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 2021 Form 10-K. For more information, please also see Note 3 to the Company's unaudited Consolidated Financial Statements. Highlights
? Total loans increased to
quarter.
? Net interest margin increased to 3.83% in the third quarter of 2022 from 3.22%
in third quarter of 2021.
? Earnings per share increased 14.1% compared to second quarter of 2022 and 45.2%
when compared to same quarter in 2021.
Quarterly Statement of Operations Review
Net Income Net income for the quarter endedSeptember 30, 2022 , was$99.0 million , an increase of$26.6 million , or 36.7%, compared to net income of$72.4 million for the same quarter a year ago. Diluted earnings per share for the quarter endedSeptember 30, 2022 , was$1.35 per share compared to$0.93 per share for the same quarter a year ago. Return on average stockholders' equity was 15.94% and return on average assets was 1.81% for the quarter endedSeptember 30, 2022 , compared to a return on average stockholders' equity of 11.61% and a return on average assets of 1.45% for the same quarter a year ago. 44
--------------------------------------------------------------------------------
Table of Contents
Financial Performance
Three months ended
September 30,
September 30, 2022 2021
Net income $99.0 million $72.4 million
Basic earnings per common share $ 1.35 $ 0.93
Diluted earnings per common share $ 1.35 $ 0.93
Return on average assets 1.81 % 1.45 %
Return on average total stockholders' equity 15.94 % 11.61 %
Efficiency ratio 36.35 % 43.85 %
Net Interest Income Before Provision for Credit Losses
Net interest income before provision for credit losses increased$45.0 million , or 29.5%, to$197.5 million during the third quarter of 2022, compared to$152.5 million during the same quarter a year ago. The increase was due primarily to an increase in interest income from loans and securities and a decrease in interest expense from deposits.
The net interest margin was 3.83% for the third quarter of 2022 compared to 3.22% for the third quarter of 2021 and 3.52% for the second quarter of 2022.
For the third quarter of 2022, the yield on average interest-earning assets was 4.38%, the cost of funds on average interest-bearing liabilities was 0.78%, and the cost of interest-bearing deposits was 0.69%. In comparison, for the third quarter of 2021, the yield on average interest-earning assets was 3.56%, the cost of funds on average interest-bearing liabilities was 0.48%, and the cost of interest-bearing deposits was 0.44%. The increase in the yield on average interest-earning assets resulted mainly from higher interest rates. The net interest spread, defined as the difference between the yield on average interest-earning assets and the cost of funds on average interest-bearing liabilities, was 3.60% for the quarter endedSeptember 30, 2022 compared to 3.08% for the same quarter a year ago. 45
--------------------------------------------------------------------------------
Table of Contents
The following table sets forth information concerning average interest-earning assets, average interest-bearing liabilities, and the average yields and rates paid on those assets and liabilities for the three months endedSeptember 30, 2022 , and 2021. Average outstanding amounts included in the table are daily averages. Interest-Earning Assets and Interest-Bearing Liabilities Three months ended September 30, 2022 2021 Interest Average Interest Average Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate (1)(2) Balance Expense Rate (1)(2) (In thousands) Interest-earning assets: Total loans (1)$ 17,923,495 $ 211,541 4.68 %$ 15,798,496 $ 163,948 4.12 %
Investment
securities 1,364,013 7,483 2.18 1,058,004 3,707 1.39 Federal Home Loan Bank stock 18,756 258 5.46 17,250 258 5.93 Deposits with banks 1,178,261 6,732 2.27 1,893,785 714 0.15
Total
interest-earning
assets 20,484,525 226,014 4.38 18,767,535 168,627 3.56 Non-interest earning assets: Cash and due from banks 174,298 155,604 Other non-earning assets 1,156,141 1,027,921 Total non-interest earning assets 1,330,439 1,183,525 Less: Allowance for loan losses (150,064 ) (131,316 ) Deferred loan fees (6,040 ) (7,302 ) Total assets$ 21,658,860 $ 19,812,442 Interest-bearing liabilities: Interest-bearing demand accounts$ 2,508,526 $ 1,913 0.30 %$ 2,109,632 $ 525 0.10 % Money market accounts 5,153,566 11,740 0.90 4,228,025 4,554 0.43 Savings accounts 1,151,126 218 0.07 914,540 164 0.07 Time deposits 5,013,213 10,218 0.81 5,882,576 9,299 0.63
Total
interest-bearing
deposits 13,826,431 24,089 0.69 13,134,773 14,542 0.44 Other borrowings 498,234 2,941 2.34 43,246 146 1.34 Long-term debt 119,136 1,455 4.85 119,136 1,455 4.84 Total interest-bearing liabilities 14,443,801 28,485 0.78 13,297,155 16,143 0.48 Non-interest bearing liabilities: Demand deposits 4,456,214 3,830,485 Other liabilities 293,653 211,636 Total equity 2,465,192 2,473,166 Total liabilities and equity$ 21,658,860 $ 19,812,442 Net interest spread 3.60 % 3.08 % Net interest income$ 197,529 $ 152,484 Net interest margin 3.83 % 3.22 %
(1) Yields and amounts of interest earned include loan fees. Non-accrual loans are included in the average balance. (2) Calculated by dividing net interest income by average outstanding interest-earning assets.
46
--------------------------------------------------------------------------------
Table of Contents
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,
2022-2021
Increase/(Decrease) in
Net Interest Income Due to:
Changes in Changes in Total
Volume Rate Change
(In thousands)
Interest-earning assets:
Loans $ 23,551 $ 24,042 $ 47,593
Investment securities 1,277 2,499 3,776
Federal Home Loan Bank stock 21 (21 ) -
Deposits with other banks (365 ) 6,383 6,018
Total changes in interest income 24,484 32,903 57,387
Interest-bearing liabilities: Interest-bearing demand accounts 116 1,274 1,390 Money market accounts 1,179 6,006 7,185 Savings accounts 44 9 53 Time deposits (1,494 ) 2,413 919 Other borrowed funds 2,608 187 2,795 Total changes in interest expense 2,453 9,889 12,342 Changes in net interest income$ 22,031 $ 23,014 $ 45,045
(1) Changes in interest income and interest expense attributable to changes in both volume and rate have been allocated proportionately to changes due to volume and changes due to rate.
Provision/(reversal) for credit losses
As permitted under the Coronavirus, Aid, Relief and Economic Security Act (the
"CARES Act") and as extended by the Consolidated Appropriations Act, 2021, the
Company adopted the Current Expected Credit Losses ("CECL") methodology for
estimated credit losses effective as of January 1, 2021 . The Company recorded a
provision for credit losses of $2.0 million in the third quarter of 2022
compared to a provision for credit losses of $2.5 million in the second quarter
of 2022 and a provision for credit losses of $3.1 million in the third quarter
of 2021. In 2022, the third quarter provision for credit losses were primarily
driven by the growth in loans during the period. As of September 30, 2022 , the
allowance for loan losses increased by $12.7 million to $148.8 million , or 0.82%
of gross loans, compared to $136.2 million , or 0.83% of gross loans, as of
December 31, 2021 . The change in the allowance for loan losses during the third
quarter of 2022 consisted of a $602 thousand provision for loan losses, and $557
thousand in net charge-offs. The Company will continue to monitor the continuing
impact of the COVID-19 pandemic on credit risks and losses, as well as on
customer deposits and other liabilities and assets.
47--------------------------------------------------------------------------------
Table of Contents
The following table sets forth the charge-offs and recoveries for the periods
indicated:
Three months ended September 30, Nine months ended September 30,
2022 2021 2022 2021
(In thousands)
Charge-offs:
Commercial loans $ 2,091 $ 2,649 $ 2,362 $ 19,499
Real estate loans (1) 137 3 138 3
Total charge-offs 2,228 2,652 2,500 19,502
Recoveries:
Commercial loans 1,576 121 2,109 1,545
Real estate loans (1) 95 76 336 76
Real estate Construction loans - 144 6 558
Total recoveries 1,671 341 2,451 2,179
Net charge-offs/(recoveries) $ 557 $ 2,311 $ 49 $ 17,323 (1) Real estate loans include commercial mortgage loans, residential mortgage loans, equity lines and Installment & other.
Non-Interest Income Non-interest income, which includes revenues from depository service fees, letters of credit commissions, securities gains (losses), wire transfer fees, and other sources of fee income, was$9.9 million for the third quarter of 2022, a decrease of$2.3 million , or 18.9%, compared to$12.2 million for the third quarter of 2021. The decrease was primarily due to an increase of$3.7 million in unrealized losses on equity securities, when compared to the same quarter a year ago. Non-Interest Expense Non-interest expense increased$3.2 million , or 4.4%, to$75.4 million in the third quarter of 2022 compared to$72.2 million in the same quarter a year ago. The increase in non-interest expense in the third quarter of 2022 was primarily due to an increase of$1.2 million in salaries and employee benefits, and an increase of$1.1 million in marketing expense, when compared to the same quarter a year ago. The efficiency ratio was 36.4% in the third quarter of 2022 compared to 43.9% for the same quarter a year ago. Income Taxes The effective tax rate for the third quarter of 2022 was 23.8% compared to 19.1% for the third quarter of 2021. The effective tax rate includes the impact of alternative energy investments and low-income housing tax credits.
Year-to-Date Statement of Operations Review
Net income for the nine months endedSeptember 30, 2022 , was$263.0 million , an increase of$40.1 million , or 18.0%, compared to net income of$223.0 million for the same period a year ago. Diluted earnings per share was$3.52 compared to$2.82 per share for the same period a year ago. The net interest margin for the nine months endedSeptember 30, 2022 , was 3.54% compared to 3.22% for the same period a year ago. Return on average stockholders' equity was 14.35% and return on average assets was 1.66% for the nine months endedSeptember 30, 2022 , compared to a return on average stockholders' equity of 12.11% and a return on average assets of 1.54% for the same period a year ago. The efficiency ratio for the nine months endedSeptember 30, 2022 , was 38.54% compared to 44.71% for the same period a year ago. 48
--------------------------------------------------------------------------------
Table of Contents
The following table sets forth information concerning average interest-earning assets, average interest-bearing liabilities, and the average yields and rates paid on those assets and liabilities for the nine months endedSeptember 30, 2022 , and 2021. Average outstanding amounts included in the table are daily averages. Interest-Earning Assets and Interest-Bearing Liabilities Nine months ended September 30, 2022 2021 Interest Average Interest Average Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate (1)(2) Balance Expense Rate (1)(2) (In thousands) Interest-earning assets: Total loans (1)$ 17,468,247 $ 558,657 4.28 %$ 15,725,324 $ 485,162 4.12 %
Investment
securities 1,263,341 18,059 1.91 1,010,328 9,963 1.32 Federal Home Loan Bank stock 17,757 774 5.83 17,250 730 5.66 Interest-bearing deposits 1,332,491 10,003 1.00 1,605,851 1,467 0.12
Total
interest-earning
assets 20,081,836 587,493 3.91 18,358,753 497,322 3.62 Non-interest earning assets: Cash and due from banks 169,394 153,790 Other non-earning assets 1,102,206 1,034,752 Total non-interest earning assets 1,271,600 1,188,542 Less: Allowance for loan losses (144,284 ) (146,640 ) Deferred loan fees (5,234 ) (6,224 ) Total assets$ 21,203,918 $ 19,394,431 Interest-bearing liabilities: Interest-bearing demand accounts$ 2,456,556 $ 3,206 0.17 %$ 1,989,833 $ 1,819 0.12 % Money market accounts 5,088,227 22,078 0.58 3,913,073 13,893 0.47 Savings accounts 1,137,485 610 0.07 885,863 590 0.09 Time deposits 5,060,286 22,002 0.58 6,105,604 33,362 0.73
Total
interest-bearing
deposits 13,742,554 47,896 0.47 12,894,373 49,664 0.51 Other borrowings 209,679 3,396 2.17 86,410 1,037 1.60 Long-term debt 119,136 4,318 4.85 119,136 4,318 4.85 Total interest-bearing liabilities 14,071,369 55,610 0.53 13,099,919 55,019 0.56 Non-interest bearing liabilities: Demand deposits 4,403,195 3,613,026 Other liabilities 278,704 219,591 Total equity 2,450,650 2,461,895 Total liabilities and equity$ 21,203,918 $ 19,394,431 Net interest spread 3.38 % 3.06 % Net interest income$ 531,883 $ 442,303 Net interest margin 3.54 % 3.22 %
(1) Yields and amounts of interest earned include loan fees. Non-accrual loans are included in the average balance. (2) Calculated by dividing net interest income by average outstanding interest-earning assets.
49
--------------------------------------------------------------------------------
Table of Contents
The following table summarizes the changes in interest income and interest
expense attributable to changes in volume and changes in interest rates for the
nine months ended
Taxable-Equivalent Net Interest Income - Changes Due to Volume and Rate(1)
Nine months ended September 30,
2022-2021
Increase/(Decrease) in
Net Interest Income Due to:
Changes in Changes in Total
Volume Rate Change
(In thousands)
Interest-earning assets:
Loans $ 55,251 $ 18,244 $ 73,495
Investment securities 2,896 5,200 8,096
Federal Home Loan Bank stock 22 22 44
Deposits with other banks (293 ) 8,829 8,536
Total changes in interest income 57,876 32,295 90,171
Interest-bearing liabilities: Interest-bearing demand accounts 491 894 1,385 Money market accounts 4,705 3,481 8,186 Savings accounts 149 (128 ) 21 Time deposits (5,180 ) (6,181 ) (11,361 ) Other borrowed funds 1,890 470 2,360 Total changes in interest expense 2,055 (1,464 ) 591 Changes in net interest income$ 55,821 $ 33,759 $ 89,580
(1) Changes in interest income and interest expense attributable to changes in both volume and rate have been allocated proportionately to changes due to volume and changes due to rate.
Balance Sheet Review Assets
Total assets were
Securities Available-for-Sale 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. 50
--------------------------------------------------------------------------------
Table of Contents
For available-for-sale ("AFS") debt securities in an unrealized loss position,
the Company first assesses whether it intends to sell, or it is more likely than
not that it will be required to sell the security before recovery of its
amortized cost basis. If either of the criteria regarding intent or requirement
to sell is met, the security's amortized cost basis is written down to fair
value. For AFS debt securities that do not meet the aforementioned criteria, the
Company evaluates whether the decline in fair value has resulted from credit
losses or other factors with the credit component of the unrealized loss of the
impaired AFS debt security recognized as an allowance for credit losses, and a
corresponding provision for credit losses on the consolidated statement of
income.
In making this assessment, management considers the extent to which fair value
is less than amortized cost, the payment structure of the security, failure of
the issuer of the security to make scheduled interest or principal payments, any
changes to the rating of the security by a rating agency, and adverse conditions
specifically related to the security, among other factors. If this assessment
indicates that a credit loss exists, the present value of cash flows expected to
be collected from the security are compared to the amortized cost basis of the
security. Any fair value changes that have not been recorded through an
allowance for credit losses is recognized in other comprehensive income.
Losses are charged against the allowance when management believes the uncollectability of an AFS debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met. Changes in the allowance for credit losses are recorded as provision for credit loss expense.
The amortized cost of the Company's AFS debt securities exclude accrued interest, which is included in "accrued interest income" on the Consolidated Balance Sheets. The Company has made an accounting policy election not to measure an allowance for credit losses for accrued interest receivables on AFS debt securities since the Company timely reverses any previously accrued interest when the debt security remains in default for an extended period. As each AFS debt security has a unique security structure, where the accrual status is clearly determined when certain criteria listed in the terms are met, the Company assesses the default status of each security as defined by the debt security's specific security structure. AtSeptember 30, 2022 , no AFS debt securities were in default. In the current period, management evaluated the securities in an unrealized loss position and determined that their unrealized losses were a result of the level of market interest rates relative to the types of securities and pricing changes caused by shifting supply and demand dynamics and not a result of downgraded credit ratings or other indicators of deterioration of the underlying issuers' ability to repay. Accordingly, we determined the unrealized losses were not credit-related and recognized the unrealized losses in "other comprehensive income" in stockholders' equity. Although we periodically sell securities for portfolio management purposes, we do not foresee having to sell any impaired securities strictly for liquidity needs and believe that it is more likely than not we would not be required to sell any impaired securities before recovery of their amortized cost. Securities available-for-sale represented 6.5% of total assets as ofSeptember 30, 2022 , compared to 5.4% of total assets as ofDecember 31, 2021 . Securities available-for-sale were$1.4 billion as ofSeptember 30, 2022 , compared to$1.1 billion as ofDecember 31, 2021 . 51
--------------------------------------------------------------------------------
Table of Contents
The following tables set forth the amortized cost, gross unrealized gains, gross
unrealized losses, and fair value of securities available-for-sale as of
September 30, 2022
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
(In thousands)
Securities Available-for-Sale
U.S. treasury securities $ 242,510 $ - $ 1,110 $ 241,400
U.S. government agency entities 68,712 526 126 69,112
Mortgage-backed securities 1,001,832 58 140,402 861,488
Collateralized mortgage obligations 35,378 - 3,669 31,709
Corporate debt securities 228,879 - 18,177 210,702
Total $ 1,577,311 $ 584 $ 163,484 $ 1,414,411
December 31, 2021
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
(In thousands)
Securities Available-for-Sale
U.S. government agency entities $ 86,475 $ 1,169 $ 135 $ 87,509
Mortgage-backed securities 886,614 9,465 7,414 888,665
Collateralized mortgage obligations 9,547 - 430 9,117
Corporate debt securities 144,231 441 2,654 142,018
Total $ 1,126,867 $ 11,075 $ 10,633 $ 1,127,309 For additional information, see Note 8 to the Company's unaudited Consolidated Financial Statements.
Securities available-for-sale having a carrying value of$144.3 million as ofSeptember 30, 2022 , and$30.5 million as ofDecember 31, 2021 , were pledged to secure public deposits and other borrowings. 52
--------------------------------------------------------------------------------
Table of ContentsEquity Securities The Company recognized a net loss of$3.7 million for the three months endedSeptember 30, 2022 , due to the decrease in fair value of equity investments with readily determinable fair values compared to a net gain of$3 thousand for the three months endedSeptember 30, 2021 . The Company recognized a net gain of$1.3 million for the nine months endedSeptember 30, 2022 due to the increase in fair value of equity investments with readily determinable fair values compared to a net loss of$3.6 million for the nine months endedSeptember 30, 2021 . Equity securities were$23.1 million and$22.3 million as ofSeptember 30, 2022 , andDecember 31, 2021 , respectively. Loans Gross loans were$18.1 billion atSeptember 30, 2022 , an increase of$1.8 billion , or 11.0%, from$16.3 billion atDecember 31, 2021 . The increase was primarily due to increases of$385.0 million , or 12.9%, in commercial loans, an increase of$948.6 million , or 22.7% in residential mortgage loans, which included$568.5 million acquired from the acquisition of certainHSBC West Coast branches, and an increase of$534.5 million , or 6.6% in commercial mortgage loans, offset, in part, by a decrease of$69.0 million , or 16.5%, in home equity loans. For the third quarter of 2022, total loans, increased by$318.9 million or 7.8% annualized.
The loan balances and composition at
% of % of
Gross December 31, Gross %
September 30, 2022 Loans 2021 Loans Change
(in thousands)
Commercial loans $ 3,367,437 18.6 % $ 2,982,399 18.2 % 12.9 %
Residential mortgage loans
and equity lines 5,481,098 30.3 4,601,493 28.2 19.1
Commercial mortgage loans 8,677,733 47.9 8,143,272 49.8 6.6
Real estate construction
loans 573,421 3.2 611,031 3.8 (6.2 )
Installment and other
loans 7,114 0.0 4,284 0.0 66.1
Gross loans $ 18,106,803 100 % $ 16,342,479 100 % 10.8 %
Allowance for loan losses (148,817 ) (136,157 ) 9.3
Unamortized deferred loan
fees (6,936 ) (4,321 ) 60.5
Total loans, net $ 17,951,050 $ 16,202,001 10.8 %
Non-performing Assets
Non-performing assets include loans past due 90 days or more and still accruing
interest, non-accrual loans, and OREO. Our policy is to place loans on
non-accrual status if interest and/or principal is past due 90 days or more, or
in cases where management deems the full collection of principal and interest
unlikely. After a loan is placed on non-accrual status, any previously accrued
but unpaid interest is reversed and charged against current income and
subsequent payments received are generally first applied towards the outstanding
principal balance of the loan. Depending on the circumstances, management may
elect to continue the accrual of interest on certain past due loans if partial
payment is received and/or the loan is well collateralized and in the process of
collection. The loan is generally returned to accrual status when the borrower
has brought the past due principal and interest payments current and, in the
opinion of management, the borrower has demonstrated the ability to make future
payments of principal and interest as scheduled.
Management reviews the loan portfolio regularly to seek to identify problem
loans. During the ordinary course of business, management may become aware of
borrowers that may not be able to meet the contractual requirements of their
loan agreements. Such loans generally are placed under closer supervision with
consideration given to placing the loans on non-accrual status, the need for an
additional allowance for loan losses, and (if appropriate) partial or full
charge-off.
53--------------------------------------------------------------------------------
Table of Contents
The ratio of non-performing assets to total assets was 0.3% as ofSeptember 30, 2022 , compared to 0.3% as ofDecember 31, 2021 . Total non-performing assets increased$3.7 million , or 5.2%, to$75.4 million atSeptember 30, 2022 , compared to$71.7 million atDecember 31, 2021 , primarily due to an increase of$2.3 million , or 3.5%, in non-accrual loans, and an increase of$1.7 million , or 120.4% in accruing loans past due 90 days or more, offset in part, by decrease of$301 thousand , or 6.9%, in other real estate owned. As a percentage of gross loans, excluding loans held for sale, plus OREO, our non-performing assets were 0.42% as ofSeptember 30, 2022 , compared to 0.44% as ofDecember 31, 2021 . The non-performing loan portfolio coverage ratio, defined as the allowance for credit losses to non-performing loans, increased to 219.3% as ofSeptember 30, 2022 , from 212.9% as ofDecember 31, 2021 . The following table sets forth the changes in non-performing assets and TDRs as ofSeptember 30, 2022 , compared toDecember 31, 2021 , and toSeptember 30, 2021 : September 30, September 30, 2022 December 31, 2021 % Change 2021 % Change (in thousands) Non-performing assets Accruing loans past due 90 days or more$ 3,172 $ 1,439 120$ 4,333 (27 ) Non-accrual loans: Construction loans - - - 5,491 (100 ) Commercial mortgage loans 26,911 38,173 (30 ) 36,968 (27 ) Commercial loans 26,604 16,558 61 17,098 56 Residential mortgage loans 14,601 11,115 31 9,125 60 Installment and other loans 9 - - - - Total non-accrual loans$ 68,125 $ 65,846 3$ 68,682 (1 ) Total non-performing loans 71,297 67,285 6 73,015 (2 ) Other real estate owned 4,067 4,368 (7 ) 5,251 (23 ) Total non-performing assets$ 75,364 $ 71,653 5$ 78,266 (4 ) Accruing troubled debt restructurings (TDRs)$ 15,208 $ 12,837 18$ 24,406 (38 ) Allowance for loan losses$ 148,817 $ 136,157 9$ 131,945 13 Total gross loans outstanding, at period-end$ 18,106,803 $ 16,342,479 11$ 15,976,781 13 Allowance for loan losses to non-performing loans, at period-end 208.73 % 202.36 % 180.71 % Allowance for loan losses to gross loans, at period-end 0.82 % 0.83 % 0.83 % Non-accrual Loans As ofSeptember 30, 2022 , total non-accrual loans were$68.1 million , a decrease of$2.3 million , or 3.5%, from$65.8 million atDecember 31, 2021 , and a decrease of$557 thousand , or 0.8%, from$68.7 million atSeptember 30, 2021 . The allowance for the collateral-dependent loans is calculated based on the difference between the outstanding loan balance and the value of the collateral as determined by recent appraisals, sales contracts, or other available market price information, less cost to sell. The allowance for collateral-dependent loans varies from loan to loan based on the collateral coverage of the loan at the time of designation as non-performing. We continue to monitor the collateral coverage of these loans, based on recent appraisals, on a quarterly basis and adjust the allowance accordingly. 54
--------------------------------------------------------------------------------
Table of Contents
The following tables set forth the type of properties securing the non-accrual
portfolio loans and the type of businesses the borrowers engaged in as of the
dates indicated:
September 30, 2022 December 31, 2021
Real Real
Estate (1) Commercial Other Estate (1) Commercial
(In thousands)
Type of Collateral
Single/multi-family residence $ 15,893 $ 2,019 $ - $ 12,456 $ 7,697
Commercial real estate 25,619 151 - 36,832 338
Land - 2,584 - - 2,744
Personal property (UCC) - 21,850 9 - 5,779
Total $ 41,512 $ 26,604 $ 9 $ 49,288 $ 16,558
(1) Real estate includes commercial
mortgage loans, real estate
construction loans, residential
mortgage loans and equity lines.
September 30, 2022 December 31, 2021
Real Real
Estate (1) Commercial Other Estate (1) Commercial
(In thousands)
Type of Business
Real estate development $ 25,020 $ - $ - $ 13,775 $ -
Wholesale/Retail 2,069 12,569 - 24,600 12,468
Food/Restaurant 90 - - - -
Import/Export - 13,803 - - 3,190
Other 14,332 232 9 10,913 900
Total $ 41,511 $ 26,604 $ 9 $ 49,288 $ 16,558
(1) Real estate includes commercial
mortgage loans, real estate
construction loans, residential
mortgage loans and equity lines.
As ofSeptember 30, 2022 , recorded investment in non-accrual loans was$68.1 million . As ofDecember 31, 2021 , recorded investment in non-accrual loans totaled$65.8 million . For non-accrual loans, the amounts previously charged off represent 12.2% of the contractual balances for non-accrual loans as ofSeptember 30, 2022 and 10.7% as ofDecember 31, 2021 . As ofSeptember 30, 2022 ,$41.5 million , or 60.9%, of the$68.1 million of non-accrual loans were secured by real estate compared to$49.3 million , or 74.9%, of the$65.8 million of non-accrual loans that were secured by real estate as ofDecember 31, 2021 . The Bank generally seeks to obtain current appraisals, sales contracts, or other available market price information intended to provide updated factors in evaluating potential loss. As ofSeptember 30, 2022 ,$6.2 million of the$148.8 million allowance for loan losses was allocated for non-accrual loans and$142.6 million was allocated to the general allowance. The allowance for loan losses to non-performing loans was 208.7% as ofSeptember 30, 2022 , compared to 202.4% as ofDecember 31, 2021 , primarily due to an increase in the non-accrual loans. Non-accrual loans also include those TDRs that do not qualify for accrual status. 55
--------------------------------------------------------------------------------
Table of Contents
The following table presents non-accrual loans and the related allowance as of
September 30, 2022
Unpaid
Principal Recorded
Balance Investment Allowance
(In thousands)
With no allocated allowance
Commercial loans $ 10,171 $ 6,887 $ -
Commercial mortgage loans 14,148 10,956 -
Residential mortgage loans and equity lines 5,582 5,407 -
Installment and other loans 10 9 -
Subtotal $ 29,911 $ 23,259 $ -
With allocated allowance
Commercial loans $ 32,426 $ 19,717 $ 4,013
Commercial mortgage loans 16,002 15,955 2,146
Residential mortgage loans and equity lines 9,951 9,194 39
Subtotal $ 58,379 $ 44,866 $ 6,198
Total non-accrual loans $ 88,290 $ 68,125 $ 6,198
December 31, 2021
Unpaid
Principal Recorded
Balance Investment Allowance
(In thousands)
With no allocated allowance
Commercial loans $ 15,879 $ 11,342 $ -
Commercial mortgage loans 24,437 21,209 -
Residential mortgage loans and equity lines 6,020 5,850 -
Subtotal $ 46,336 $ 38,401 $ -
With allocated allowance
Commercial loans $ 14,294 $ 5,217 $ 894
Commercial mortgage loans 17,930 16,964 3,631
Residential mortgage loans and equity lines 6,048 5,264 22
Subtotal $ 38,272 $ 27,445 $ 4,547
Total non-accrual loans $ 84,608 $ 65,846 $ 4,547
56--------------------------------------------------------------------------------
Table of Contents Loan Interest Reserves In accordance with customary banking practice, construction loans and land development loans generally are originated where interest on the loan is disbursed from pre-established interest reserves included in the total original loan commitment. Our construction loans and land development loans generally include optional renewal terms after the maturity of the initial loan term. New appraisals are obtained prior to extension or renewal of these loans in part to determine the appropriate interest reserve to be established for the new loan term. Loans with interest reserves are generally underwritten to the same criteria, including loan to value and, if applicable, pro forma debt service coverage ratios, as loans without interest reserves. Construction loans with interest reserves are monitored on a periodic basis to gauge progress towards completion. Interest reserves are frozen if it is determined that additional draws would result in a loan to value ratio that exceeds policy maximums based on collateral property type. Our policy limits in this regard are consistent with supervisory limits and range from 50% in the case of land to 85% in the case of one to four family residential construction projects. As ofSeptember 30, 2022 , construction loans of$400.1 million were disbursed with pre-established interest reserves of$58.0 million , compared to$520.5 million with pre-established interest reserves of$51.1 million atDecember 31, 2021 . The balance for construction loans with interest reserves that have been extended was$33.1 million with pre-established interest reserves of$0.4 million atSeptember 30, 2022 , compared to$20.4 million with pre-established interest reserves of$0.4 million atDecember 31, 2021 . Land loans of$43.5 million were disbursed with pre-established interest reserves of$1.0 million atSeptember 30, 2022 , compared to$46.2 million of land loans disbursed with pre-established interest reserves of$0.6 million atDecember 31, 2021 . AtSeptember 30, 2022 andDecember 31, 2021 , the balance for land loans with interest reserves that have been extended was$0.9 million with pre-established interest reserves of$58 thousand . AtSeptember 30, 2022 andDecember 31, 2021 , the Bank had no loans on non-accrual status with available interest reserves. AtSeptember 30, 2022 andDecember 31, 2021 , there were zero non-accrual non-residential construction loans, residential construction loans, and land loans that were originated with pre-established interest reserves. While we typically expect loans with interest reserves to be repaid in full according to the original contractual terms, some loans may require one or more extensions beyond the original maturity before full repayment. Typically, these extensions are required due to construction delays, delays in the sale or lease of the property, or some combination of these two factors. Loan Concentration Most of the Company's business activities are with customers located in the high-density Asian-populated areas of Southern 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 our loans are collateralized with real property or other pledged collateral of the borrowers. The Company generally expects loans to be paid off from the operating profits of the borrowers, refinancing by another lender, or through sale by the borrowers of the collateral. There were no loan concentrations to multiple borrowers in similar activities that exceeded 10% of total loans as ofSeptember 30, 2022 , or as ofDecember 31, 2021 . 57
--------------------------------------------------------------------------------
Table of Contents
The federal banking regulatory agencies issued final guidance onDecember 6, 2006 , regarding risk management practices for financial institutions with high or increasing concentrations of commercial real estate ("CRE") loans on their balance sheets. The regulatory guidance reiterates the need for sound internal risk management practices for those institutions that have experienced rapid growth in CRE lending, have notable exposure to specific types of CRE, or are approaching or exceeding the supervisory criteria used to evaluate the CRE concentration risk, but the guidance is not to be construed as a limit for CRE exposure. The supervisory criteria are: (1) total reported loans for construction, land development, and other land represent 100% of the institution's total risk-based capital, and (2) both total CRE loans represent 300% or more of the institution's total risk-based capital and the institution's CRE loan portfolio has increased 50% or more within the last thirty-six months. The Bank's loans for construction, land development, and other land represented 29.0% of the Bank's total risk-based capital as ofSeptember 30, 2022 , andDecember 31, 2021 . Total CRE loans represented 289.9% of total risk-based capital as ofSeptember 30, 2022 , and 284.7% as ofDecember 31, 2021 which were within the Bank's internal limit of 400%, of total capital. Allowance for Credit Losses The Bank maintains the allowance for credit losses at a level that the Bank's management considers appropriate to cover the estimated and known risks in the loan portfolio and off-balance sheet unfunded credit commitments. Allowance for credit losses is comprised of the allowance for loan losses and for off-balance sheet unfunded credit commitments. With this risk management objective, the Bank's management has an established monitoring system that is designed to identify individually evaluated and potential problem loans, and to permit periodic evaluation of impairment and the appropriate level of the allowance for credit losses in a timely manner. In addition, the Company's Board of Directors has established a written credit policy that includes a credit review and control system that it believes should be effective in ensuring that the Bank maintains an appropriate allowance for credit losses. The Board of Directors provides oversight for the allowance evaluation process, including quarterly evaluations, and determines whether the allowance is appropriate to absorb losses in the credit portfolio. The determination of the amount of the allowance for credit losses and the provision for credit losses are based on management's current judgment about the credit quality of the loan portfolio and take into consideration known relevant internal and external factors that affect collectability when determining the appropriate level for the allowance for credit losses. The nature of the process by which the Bank determines the appropriate allowance for credit losses requires the exercise of considerable judgment. Additions or reductions to the allowance for credit losses are made by charges or credits to the provision for credit losses. While management utilizes its business judgment based on the information available, the ultimate appropriateness of the allowance is dependent upon a variety of factors, many of which are beyond the Bank's control, including but not limited to the performance of the Bank's loan portfolio, the economy and market conditions, changes in interest rates, and the view of the regulatory authorities toward loan classifications. Identified credit exposures that are determined to be uncollectible are charged against the allowance for credit losses. Recoveries of previously charged off amounts, if any, are credited to the allowance for credit losses. A weakening of the economy or other factors that adversely affect asset quality could result in an increase in the number of delinquencies, bankruptcies, or defaults, and a higher level of non-performing assets, net charge-offs, and provision for credit losses. The allowance for loan losses was$148.8 million and the allowance for off-balance sheet unfunded credit commitments was$7.5 million atSeptember 30, 2022 , which represented the amount believed by management to be appropriate to absorb credit losses inherent in the loan portfolio, including unfunded credit commitments. The allowance for credit losses represented 0.86% of period-end gross loans and 219.3% of non-performing loans atSeptember 30, 2022 . The comparable ratios were 0.88% of period-end gross loans and 212.9% of non-performing loans atDecember 31, 2021 . 58
--------------------------------------------------------------------------------
Table of Contents
Critical Accounting Policies and Estimates
Our accounting policies are fundamental to understanding management's discussion and analysis of results of operations and financial condition. We identify critical policies and estimates as those that require management to make particularly difficult, subjective, and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. We have identified the policy and estimates related to the allowance for credit losses on loans as a critical accounting policy. Our critical accounting policies and estimates are described in Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations included in the 2021 Form 10-K. For more information, please also see Note 3 to the Company's unaudited Consolidated Financial Statements.
Expected Credit Losses Estimate for Loans
The allowance for credit losses on loans held for investment is the combination of the allowance for loan losses and the reserve for unfunded loan commitments. The allowance for loan losses is reported as a reduction of the amortized cost basis of loans, while the reserve for unfunded loan commitments is included within "Other liabilities" on the Consolidated Balance Sheets. The amortized cost basis of loans does not include interest receivable, which is included in "Other assets" on the Consolidated Balance Sheets. The "Provision for credit losses" on the Consolidated Statement of Operations and Comprehensive Income is a combination of the provision for loan losses and the provision for unfunded loan commitments. Under the CECL methodology, expected credit losses reflect losses over the remaining contractual life of an asset, considering the effect of prepayments and available information about the collectability of cash flows, including information about relevant historical experience, current conditions, and reasonable and supportable forecasts of future events and circumstances. Thus, the CECL methodology incorporates a broad range of information in developing credit loss estimates. For further information regarding the calculation of the allowance for credit losses on loans held for investment using the CECL methodology, see Note 9 to the unaudited Consolidated Financial Statements contained in "Item 1. Consolidated Financial Statements." In calculating our allowance for credit losses in the third quarter of 2022, management included an additional reserve adjustment to reflect the time gap between the preparation of theSeptember 2022 Moody's forecast of future GDP, unemployment rates, CRE and home price indexes and the higher likelihood of an economic slowdown resulting for the impact of higher interest rates. Our methodology and framework along with the 8-quarter reasonable and supportable forecast period and the 4-quarter reversion period have remained consistent since the implementation of CECL 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.
59--------------------------------------------------------------------------------
Table of Contents
The Company's CECL methodology utilizes an eight-quarter reasonable and
supportable ("R&S") forecast period, and a four-quarter reversion period.
Management relies on multiple forecasts, blending them into a single loss
estimate. Generally speaking, the blended scenario approach would include the
Baseline, the Alternative Scenario 1 - Upside - 10th Percentile and the
Alternative Scenario 3 - Downside - 90th Percentile forecasts. After the R&S
period, the Company will revert straight-line for the four-quarter reversion
period to the long-term loss rates for each of the six portfolios of loans. The
contractual term excludes renewals and modifications but includes pre-approved
extensions and prepayment assumptions where applicable.
Our allowance for credit losses is sensitive to a number of inputs, including
macroeconomic forecast assumptions and credit rating migrations during the
period. Our macroeconomic forecasts used in determining the September 30, 2022 ,
allowance for credit losses consisted of three scenarios. The baseline scenario
reflects ongoing GDP growth and falling unemployment in 2022, generally in line
with market expectations, and consistent with waning COVID transmission and
improved supply chains. The upside scenario reflects a faster recovery in
consumer spending and stronger productivity growth in 2022 relative to the
baseline scenario. The downside scenario contemplates a short recession due to
the Russian invasion of Ukraine worsens significantly, worsening supply-chain
disruptions, resurgent COVID infections that results in negative GDP growth, and
rising unemployment beginning in the third quarter of 2022. We placed the most
weight on our baseline scenario, with the remaining weighting split equally
between the upside and downside scenarios.
Keeping all other factors constant, we estimate that if we had applied 100%
weighting to the downside scenario, the allowance for credit losses as of
September 30, 2022 , would have been approximately $40.8 million higher. This
estimate is intended to reflect the sensitivity of the allowance for credit
losses to changes in our scenario weights and is not intended to be indicative
of future changes in the allowance for credit losses.
Management believes the allowance for credit losses is appropriate for the
current expected credit losses in our loan portfolio and associated unfunded
commitments, and the credit risk ratings and inherent loss rates currently
assigned are reasonable and appropriate as of the reporting date. It is possible
that others, given the same information, may at any point in time reach
different conclusions that could result in a significant impact to the Company's
financial statements.
60--------------------------------------------------------------------------------
Table of Contents
The following table sets forth information relating to the allowance for loan
losses, charge-offs, recoveries, and the reserve for off-balance sheet credit
commitments for the periods indicated:
Three months ended September 30, Nine months ended September 30,
2022 2021 2022 2021
(In thousands)
Allowance for loan losses
Balance at beginning of period $ 148,772 $ 131,256 $ 136,157 $ 166,538
Impact of ASU 2016-13 adoption - - - (1,560 )
Adjusted beginning balance $ 148,772 $ 131,256 $ 136,157 $ 164,978
Provision/(Reversal) for credit losses 602 3,000 12,709 (15,710 )
Charge-offs:
Commercial loans (2,091 ) (2,649 ) (2,362 ) (19,499 ) Real estate loans (137 ) (3 ) (138 ) (3 ) Total charge-offs (2,228 ) (2,652 ) (2,500 ) (19,502 ) Recoveries: Commercial loans 1,576 121 2,109 1,545 Construction loans - 76 6 76 Real estate loans 95 144 336 558 Total recoveries 1,671 341 2,451 2,179 Balance at the end of period $ 148,817 $
131,945
Reserve for off-balance sheet credit commitments Balance at beginning of period $ 6,136$ 8,050 $ 7,100$ 5,880 Impact of ASU 2016-13 adoption - - - 6,018 Adjusted beginning balance 6,136 8,050 7,100 11,898 Reversal for credit losses 1,398 50 434 (3,798 ) Balance at the end of period $ 7,534$ 8,100 $ 7,534$ 8,100 Average loans outstanding during the period$ 17,923,495 $
15,798,496
$ 18,106,803 $
15,976,781
$ 71,297 $ 73,015 $ 71,297 $ 73,015
Ratio of net (recoveries)/charge-offs to
average loans outstanding during the
period 0.01 % 0.06 % 0.00 % 0.15 %
Provision for credit losses to
average loans outstanding during the
period 0.04 % 0.08 % 0.10 % (0.17% )
Allowance for credit losses
to non-performing loans, at period-end 219.30 % 191.80 % 219.30 % 191.80 %
Allowance for credit losses to gross
loans, at period-end 0.86 % 0.88 % 0.86 % 0.88 %
61--------------------------------------------------------------------------------
Table of Contents
The table set forth below reflects management's allocation of the allowance for
loan losses by loan category and the ratio of each loan category to the average
gross loans as of the dates indicated:
September 30, 2022 December 31, 2021
Percentage of Percentage of
Loans in Each Loans in Each
Category Category
to Average to Average
Amount Gross Loans Amount Gross Loans
(In thousands)
Type of Loan:
Commercial loans $ 50,399 18.2 % $ 43,394 18.4 %
Real estate construction loans 6,211 3.5 6,302 4.2
Commercial mortgage loans 70,050 48.3 61,081 48.7
Residential mortgage loans and equity lines 22,029 30.0 25,379 28.7
Installment and other loans 128 0.0 1 -
Total loans $ 148,817 100 % $ 136,157 100 %
The allowance allocated to commercial loans increased $7.0 million , or 16.1%, to
$50.4 million at September 30, 2022 , from $43.4 million at December 31, 2021 .
The increase is due primarily to an increase in allocated allowance for
non-accrual commercial loans.
The allowance allocated to real estate construction loans decreased
The allowance allocated to commercial mortgage loans increased$9.0 million , or 14.7%, to$70.1 million atSeptember 30, 2022 , from$61.1 million atDecember 31, 2021 . The increase is due primarily to an increase in commercial mortgage loans and an increase in the expected life for multifamily loans as a result of our annual CECL recalibration.
The allowance allocated for residential mortgage loans and equity lines
decreased by
Deposits
Total deposits were
62
--------------------------------------------------------------------------------
Table of Contents
The following table sets forth the deposit mix as of the dates indicated:
September 30, 2022 December 31, 2021
Amount Percentage Amount Percentage
Deposits (In thousands)
Non-interest-bearing demand deposits$ 4,398,152 23.7 %$ 4,492,054 24.9 % NOW deposits 2,570,036 13.8 2,522,442 14.0 Money market deposits 4,935,266 26.6 4,611,579 25.5 Savings deposits 1,128,823 6.1 915,515 5.1 Time deposits 5,543,474 29.8 5,517,252 30.5 Total deposits$ 18,575,751 100.0 %$ 18,058,842 100.0 % The following table sets forth the maturity distribution of time deposits atSeptember 30, 2022 : At September 30, 2022 Time Deposits - Time Deposits - Total Time under$100,000 $100,000 and over Deposits (In thousands) Three months or less $ 411,459 $ 1,189,398$ 1,600,857 Over three to six months 376,119 890,147 1,266,266 Over six to twelve months 217,030 2,307,237 2,524,267 Over twelve months 28,896 123,188 152,084 Total$ 1,033,504 $ 4,509,970$ 5,543,474 Percent of total deposits 5.6 % 24.3 % 29.8 % Borrowings
Borrowings include securities sold under agreements to repurchase, Federal funds
purchased, funds obtained as advances from the FHLB of
Borrowings from the FHLB - There were$225.0 million over-night borrowings from the FHLB as ofSeptember 30, 2022 , and no over-night borrowings as ofDecember 31, 2021 . Advances from the FHLB were$360.0 million at an average rate of 3.10% as ofSeptember 30, 2022 , compared to$20.0 million at an average rate of 2.89% as ofDecember 31, 2021 . As ofSeptember 30, 2022 , FHLB advances of$325.0 million will mature inOctober 2022 ,$20.0 million will mature inMay 2023 and$15.0 million will mature inSeptember 2024 . Junior Subordinated Notes - AtSeptember 30, 2022 , Junior Subordinated Notes totaled$119.1 million with a weighted average interest rate of 5.6%, compared to$119.1 million with a weighted average rate of 2.38% atDecember 31, 2021 . The Junior Subordinated Notes have a stated maturity term of 30 years. The trusts are not consolidated with the Company in accordance with an accounting pronouncement that took effect inDecember 2003 .
For additional information, see Note 11 to the Company's unaudited Consolidated Financial Statements.
63
--------------------------------------------------------------------------------
Table of Contents
Off-Balance-Sheet Arrangements and Contractual Obligations
The following table summarizes the Company's contractual obligations to make future payments as ofSeptember 30, 2022 . Payments for deposits and borrowings do not include interest. Payments related to leases are based on actual payments specified in the underlying contracts. Payment Due by Period More than 3 years or 1 year but more but 1 year less than less than 5 years or less 3 years 5 years or more Total (In thousands) Contractual obligations: Deposits with stated maturity dates$ 5,391,390 $ 147,705 $ 4,359 $ 20 $ 5,543,474 Advances from the Federal Home Loan Bank 345,000 15,000 - - 360,000 Other borrowings - - - 22,651 22,651 Long-term debt - - - 119,136 119,136 Operating leases 11,064 14,905 7,659 2,366 35,994 Total contractual obligations and other commitments$ 5,747,454 $ 177,610 $ 12,018 $ 144,173 $ 6,081,255 In the normal course of business, we enter into various transactions, which, in accordance with GAAP, are not included in our Consolidated Balance Sheets. We enter into these transactions to meet the financing needs of our customers. These transactions include commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the Consolidated Balance Sheets. Loan Commitments - We enter into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Substantially all of our commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of loan funding. We minimize our exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures. Management assesses the credit risk associated with certain commitments to extend credit in determining the level of the allowance for credit losses. Standby Letters of Credit - Standby letters of credit are written conditional commitments issued by us to secure the obligations of a customer to a third party. In the event the customer does not perform in accordance with the terms of an agreement with the third party, we would be required to fund the commitment. The maximum potential amount of future payments we could be required to make is represented by the contractual amount of the commitment. If the commitment is funded, we would be entitled to seek reimbursement from the customer. Our policies generally require that standby letter of credit arrangements contain security and debt covenants similar to those contained in loan agreements. Capital Resources Total equity was$2.42 billion as ofSeptember 30, 2022 , a decrease of$26.7 million , from$2.45 billion as ofDecember 31, 2021 , primarily due to net income of$263.0 million , stock-based compensation of$5.2 million , proceeds from dividend reinvestment of$2.8 million and stock issued to directors of$0.8 million , offset by, other comprehensive loss of$109.8 million , purchases of treasury stock of$109.8 million , common stock cash dividends of$76.1 million and shares withheld related to net share settlement of RSUs of$2.8 million . 64
--------------------------------------------------------------------------------
Table of Contents
The following table summarizes changes in total equity for the nine months endedSeptember 30, 2022 : Nine months ended September 30, 2022 (In thousands) Net income $ 263,041
Proceeds from shares issued through the Dividend Reinvestment Plan
2,792
Shares withheld related to net share settlement of RSUs (2,864 ) Purchase of treasury stock (109,774 ) Stock issued to directors 849 RSU vested 1 Share-based compensation 5,183 Cash dividends paid to common stockholders (76,111 ) Other comprehensive loss (109,809 ) Net decrease in total equity $ (26,692 ) Capital Adequacy Review Management seeks to retain our capital at a level sufficient to support future growth, protect depositors and stockholders, and comply with various regulatory requirements. The following tables set forth actual and required capital ratios as ofSeptember 30, 2022 andDecember 31, 2021 for Bancorp and the Bank under the Basel III Capital Rules. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules. See the 2021 Form 10-K for a more detailed discussion of the Basel III Capital Rules. Minimum Capital Required to be Considered Actual Required - Basel III Well Capitalized Capital Amount Ratio Capital Amount Ratio Capital Amount Ratio September 30, 2022 (In
thousands)
Common Equity Tier 1 to Risk-Weighted Assets Cathay General Bancorp$ 2,136,403 12.06$ 1,240,523 7.00$ 1,151,914 6.50 Cathay Bank 2,221,644 12.54 1,239,943 7.00 1,151,376 6.50 Tier 1 Capital to Risk-Weighted Assets Cathay General Bancorp 2,136,403 12.06 1,506,349 8.50 1,417,741 8.00 Cathay Bank 2,221,644 12.54 1,505,646 8.50 1,417,078 8.00 Total Capital to Risk-Weighted Assets Cathay General Bancorp 2,408,255 13.59 1,860,785 10.50 1,772,176 10.00 Cathay Bank 2,377,996 13.42 1,859,915 10.50 1,771,348 10.00 Leverage Ratio Cathay General Bancorp 2,136,403 10.02 853,269 4.00 1,066,586 5.00 Cathay Bank 2,221,644 10.42 852,622 4.00 1,065,778 5.00 65
--------------------------------------------------------------------------------
Table of Contents
Minimum Capital Required to be Considered
Actual Required - Basel III Well Capitalized
Capital Amount Ratio Capital Amount Ratio Capital Amount Ratio
December 31, 2021 (In thousands)
Common Equity Tier 1 to Risk-Weighted Assets Cathay General Bancorp$ 2,056,601 12.80$ 1,124,381 7.00$ 1,044,068 6.50 Cathay Bank 2,137,925 13.32 1,123,721 7.00 1,043,455 6.50 Tier 1 Capital to Risk-Weighted Assets Cathay General Bancorp 2,056,601 12.80 1,365,320 8.50 1,285,007 8.00 Cathay Bank 2,137,925 13.32 1,364,519 8.50 1,284,253 8.00 Total Capital to Risk-Weighted Assets Cathay General Bancorp 2,315,358 14.41 1,686,572 10.50 1,606,259 10.00 Cathay Bank 2,281,182 14.21 1,685,582 10.50 1,605,316 10.00 Leverage Ratio Cathay General Bancorp 2,056,601 10.40 791,226 4.00 989,033 5.00 Cathay Bank 2,137,925 10.82 790,430 4.00 988,037 5.00 As ofSeptember 30, 2022 , capital levels at Bancorp and the Bank exceed all capital adequacy requirements under the fully phased-in Basel III Capital Rules. Based on the ratios presented above, capital levels as ofSeptember 30, 2022 at Bancorp and the Bank exceed the minimum levels necessary to be considered "well capitalized." Dividend Policy Holders of common stock are entitled to dividends as and when declared by our Board of Directors out of funds legally available for the payment of dividends. Although we have historically paid cash dividends on our common stock, we are not required to do so. We increased the common stock dividend from$0.24 per share in the fourth quarter of 2017, to$0.31 per share in the fourth quarter of 2018, to$0.34 per share in the fourth quarter of 2021. The amount of future dividends, if any, will depend on our earnings, financial condition, capital requirements and other factors, and will be determined by our Board of Directors. The terms of our Junior Subordinated Notes also limit our ability to pay dividends. If we are not current in our payment of dividends on our Junior Subordinated Notes, we may not pay dividends on our common stock. The Company declared a cash dividend of$0.34 per share on 73,774,691 shares outstanding onAugust 30, 2022 , for distribution to holders of our common stock onSeptember 9, 2022 . The Company paid total cash dividends of$25.1 million in the third quarter of 2022. Financial Derivatives It is our policy not to speculate on the future direction of interest rates. However, from time to time, we may enter into financial derivatives in order to seek mitigation of exposure to interest rate risks related to our interest-earning assets and interest-bearing liabilities. We believe that these transactions, when properly structured and managed, may provide a hedge against inherent interest rate risk in our assets or liabilities and against risk in specific transactions. In such instances, we may enter into interest rate swap contracts or other types of financial derivatives. Prior to considering any hedging activities, we seek to analyze the costs and benefits of the hedge in comparison to other viable alternative strategies. All hedges must be approved by the Bank's Investment Committee. The Company follows ASC Topic 815 that establishes accounting and reporting standards for financial derivatives, including certain financial derivatives embedded in other contracts, and hedging activities. It requires the recognition of all financial derivatives as assets or liabilities in the Company's Consolidated Balance Sheets and measurement of those financial derivatives at fair value. The accounting treatment of changes in fair value is dependent upon whether or not a financial derivative is designated as a hedge and, if so, the type of hedge. Fair value is determined using third-party models with observable market data. For derivatives designated as cash flow hedges, changes in fair value are recognized in other comprehensive income and are reclassified to earnings when the hedged transaction is reflected in earnings. For derivatives designated as fair value hedges, changes in the fair value of the derivatives are reflected in current earnings, together with changes in the fair value of the related hedged item if there is a highly effective correlation between changes in the fair value of the interest rate swaps and changes in the fair value of the underlying asset or liability that is intended to be hedged. If there is not a highly effective correlation between changes in the fair value of the interest rate swap and changes in the fair value of the underlying asset or liability that is intended to be hedged, then only the changes in the fair value of the interest rate swaps are reflected in the Company's Consolidated Financial Statements. 66
--------------------------------------------------------------------------------
Table of Contents
The Company offers various interest rate derivative contracts to its customers.
When derivative transactions are executed with its customers, the derivative
contracts are offset by paired trades with third-party financial institutions
including with central counterparties ("CCP"). Certain derivative contracts
entered with CCPs are settled-to-market daily to the extent the CCP's rulebooks
legally characterize the variation margin as settlement. Derivative contracts
are intended to allow borrowers to lock in attractive intermediate and long-term
fixed rate financing while not increasing the interest rate risk to the Company.
These transactions are generally not linked to specific Company assets or
liabilities on the Consolidated Balance Sheets or to forecasted transactions in
a hedging relationship and, therefore, are economic hedges. The contracts are
marked to market at each reporting period. The changes in fair values of the
derivative contracts traded with third-party financial institutions are expected
to be largely comparable to the changes in fair values of the derivative
transactions executed with customers throughout the terms of these contracts,
except for the credit valuation adjustment component. The Company records
credit valuation adjustments on derivatives to properly reflect the variances of
credit worthiness between the Company and the counterparties, considering the
effects of enforceable master netting agreements and collateral arrangements.
In May 2014 , Bancorp entered into interest rate swap contracts in the notional
amount of $119.1 million for a period of ten years. The objective of these
interest rate swap contracts, which were designated as hedging instruments in
cash flow hedges, was to hedge the quarterly interest payments on Bancorp's
$119.1 million of Junior Subordinated Debentures that had been issued to five
trusts, throughout the ten-year period beginning in June 2014 and ending in June
2024 , from the risk of variability of these payments resulting from changes in
the three-month LIBOR interest rate. As of September 30, 2022 , and 2021, the
ineffective portion of these interest rate swaps was not significant.
The notional amount and net unrealized loss of the Company's cash flow
derivative financial instruments as of September 30, 2022 , and December 31,
2021 , were as follows:
September 30, December 31,
2022 2021
Cash flow swap hedges: (In thousands)
Notional $ 119,136 $ 119,136
Weighted average fixed rate-pay 2.61 % 2.61 %
Weighted average variable rate-receive 2.07 % 0.16 %
Unrealized gain/(loss), net of taxes (1)$ 2,527 $ (3,276 ) Three months ended Nine months ended September 30, September 30, 2022
138 $ 754 $ 1,311 $ 2,196
(1) Included in other comprehensive income.
(2) the amount of periodic net settlement of interest rate swaps was included in
interest expense.
67--------------------------------------------------------------------------------
Table of Contents
The Bank entered into interest rate swap contracts that are matched to fixed-rate commercial real estate loans in the Bank's loan portfolio. These contracts have been designated as hedging instruments to hedge the risk of changes in the fair value of the underlying commercial real estate loans due to changes in interest rates. As ofSeptember 30, 2022 , the Bank's outstanding interest rate swap contracts had a notional amount of$877.2 million for various terms from three to ten years. The swap contracts are structured so that the notional amounts reduce over time to match the contractual amortization of the underlying loan and allow prepayments with the same pre-payment penalty amounts as the related loan. As ofSeptember 30, 2022 , and 2021, the ineffective portion of these interest rate swaps was not significant. The Company has designated as a partial-term hedging election$670.2 million notional as last-of-layer hedge on pools of loans with a notational value of$1.2 billion as ofSeptember 30, 2022 . The loans are not expected to be affected by prepayment, defaults, or other factors affecting the timing and amount of cash flows under the last-of-layer method. The Company has entered into these pay-fixed and receive 1-Month LIBOR interest rate swaps to convert the last-of-layer$670.2 million portion of$1.2 billion fixed rate loan pools in order to reduce the Company's exposure to higher interest rates for the last-of-layer tranches. As ofSeptember 30, 2022 , the last-of-layer loan tranche had a fair value basis adjustment of$32.8 million . The interest rate swap converts this last-of-layer tranche into a floating rate instrument. The Company's risk management objective with respect to this last-of-layer interest rate swap is to reduce interest rate exposure as to the last-of-layer tranche. Interest rate swap contracts involve the risk of dealing with institutional derivative counterparties and their ability to meet contractual terms. Institutional counterparties must have a strong credit profile and be approved by our Board of Directors. The Company's credit exposure on interest rate swaps is limited to the net favorable value and interest payments of all swaps by each counterparty. Credit exposure may be reduced by the amount of collateral pledged by the counterparty. Bancorp's interest rate swaps have been assigned by the counterparties to a derivative clearing organization and daily margin is indirectly maintained with the derivative clearing organization. There was no cash collateral deposit posted by Bancorp related to derivative contracts as ofSeptember 30, 2022 and$5.9 million as ofDecember 31, 2021 . The notional amount and net unrealized loss of the Company's fair value derivative financial instruments as ofSeptember 30, 2022 , andDecember 31, 2021 , were as follows: September 30, December 31, 2022 2021 Fair value swap hedges: (In thousands) Notional$ 877,188 $ 729,280 Weighted average fixed rate-pay 2.14 % 2.65 % Weighted average variable rate spread 0.54 % 1.31 % Weighted average variable rate-receive 1.98 %
1.43 %
Unrealized gain/(loss), net of taxes (1)$ 40,465 $ (1,013 ) Three months ended Nine months ended September 30, September 30, September 30, 2022 2021 September 30, 2022 2021 Periodic net settlement of swaps (2) $ 1,461$ (2,363 ) $ (1,628 )$ (7,137 ) (1) the amount is included in other non-interest income. (2) the amount of periodic net settlement of interest rate swaps was included in interest income. 68
--------------------------------------------------------------------------------
Table of Contents
From time to time, the Company enters into foreign exchange forward contracts with various counterparties to mitigate the risk of fluctuations in foreign currency exchange rates for foreign exchange certificates of deposit or foreign exchange contracts entered into with our clients. These contracts are not designated as hedging instruments and are recorded at fair value in our Consolidated Balance Sheets. Changes in the fair value of these contracts as well as the related foreign exchange certificates of deposit and foreign exchange contracts are recognized immediately in net income as a component of non-interest income. Period end gross positive fair values are recorded in other assets and gross negative fair values are recorded in other liabilities.
The notional amount and fair value of the Company's derivative financial
instruments not designated as hedging instruments as of
September 30 ,December 31 , Derivative financial instruments 2022
2021
not designated as hedging instruments: (In
thousands)
Notional amounts: Option contracts $ - $ 676 Spot, forward, and swap contracts with positive fair value$ 162,518 $ 181,997 Spot, forward, and swap contracts with negative fair value$ 45,990 $ 51,782 Fair value: Option contracts $ - $ 3
Spot, forward, and swap contracts with positive fair value $ 752
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 ofSeptember 30, 2022 , our average monthly liquidity ratio (defined as net cash plus short-term and marketable securities to net deposits and short-term liabilities) was 13.7% compared to 17.3% as ofDecember 31, 2021 . The Bank is a shareholder of the FHLB, which enables the Bank to have access to lower-cost FHLB financing when necessary. AtSeptember 30, 2022 , the Bank had an approved credit line with the FHLB ofSan Francisco totaling$5.3 billion . Total advances from the FHLB ofSan Francisco were$360.0 million and standby letters of credit issued by the FHLB on the Company's behalf were$754.8 million as ofSeptember 30, 2022 . These borrowings bear fixed rates and are secured by the Bank's loans. See Note 11 to the Consolidated Financial Statements. AtSeptember 30, 2022 , the Bank pledged$630.4 thousand of its commercial loans and$1.6 million of securities to theFederal Reserve Bank's Discount Window under the Borrower-in-Custody program. The Bank had borrowing capacity of$1.9 million from the Federal Reserve Bank Discount Window atSeptember 30, 2022 . Liquidity can also be provided through the sale of liquid assets, which consist of federal funds sold, securities purchased under agreements to resell, and securities available-for-sale. AtSeptember 30, 2022 , investment securities totaled$1.4 billion , with$144.3 million pledged as collateral for borrowings and other commitments. The remaining balance was available as additional liquidity or to be pledged as collateral for additional borrowings. Approximately 97.3% of our time deposits mature within one year or less as ofSeptember 30, 2022 . Management anticipates that there may be some outflow of these deposits upon maturity due to the keen competition in the Bank's marketplace. However, based on our historical runoff experience, we expect the outflow will not be significant and can be replenished through our normal growth in deposits. As ofSeptember 30, 2022 , management believes all the above-mentioned sources will provide adequate liquidity during the next twelve months for the Bank to meet its operating needs. Deposits and other sources of liquidity, however, may be adversely impacted by the COVID-19 pandemic and its related economic impacts. The business activities of Bancorp consist primarily of the operation of the Bank and limited activities in other investments. The Bank paid dividends to Bancorp totaling$185.0 million and$155.0 million during the third quarter of 2022 and 2021, respectively. 69
--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source
