decrease is due primarily to a decrease in the allowance of $31.5 million
from the adoption of ASU 2016-13 and net charge-offs of $18.0 million offset by
a provision for loan losses of $18.9 million .
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The allowance allocated to real estate construction loans decreased$24.5 million , or 79.3%, to$6.3 million atSeptember 30, 2021 , from$30.9 million atDecember 31, 2020 . The decrease is due primarily to a decrease in the allowance of$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 only historical loss experience used in incurred loss model. The allowance allocated to commercial mortgage loans increased$11.8 million , or 24.0%, to$61.0 million atSeptember 30, 2021 , from$49.2 million atDecember 31, 2020 . The increase is due primarily to an increase in the allowance of$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 endedSeptember 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 ofSeptember 30, 2021 , from$17.7 million atDecember 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 endedSeptember 30, 2021 . Deposits Total deposits were$17.0 billion atSeptember 30, 2021 , an increase of$897.5 million , or 5.6%, from$16.1 billion atDecember 31, 2020 . The following table sets forth the deposit mix as of the dates indicated: September 30, 2021 December 31, 2020 Amount Percentage Amount Percentage (In thousands)
Deposits
Non-interest-bearing demand deposits$ 4,024,504 23.7 %$ 3,365,086 20.9 % Interest bearing demand deposits 2,202,956 13.0 1,926,135 12.0 Money market deposits 4,132,912 24.3 3,359,191 20.8 Savings deposits 920,138 5.4 785,672 4.9 Time deposits 5,726,360 33.6 6,673,317 41.4 Total deposits$ 17,006,870 100.0 %$ 16,109,401 100.0 % The following table sets forth the maturity distribution of time deposits atSeptember 30, 2021 : At September 30, 2021 Time Deposits - Time Deposits - Total Time under$100,000 $100,000 and over Deposits (In thousands) Less than three months $ 187,913 $ 1,331,317$ 1,519,230 Three to six months 398,779 1,641,597 2,040,376 Six to twelve months 184,602 1,771,945 1,956,547 Over one year 68,130 142,077 210,207 Total $ 839,424 $ 4,886,936$ 5,726,360 Percent of total deposits 4.9 % 28.7 % 33.7% 72
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Borrowings include federal funds purchased, funds obtained as advances from the
FHLB of
Borrowings from the FHLB - There were no over-night borrowings from the FHLB as ofSeptember 30, 2021 , andDecember 31, 2020 . Advances from the FHLB were$20.0 million at an average rate of 2.89% as ofSeptember 30, 2021 , compared to$150.0 million at an average rate of 2.15% as ofDecember 31, 2020 . As ofSeptember 30, 2021 , FHLB advances of$20.0 million will mature inMay 2023 . Junior Subordinated Notes - AtSeptember 30, 2021 , Junior Subordinated Notes totaled$119.1 million with a weighted average interest rate of 2.36%, compared to$119.1 million with a weighted average rate of 2.40% atDecember 31, 2020 . The Junior Subordinated Notes have a stated maturity term of 30 years. The trusts are not consolidated with the Company in accordance with an accounting pronouncement that took effect inDecember 2003 .
For additional information, see Note 11 to the Company's unaudited Consolidated Financial Statements.
Off-Balance-Sheet Arrangements and Contractual Obligations
The following table summarizes the Company's contractual obligations to make future payments as ofSeptember 30, 2021 . Payments for deposits and borrowings do not include interest. Payments related to leases are based on actual payments specified in the underlying contracts. Payment Due by Period More than 3 years or 1 year but more but 1 year less than less than 5 years or less 3 years 5 years or more Total (In thousands) Contractual obligations: Deposits with stated maturity dates$ 5,516,154 $ 203,360 $ 6,833 $ 13 $ 5,726,360 Advances from the Federal Home Loan Bank - 20,000 - - 20,000 Other borrowings - - - 23,197 23,197 Long-term debt - - - 119,136 119,136 Operating leases 9,577 14,696 6,452 3,338 34,063 Total contractual obligations and other commitments$ 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 GAAP, are not included in our 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 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. 73
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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$2.46 billion as ofSeptember 30, 2021 , an increase of$45.1 million , from$2.42 billion as ofDecember 31, 2020 , primarily due to net income of$223.0 million , stock-based compensation of$4.1 million , and proceeds from dividend reinvestment of$2.6 million , offset, in part, by purchases of treasury stock of$100.7 million , common stock cash dividends of$73.3 million and a decrease in other comprehensive income of$5.7 million . The following table summarizes changes in total equity for the nine months endedSeptember 30, 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
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Table of Contents Capital Adequacy Review
Management seeks to maintain the Company's capital at a level sufficient to support future growth, protect depositors and stockholders, and comply with various regulatory requirements.
The following tables set forth actual and required capital ratios as ofSeptember 30, 2021 andDecember 31, 2020 for Bancorp and the Bank under the Basel III Capital Rules. The Basel III Capital Rules became fully phased-in onJanuary 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. Minimum Capital Required to be Considered Actual Required - Basel III Well Capitalized Capital Amount Ratio Capital Amount Ratio Capital Amount Ratio (In thousands)
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 Minimum Capital Required to be Considered Actual Required - Basel III Well Capitalized Capital Amount Ratio Capital Amount Ratio Capital Amount Ratio (In
thousands)
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 ofSeptember 30, 2021 , capital levels at Bancorp and the Bank exceed all capital adequacy requirements under the fully phased-in Basel III Capital Rules. Based on the ratios presented above, capital levels as ofSeptember 30, 2021 at Bancorp and the Bank exceed the minimum levels necessary to be considered "well capitalized." 75
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Table of Contents 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. We increased the common stock dividend from$0.21 per share in the fourth quarter of 2016, to$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$0.31 per share on 77,860,539 shares outstanding onAugust 19, 2021 for distribution to holders of our common stock onSeptember 9, 2021 . The Company declared a cash dividend of$0.31 per share on 79,188,570 shares outstanding onMay 28, 2021 , for distribution to holders of our common stock onJune 7, 2021 . The Company declared a cash dividend of$0.31 per share on 79,514,076 shares outstanding onMarch 1, 2021 , for distribution to holders of our common stock onMarch 11, 2021 . The Company paid total cash dividends of$73.3 million in the first nine months of 2021. Financial Derivatives It is our policy not to speculate on the future direction of interest rates. However, from time to time, we may enter into financial derivatives in order to seek mitigation of exposure to interest rate risks related to our interest-earning assets and interest-bearing liabilities. We believe that these transactions, when properly structured and managed, may provide a hedge against inherent interest rate risk in our assets or liabilities and against risk in specific transactions. In such instances, we may enter into interest rate swap contracts or other types of financial derivatives. Prior to considering any hedging activities, we seek to analyze the costs and benefits of the hedge in comparison to other viable alternative strategies. All hedges must be approved by the Bank's Investment Committee. The Company follows ASC Topic 815 that establishes accounting and reporting standards for financial derivatives, including certain financial derivatives embedded in other contracts, and hedging activities. It requires the recognition of all financial derivatives as assets or liabilities in the Company's Consolidated Balance Sheets and measurement of those financial derivatives at fair value. The accounting treatment of changes in fair value is dependent upon whether or not a financial derivative is designated as a hedge and, if so, the type of hedge. Fair value is determined using third-party models with observable market data. For derivatives designated as cash flow hedges, changes in fair value are recognized in other comprehensive income and are reclassified to earnings when the hedged transaction is reflected in earnings. For derivatives designated as fair value hedges, changes in the fair value of the derivatives are reflected in current earnings, together with changes in the fair value of the related hedged item if there is a highly effective correlation between changes in the fair value of the interest rate swaps and changes in the fair value of the underlying asset or liability that is intended to be hedged. If there is not a highly effective correlation between changes in the fair value of the interest rate swap and changes in the fair value of the underlying asset or liability that is intended to be hedged, then only the changes in the fair value of the interest rate swaps are reflected in the Company's Consolidated Financial Statements. The Company offers various interest rate derivative contracts to its customers. When derivative transactions are executed with its customers, the derivative contracts are offset by paired trades with third-party financial institutions including with 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. 76
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InMay 2014 , Bancorp entered into interest rate swap contracts in the notional amount of$119.1 million for a period of ten years. The objective of these interest rate swap contracts, which were designated as hedging instruments in cash flow hedges, was to hedge the quarterly interest payments on Bancorp's$119.1 million of Junior Subordinated Debentures that had been issued to five trusts, throughout the ten-year period beginning inJune 2014 and ending inJune 2024 , from the risk of variability of these payments resulting from changes in the three-month LIBOR interest rate. As ofSeptember 30, 2021 , and 2020, the ineffective portion of these interest rate swaps was not significant. The notional amount and net unrealized loss of the Company's cash flow derivative financial instruments as ofSeptember 30, 2021 , andDecember 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 ofSeptember 30, 2021 , the Bank's outstanding interest rate swap contracts had a notional amount of$779.4 million for various terms from three to ten years. The Bank entered into these interest rate swap contracts that are matched to fixed-rate CRE loans in the Bank's loan portfolio. These contracts have been designated as hedging instruments to hedge the risk of changes in the fair value of the underlying CRE loans due to changes in interest rates. The swap contracts are structured so that the notional amounts reduce over time to match the contractual amortization of the underlying loan and allow prepayments with the same pre-payment penalty amounts as the related loan. As ofSeptember 30, 2021 , and 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 ofSeptember 30, 2021 , andDecember 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, September 30, September 30, 2021 2020 September 30, 2021 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 ofSeptember 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 ofSeptember 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 our Board of Directors. The Company's credit exposure on interest rate swaps is limited to the net favorable value and interest payments of all swaps by each counterparty. Credit exposure may be reduced by the amount of collateral pledged by the counterparty. Bancorp's interest rate swaps have been assigned by the counterparties to a derivative clearing organization and daily margin is indirectly maintained with the derivative clearing organization. Cash posted as collateral by Bancorp related to derivative contracts totaled$24.3 million as ofSeptember 30, 2021 and$11.9 million as ofDecember 31, 2020 . 78
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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 instruments and are recorded at fair value in our Consolidated Balance Sheets. Changes in the fair value of these contracts as well as the related foreign exchange certificates of deposit and foreign exchange contracts are recognized immediately in net income as a component of non-interest income. Period end gross positive fair values are recorded in other assets and gross negative fair values are recorded in other liabilities. The notional amount and fair value of the Company's derivative financial instruments not designated as hedging instruments as ofSeptember 30, 2021 , andDecember 31, 2020 , were as 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 customer credit needs, and to take advantage of
investment opportunities as they are presented in the marketplace. Our principal
sources of liquidity are growth in deposits, proceeds from the maturity or sale
of securities and other financial instruments, repayments from securities and
loans, federal funds purchased, securities sold under agreements to repurchase,
and advances from the FHLB. As of September 30, 2021 , our average monthly
liquidity ratio (defined as net cash plus short-term and marketable securities
to net deposits and short-term liabilities) was 18.1% compared to 14.7% as of
December 31, 2020 .
The Bank is a shareholder of the FHLB, which enables the Bank to have access to
lower-cost FHLB financing when necessary. At September 30, 2021 , the Bank had an
approved credit line with the FHLB of San Francisco totaling $4.8 billion . Total
advances from the FHLB of San Francisco were $20.0 million and standby letter of
credits issued by the FHLB on the Company's behalf were $675.4 million as of
September 30, 2021 . 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 pledged $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. The Bank had borrowing capacity of $2.6 million
from the Federal Reserve Bank Discount Window at September 30, 2021 .
Liquidity can also be provided through the sale of liquid assets, which consist
of federal funds sold, securities purchased under agreements to resell, and
securities available-for-sale. At September 30, 2021 , investment securities
totaled $1.1 billion , with $30.9 million pledged as collateral for borrowings
and other commitments. The remaining $1.0 billion was available as additional
liquidity or to be pledged as collateral for additional borrowings.
Approximately 96% of our time deposits mature within one year or less as of
September 30, 2021 . Management anticipates that there may be some outflow of
these deposits upon maturity due to the keen competition in the Bank's
marketplace. However, based on our historical runoff experience, we expect the
outflow will not be significant and can be replenished through our normal growth
in deposits. As of September 30, 2021 , management believes all the
above-mentioned sources will provide adequate liquidity during the next twelve
months for the Bank to meet its operating needs. Deposits and other sources of
liquidity, however, may be adversely impacted by the COVID-19 pandemic.
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 $155 million and $96.0 million during the first nine months of
2021 and 2020, respectively.
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