CATHAY GENERAL BANCORP General
The following discussion is intended to provide information to facilitate the understanding and assessment of the consolidated financial condition and results of operations of the Bancorp and its subsidiaries. It should be read in conjunction with this Annual Report and the audited Consolidated Financial Statements and Notes appearing elsewhere in this Annual Report. The following discussion and analysis of our financial condition and results of operations contains forward-looking statements. These statements are based on current expectations and assumptions, which are subject to risks and uncertainties. See "Forward-Looking Statements" and "Risk Factors Summary." Actual results could differ materially because of various factors, including but not limited to those discussed in "Risk Factors," under Part I, Item 1A of this Annual Report. The Bank offers a wide range of financial services. As of the filing date of this report, the Bank operates 31 branches inSouthern California , 16 branches inNorthern California , 10 branches inNew York State , four branches inWashington State , two branches inIllinois , two branches inTexas , one branch in each ofMaryland ,Massachusetts ,Nevada , andNew Jersey , one branch inHong Kong , and a representative office inBeijing , inShanghai , and inTaipei . The Bank is a commercial bank, servicing primarily individuals, professionals, and small to medium-sized businesses in the local markets in which its branches are located. The financial information presented herein includes the accounts of the Bancorp, its subsidiaries, including the Bank, and the Bank's consolidated subsidiaries. All material transactions between these entities are eliminated. 56
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Table of Contents Critical Accounting Policies The discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of the 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 our Consolidated Financial Statements. Actual results may differ from these estimates under different assumptions or conditions. Certain accounting policies that are fundamental to understanding our financial condition and results of operations involve significant judgments and assumptions by management that have a material impact on the carrying value of certain assets and liabilities. Management considers such accounting policies to be critical accounting policies. The judgments and assumptions used by management are based on historical experience and other factors that are believed to be reasonable under the circumstances.
Management believes the following are critical accounting policies that require the most significant judgments and estimates used in the preparation of the Consolidated Financial Statements:
Allowance for Credit Losses ("ACL") on Loans Held for Investment
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. 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 takes 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$136.2 million and the allowance for off-balance sheet unfunded credit commitments was$7.1 million atDecember 31, 2021 , which represented the amount believed by management to be appropriate to absorb lifetime credit losses in the loan portfolio, including unfunded credit commitments. The allowance for loan losses represented 0.83% of period-end gross loans and 202.4% of non-performing loans atDecember 31, 2021 . The comparable ratios were 1.10% of period-end gross loans and 237.3% of non-performing loans atDecember 31, 2020 . 57
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The allowance for credit losses is discussed in more detail in "Risk Elements of the Loan Portfolio - Allowance for Credit Losses" below. Management has reviewed the foregoing critical accounting policies and related disclosures with the Audit Committee of the Company's Board of Directors.
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 this Annual Report on Form 10-K.
The below table details our exposure to borrowers in industries generally considered to be the most impacted by the COVID-19 pandemic:
December 31, 2021
Percent of
Total Loan
Industry (1) Loan Balance Portfolio
(In millions)
Restaurants $ 144.0 1.0 %
Hotels/motels 301.0 2.0
Retail businesses/properties 1,871.0 11.0
Total $ 2,316.0 14.0 %
(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 ofDecember 31, 2021 , borrowers in the industries detailed in the table above (and potentially other industries) could have greater sensitivity to the economic downturn resulting from COVID-19 with potentially longer recovery periods than other business lines. Loan modifications We began receiving requests from our borrowers for loan deferrals inMarch 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. AtDecember 31, 2021 ,$70.0 million of loans remain under loan modifications. 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 troubled debt restructuring ("TDR"). Such conditions include 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. 58
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Paycheck Protection Program (PPP)
As part of the CARES Act, theSmall Business Administration (SBA) has been authorized to guarantee loans under the PPP throughDecember 31, 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. PPP loans have a two to five year term and earn interest at a rate of 1%. We began accepting applications onApril 3, 2020 . As ofDecember 31, 2021 , our outstanding PPP loans had a current balance of$90.5 million and$337.0 million of PPP loans had been forgiven by theU.S. Treasury or repaid by the borrowers. PPP loans are guaranteed by the SBA and therefore we believe PPP loans generally do not represent a material credit risk. Capital and liquidity While we believe we have sufficient capital and do not anticipate any need for additional liquidity as ofDecember 31, 2021 , in response to the uncertainty regarding the severity and duration of the COVID-19 pandemic, we are prepared to take additional actions, as needed, to maintain strong capital levels and ensure the strength of our liquidity position. Such actions may include pledging additional collateral to increase our borrowing capacity with the FRB, if necessary. Our Board of Directors also will continue to evaluate the impacts of the COVID-19 pandemic and the appropriateness of declaring future dividends and the rate of any future dividends as well as any stock repurchases, in light of our capital and liquidity needs. Asset impairment At this time, as ofDecember 31, 2021 , we do not believe there exists any impairment to our goodwill and intangible assets, long-lived assets, right of use assets, or available-for-sale investment securities due to the COVID-19 pandemic. It is uncertain whether prolonged effects of the COVID-19 pandemic will result in future impairment charges related to any of the aforementioned assets. Continued and sustained declines in Bancorp's stock price and/or other credit related impacts could give rise to triggering events in the future that could result in a write-down in the value of our goodwill, which could have a material adverse impact on our results of operations.
Our processes, controls and business continuity plan
As a financial institution, we are considered an essential business and therefore continue to operate on a modified basis to comply with governmental restrictions and public health authority guidelines. The health and safety of our employees and customers is a major concern to our management. We are continuing to permit employees to work from home when feasible or, if working from one of our locations is required, to maintain appropriate social distancing and observe other health precautions. We have also taken such other actions as social distancing, restrictions on in-person meetings and conferences, Company travel restrictions and increased sanitary protocols. We believe these actions offer the best protection for our employees and customers and enhance our ability to continue providing our banking services. Through this time of disruption, we have remained open for business supporting our customers while implementing our business continuity plan to mitigate the risks of the spread of COVID-19 to our employees and customers. While physical access to our bank offices remains restricted, customer business is still being transacted through drive-up facilities, online, telephone or by appointment.
We believe that we are positioned to continue these business continuity measures for the foreseeable future, however, no assurances can be provided as these circumstances may change depending on the duration and severity of the pandemic.
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Table of Contents Results of Operations Overview For the year endedDecember 31, 2021 , we reported net income of$298.3 million , or$3.80 per diluted share, compared to net income of$228.9 million , or$2.87 per diluted share, in 2020, and net income of$279.1 million , or$3.48 per diluted share, in 2019. The$69.4 million increase in net income from 2020 to 2021 was primarily the result of increases in net interest income and decreases in provision for credit losses, partially offset by increases in income taxes. The return on average assets in 2021 was 1.52%, compared to 1.22% in 2020, and to 1.61% in 2019. The return on average stockholders' equity was 12.11% in 2021, compared to 9.70% in 2020, and to 12.63% in 2019. Highlights ? Record net income of$298.3 million and EPS of$3.80 per share in 2021. ? Total deposits, excluding time deposits, increased for the year by$3.1 billion , or 33.0%, to$12.5 billion from$9.4 billion in 2020.
Net income available to common stockholders and key financial performance ratios are presented below for the three years indicated:
Year Ended December 31,
2021 2020 2019
(In thousands, except per share data)
Net income $ 298,304 $ 228,860 $ 279,135
Basic earnings per common share $ 3.81 $ 2.88 $ 3.49
Diluted earnings per common share $ 3.80 $ 2.87 $ 3.48
Return on average assets 1.52 % 1.22 % 1.61 %
Return on average stockholders' equity 12.11 % 9.70 % 12.63 %
Total average assets $ 19,591,538 $ 18,736,854 $ 17,337,267
Total average equity $ 2,463,021 $ 2,359,735 $ 2,209,642
Efficiency ratio 43.92 % 47.65 % 44.75 %
Effective income tax rate 21.88 % 9.89 % 20.10 %
Net Interest Income
Comparison of 2021 with 2020
Net interest income increased
Average loans for 2021 were$15.8 billion , a$326.6 million , or 2.1% increase from$15.5 billion in 2020. Compared with 2020, average commercial mortgage loans increased$304.1 million , or 4.1%, and average real estate construction loans increased$39.8 million , or 6.3%. Average investment securities were$1.0 billion in 2021, a decrease of$169.8 million , or 14.0%, from 2020. Average interest-bearing cash on deposits with financial institutions increased$689.3 million , or 71.8%, to$1.6 billion in 2021 from$960.3 million in 2020. Average interest-bearing deposits were$13.0 billion in 2021, an increase of$434.2 billion , or 3.5%, from$12.5 billion in 2020, primarily due to increases of$1.1 billion , or 38.9%, in money market accounts,$455.3 million , or 28.6%, in interest bearing demand deposits, and$138.1 million , or 18.2%, in savings accounts, offset by decreases of$1.3 billion , or 17.7%, in time deposits. 60
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Interest income decreased
? Changes in volume: Average interest-earning assets increased
or 4.8%, to
assets of
average interest-bearing deposits with other financial institutions increased
$169.8 million in average investment securities. The changes in volume contributed to interest income increase of$12.4 million .
? Changes in rate: The average yield of interest-bearing assets decreased to
3.59% in 2021 from 3.96% in 2020. The decrease in rate on loans resulted in a
decrease of
with other financial institutions resulted in a decrease of
interest income, and the decrease in rate on investment securities resulted in
a decrease of
to interest income decrease of $46.5 million .
? Change in the mix of interest-earning assets: Average gross loans, which
generally have a higher yield than other types of investments, comprised 85.4%
of total average interest-earning assets in 2021, a decrease from 87.6% in
2020. Average investment securities comprised 5.6% of total average
interest-bearing assets in 2021, a decrease from 6.9% in 2020.
Interest expense decreased by $79.7 million , or 53.7%, to $68.8 million in 2021,
compared with $148.5 million in 2020, primarily due to decreased cost from time
deposits, FHLB advances, and long-term debt. The overall decrease in interest
expense was primarily due to decreases in rates on interest bearing deposits,
volume decreases in long term debts and volume and rate decreases in other
borrowings as discussed below:
? Changes in volume: Average interest-bearing deposits increased
or 3.5%, offset by decreases of
advances and other borrowings. The changes in volume caused a decrease in
interest expense of $13.5 million .
? Changes in rate: The average costs of interest-bearing deposits, FHLB advances
and other borrowings, and long-term debt decreased to 0.48% and 1.57% and
4.85% in 2021 from 1.09%, 1.73%, and 4.86% in 2020, respectively. The changes
in rate caused interest expense to decrease by $66.2 million .
? Change in the mix of interest-bearing liabilities: Average interest-bearing
deposits of
liabilities in 2021 compared to 96.6% in 2020. Offsetting the increase,
average FHLB advances and other borrowings of
of total interest-bearing liabilities. Average long-term debt of
million remained unchanged at 0.9% of total interest-bearing liabilities in
2021 compared to 0.9% in 2020.
Net interest margin, defined as net interest income to average interest-earning assets, was 3.22% in 2021 compared to 3.12% in 2020.
Comparison of 2020 with 2019
Net interest income decreased
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Average loans for 2020 were$15.5 billion , a$1.0 billion , or 6.9% increase from$14.5 billion in 2019. Compared with 2019, average residential mortgage loans increased$325.2 million , or 7.7%, average commercial mortgage loans increased$438.4 million , or 6.3%, average commercial loans increased$184.2 million , or 6.7%, and average real estate construction loans increased$44.8 million , or 7.7%. Average investment securities were$1.2 billion in 2020, a decrease of$226.9 million , or 15.7%, from 2019. Average interest-bearing cash on deposits with financial institutions increased$707.0 million , or 279.1%, to$960.3 million in 2020 from$253.3 million in 2019. Average interest-bearing deposits were$12.5 billion in 2020, an increase of$1.0 billion , or 8.7%, from$11.5 billion in 2019, primarily due to increases of$891.5 million , or 44.3%, in money market accounts,$301.2 million , or 23.3%, in interest bearing demand deposits, and$28.6 million , or 3.9%, in savings accounts, offset by decreases of$191.1 million , or 2.6%, in time deposits.
? Interest income decreased
to
? Changes in volume: Average interest-earning assets increased
9.3%, to
assets of
average interest-bearing deposits with other financial institutions increased
Offsetting the above increases was a decrease of
investment securities. The changes in volume contributed to interest income
increase of $47.6 million .
? Changes in rate: The average yield of interest-bearing assets decreased to
3.96% in 2020 from 4.74% in 2019. The decrease in rate on loans resulted in a
decrease of
with other financial institutions resulted in a decrease of
interest income, and the decrease in rate on investment securities resulted in
a decrease of
interest income decrease of $116.3 million .
? Change in the mix of interest-earning assets: Average gross loans, which
generally have a higher yield than other types of investments, comprised 87.6%
of total average interest-earning assets in 2020, a decrease from 89.4% in
2019. Average investment securities comprised 6.9% of total average
interest-bearing assets in 2020, a decrease from 8.9% in 2019.
Interest expense decreased by $45.9 million , or 23.6%, to $148.5 million in
2020, compared with $194.4 million in 2019, primarily due to decreased cost from
time deposits, FHLB advances, and long-term debt. The overall decrease in
interest expense was primarily due to decreases in rates on interest bearing
deposits, volume decreases in long term debts and volume and rate decreases in
other borrowings as discussed below:
? Changes in volume: Average interest-bearing deposits increased
or 9.0%, offset by decreases of
advances and other borrowings and decreases in average long-term debt of
million, or 27.8%. The changes in volume caused an increase in interest
expense of $1.3 million .
? Changes in rate: The average costs of interest-bearing deposits, FHLB advances
and other borrowings, and long-term debt decreased to 1.09% and 1.73% and
increased to 4.86% in 2020 from 1.55%, 2.21%, and 4.76% in 2019, respectively.
The changes in rate caused interest expense to decrease by
? Change in the mix of interest-bearing liabilities: Average interest-bearing
deposits of
liabilities in 2020 compared to 95.5% in 2019. Offsetting the increase,
average FHLB advances and other borrowings of
of total interest-bearing liabilities. Average long-term debt of $119.1
million decreased to 0.9% of total interest-bearing liabilities in 2020
compared to 1.4% in 2019.
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Net interest margin, defined as net interest income to average interest-earning assets, was 3.12% in 2020 compared to 3.54% in 2019.
The following table sets forth information concerning average interest-earning
assets, average interest-bearing liabilities, and the average yields and rates
paid on those assets and liabilities in 2021, 2020 and 2019. Average outstanding
amounts included in the table are daily averages.
Interest-Earning Assets and Interest-Bearing Liabilities
Average Average Average
2021 Interest Yield/ 2020 Interest Yield/ 2019 Interest Yield/
Average Income/ Rate Average Income/ Rate Average Income/ Rate
Balance Expense (1)(2) Balance Expense (1)(2) Balance Expense (1)(2)
($ In thousands)
Interest-earning
assets:
Total loans (1) $ 15,827,550 $ 649,224 4.10 % $ 15,500,910 $ 677,193 4.37 % $ 14,510,678 $ 729,619 5.03 %
Investment securities 1,046,187 14,151 1.35 % 1,215,957 20,599 1.69 % 1,442,820 33,037 2.29 %
Federal Home Loan
Bank stock 17,250 991 5.74 % 17,300 952 5.50 % 17,266 1,207 6.99 %
Interest-bearing
deposits 1,649,564 2,145 0.13 % 960,276 1,830 0.19 % 253,296 5,404 2.13 %
Total
interest-earning
assets $ 18,540,551 $ 666,511 3.59 % $ 17,694,443 $ 700,574 3.96 % $ 16,224,060 $ 769,267 4.74 %
Non-interest earning
assets:
Cash and due from
banks $ 157,952 $ 148,234 $ 199,917
Other non-earning
assets 1,041,667 1,052,693 1,039,098
Total non-interest
earning assets $ 1,199,619 $ 1,200,927 $ 1,239,015
Less: Allowance for
loan losses (142,969 ) (156,225 ) (124,431 )
Deferred loan fees (5,664 ) (2,291 ) (1,377 )
Total assets $ 19,591,537 $ 18,736,854 $ 17,337,267
Interest-bearing
liabilities:
Interest-bearing
demand deposits $ 2,047,177 $ 2,249 0.11 % $ 1,591,924 $ 2,816 0.18 % $ 1,290,752 $ 2,371 0.18 %
Money market deposits 4,034,246 18,241 0.45 % 2,903,837 21,574 0.74 % 2,012,306 21,508 1.07 %
Savings deposits 897,663 769 0.09 % 759,581 1,006 0.13 % 731,027 1,432 0.20 %
Time deposits 5,979,191 40,542 0.68 % 7,268,738 111,629 1.54 % 7,459,800 152,791 2.05 %
Total
interest-bearing
deposits $ 12,958,277 $ 61,801 0.48 % $ 12,524,080 $ 137,025 1.09 % $ 11,493,885 $ 178,102 1.55 %
Other borrowings 75,516 1,182 1.57 % 326,023 5,648 1.73 % 379,816 8,412 2.21 %
Long-term debt 119,136 5,773 4.85 % 119,136 5,791 4.86 % 164,976 7,847 4.76 %
Total
interest-bearing
liabilities $ 13,152,929 $ 68,756 0.52 % $
12,969,239
1.61 % Non-interest bearing liabilities: Demand deposits 3,751,626 3,158,828 2,837,946 Other liabilities 223,961 249,052 251,002 Today equity 2,463,021 2,359,735 2,209,642 Total liabilities and equity$ 19,591,537 $ 18,736,854 $ 17,337,267 Net interest spread 3.07 % 2.82 % 3.13 % Net interest income$ 597,755 $ 552,110 $ 574,906 Net interest margin 3.22 % 3.12 % 3.54 %
(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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Net Interest Income - Changes Due to Rate and Volume (1)
2021 - 2020 2020 - 2019
Increase/(Decrease) in Increase/(Decrease) in
Net Interest Income Due to: Net Interest Income Due to:
Change in Change in Total Change in Change in Total
Volume Rate Change Volume Rate Change
(In thousands)Interest-earning
assets
Loans$ 14,047 $ (42,016 ) $ (27,969 ) $ 47,556 $ (99,982 ) $ (52,426 ) Investment securities (2,639 ) (3,809 ) (6,448 ) (4,686 ) (7,752 ) (12,438 ) Federal Home loan Bank stock (2 ) 41 39 2 (257 ) (255 ) Deposits with other banks 1,023 (708 ) 315 4,727 (8,301 ) (3,574 ) Total changes in interest income 12,429 (46,492 ) (34,063 )
47,599 (116,292 ) (68,693 )
Interest-Bearing
Liabilities
Interest-bearing
demand deposits 674 (1,241 ) (567 ) 536 (91 ) 445
Money market deposits 6,759 (10,092 ) (3,333 ) 7,808 (7,742 ) 66 Savings deposits
161 (398 ) (237 ) 54 (480 ) (426 )
Time deposits (17,137 ) (53,950 ) (71,087 ) (3,822 ) (37,340 ) (41,162 )
Other borrowings (3,969 ) (497 ) (4,466 ) (1,089 ) (1,675 ) (2,764 )
Long-term debt - (18 ) (18 ) (2,225 ) 169 (2,056 )
Total changes in
interest expense (13,512 ) (66,196 ) (79,708 ) 1,262 (47,159 ) (45,897 )
Change in net
interest income
(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 for Credit Losses
The provision for credit losses represents the charge against current earnings
that is determined by management, through a credit review process, as the amount
needed to maintain an allowance for loan losses and an allowance for off-balance
sheet unfunded credit commitments that management believes to be sufficient to
absorb credit losses inherent in the Bank's loan portfolio and credit
commitments. The Bank recorded a reversal of $16.0 million for credit losses in
2021 compared with a provision of $57.5 million for credit losses in 2020, and a
reversal of $7.0 million in 2019. Net charge-offs for 2021 were $17.6 million ,
or 0.11% of average loans, compared to net recoveries for 2020 of $14.2 million ,
or 0.09% of average loans, and net recoveries for 2019 of $7.8 million , or 0.05%
of average loans.
Non-interest Income
Non-interest income increased $11.8 million , or 27.5%, to $54.6 million for
2021, from $42.8 million for 2020, compared to $44.8 million for
2019. Non-interest income includes depository service fees, letters of credit
commissions, securities gains (losses), gains (losses) from loan sales, gains
from sale of premises and equipment, gains on acquisition, and other sources of
fee income. These other fee-based services include wire transfer fees, safe
deposit fees, fees on loan-related activities, fee income from our Wealth
Management division, and foreign exchange fees.
Comparison of 2021 with 2020
The increase in non-interest income from 2020 to 2021 was primarily due to a
$4.5 million increase in wealth management fees, $4.3 million increase in
derivative fees and $1.3 million increase in the Bank Owned Life Insurance death
benefit income.
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Table of Contents Comparison of 2020 with 2019 The decrease in non-interest income from 2019 to 2020 was primarily due to a$6.9 million decrease in net gains from equity securities, offset in part by a$2.5 million increase in gain on low-income housing, a$1.5 million increase in gain on sales of securities, and a$1.3 million increase in fees and commissions income from wealth management. Non-interest Expense Non-interest expense includes expenses related to salaries and benefits of employees, occupancy expenses, marketing expenses, computer and equipment expenses, amortization of core deposit intangibles, amortization of investment is affordable housing and alternative energy partnerships, and other operating expenses. Comparison of 2021 with 2020 Non-interest expense totaled$286.5 million in 2021 compared to$283.5 million in 2020. The increase of$3.1 million , or 1.1%, in non-interest expense in 2021 compared to 2020 was primarily due to a combination of the following: ? Salaries and employee benefits increased$8.8 million , or 7.1%. ? Professional Service increased$3.1 million , or 14.1%. ? Computer and equipment expenses increased$2.5 million , or 22.2%. ? Marketing expenses increased$1.7 million , or 32.3.%
? Amortization of investments in affordable housing and alternative energy
partnerships decreased $12.8 million , or 21.9%.
The efficiency ratio, defined as non-interest expense divided by the sum of net
interest income before provision for loan losses plus non-interest income,
decreased to 43.92% in 2021 compared to 47.65% in 2020 due primarily to an
increase in non-interest expense and higher net interest income as explained
above.
Comparison of 2020 with 2019
Non-interest expense totaled $283.5 million in 2020 compared to $277.3 million
in 2019. The increase of $6.2 million , or 2.2%, in non-interest expense in 2020
compared to 2019 was primarily due to a combination of the following:
? Amortization of investments in affordable housing and alternative energy
partnerships increased $18.5 million , or 46.5%.
? Salaries and employee benefits decreased $5.3 million , or 4.1%.
? Other Real Estate Owned expenses decreased $4.2 million .
? Marketing expenses decreased $2.4 million , or 31.1%.
The efficiency ratio, increased to 47.65% in 2020 compared to 44.75% in 2019 due
primarily to an increase in non-interest expense and lower net interest income
as explained above.
Income Tax Expense
Income tax expense was $83.5 million in 2021, compared to $25.1 million in 2020,
and $70.2 million in 2019. The effective tax rate was 21.9% for 2021, 9.9% for
2020, and 20.1% for 2019. The effective tax rate includes the impact of
low-income housing and alternative energy investments.
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Our tax returns are open for audits by the Internal Revenue Service back to 2018 and by the California Franchise Tax Board back to 2017. The audit by the Internal Revenue Service for 2017 was completed inJuly 2020 and did not have an impact on income tax expense. From time to time, there may be differences of opinion with respect to the tax treatment accorded transactions. When, and if, such differences occur, and the related tax effects become probable and estimable, such amounts will be recognized. Financial Condition Total assets were$20.9 billion atDecember 31, 2021 , an increase of$1.9 billion , or 10.0%, from$19 billion atDecember 31, 2020 , primarily due to an increase of$1.0 billion in short-term investments and interest-bearing deposits, an increase of$726.6 million in net loans, and an increase of$89.3 million in securities available for sale and equity securities.Investment Securities
Investment securities were
As of December 31,
2021 2020
(In thousands)
Securities Available-for-Sale:
U.S. treasury securities $ - $ 80,948
U.S. government agency entities 87,509
99,839
Mortgage-backed securities 888,665
727,068
Collateralized mortgage obligations 9,117 10,324 Corporate debt securities 142,018 118,371 Total$ 1,127,309 $ 1,036,550 Equity Securities Mutual funds 6,230 6,413 Preferred stock of government sponsored entities 1,811 5,485 Other equity securities 14,278 11,846 Total$ 22,319 $ 23,744 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. 66
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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 for 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 5.4% of total assets as ofDecember 31, 2021 , compared to 5.4% of total assets as ofDecember 31, 2020 . Securities available-for-sale were$1.1 billion as ofDecember 31, 2021 , compared to$1.0 billion as ofDecember 31, 2020 . The tables below show the related fair value and the gross unrealized losses of the Company's investment portfolio, aggregated by investment category and the length of time that individual securities has been in a continuous unrealized loss position, as ofDecember 31, 2021 , andDecember 31, 2020 : As of December 31, 2021 Less than 12 months 12 months or longer Total Fair Gross Unrealized Fair Gross Unrealized Fair Gross Unrealized Value Losses Value Losses Value Losses (In thousands) Securities
Available-for-Sale
U.S. treasury securities $ - $ - $ - $ - $ - $ -U.S. government agency entities - - 2,337 135 2,337 135 Mortgage-backed securities 527,276 6,659 6,496 755 533,772 7,414 Collateralized mortgage obligations 8,989 417 128 13 9,117 430 Corporate debt securities 103,720 2,122 19,468 532 123,188 2,654 Total$ 639,985 $ 9,198$ 28,429 $ 1,435$ 668,414 $ 10,633 As of December 31, 2020 Less than 12 months 12 months or longer Total Fair Gross Unrealized Fair Gross Unrealized Fair Gross Unrealized Value Losses Value Losses Value Losses (In thousands) Securities Available-for-Sale U.S. treasury securities$ 40,952 $ 6 $ - $ -$ 40,952 $ 6U.S. government agency entities 26,390 102 40,009 444 66,399 546 Mortgage-backed securities 1,694 23 8,093 583 9,787 606 Collateralized mortgage obligations 10,131 25 193 9 10,324 34 Corporate debt securities 58,405 267 - - 58,405 267 Total$ 137,572 $ 423$ 48,295 $ 1,036$ 185,867 $ 1,459 67
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The scheduled maturities and taxable-equivalent yields by security type are presented in the following table:
Securities Portfolio Maturity Distribution and Yield Analysis:
As of December 31, 2021
After One After Five
One Year Year to Years to Over Ten
or Less Five Years Ten Years Years Total
(In thousands)
Maturity Distribution:
Securities
Available-for-Sale:
U.S. treasury securities $ - $ - $ - $ - $ -
U.S. government agency
entities - - 32,463 55,046 87,509
Mortgage-backed securities
(1) 1 960 94,918 792,786 888,665
Collateralized mortgage
obligations (1) - - 128 8,989 9,117
Corporate debt securities 5,009 123,188 13,821 - 142,018
Total $ 5,010 $ 124,148 $ 141,330 Weighted-Average Yield: Securities Available-for-Sale: U.S. treasury securities - % - % - % - % - %U.S. government agency entities - - 0.67 0.79 0.74 Mortgage-backed securities (1) 3.49 2.85 2.92 2.24 2.32 Collateralized mortgage obligations (1) - - 3.88 1.57 1.60 Corporate debt securities 1.08 1.50 4.29 - 1.75 Total 1.08 % 1.51 % 2.54 % 2.14 % 2.12 % (1) Securities reflect stated maturities and do not reflect the impact of anticipated prepayments. Equity Securities For the year endedDecember 31, 2021 , the Company recognized a net loss of$1.4 million due to the decrease in fair value of equity investments with readily determinable fair values, compared to a net loss of$1.1 million in 2020. Equity securities were$22.3 million as ofDecember 31, 2021 , compared to$23.7 million as ofDecember 31, 2020 . Loans Loans represented 85.37% of average interest-earning assets during 2021, compared with 87.6% during 2020. Gross loans increased by$698.1 million , or 4.5%, to$16.3 billion atDecember 31, 2021 , compared with$15.6 billion atDecember 31, 2020 . The increase in gross loans was primarily attributable to the following:
? Commercial mortgage loans increased
at
commercial mortgage loans accounted for 49.8% of gross loans at
2021, compared to 48.3% at December 31, 2020 . Commercial mortgage loans
consist primarily of commercial retail properties, shopping centers,
owner-occupied industrial facilities, office buildings, multiple-unit
apartments, hotels, and multi-tenanted industrial properties, and aretypically secured by first deeds of trust on such commercial properties.
? Total residential mortgage loans increased by
2020, primarily due to the low level of interest rates, the originations of
limited documentation mortgages, and loan purchases.
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? Commercial loans, including PPP loans, increased
2020. Commercial loans consist primarily of short-term loans (typically with a
maturity of one year or less) to support general business purposes, or to
provide working capital to businesses in the form of lines of credit,
trade-finance loans, loans for commercial purposes secured by cash, and SBA
loans.
? Real estate construction loans decreased
million at
Our lending relates predominantly to activities in the states ofCalifornia ,New York, Texas ,Washington, Massachusetts ,Illinois ,New Jersey ,Maryland , andNevada . We also lend to domestic clients who are engaged in international trade. Loans outstanding in our branch inHong Kong were$275.6 million as ofDecember 31, 2021 , compared to$280.5 million as ofDecember 31, 2020 .
The classification of loans by type and amount outstanding as of
Loan Type and Mix
As of December 31,
2021 2020 2019 2018 2017
(In thousands)
Commercial loans $ 2,982,399 $ 2,836,833 $ 2,778,744 $ 2,741,965 $ 2,461,266
Residential mortgage loans and
equity lines 4,601,493 4,569,944 4,436,561 3,943,820 3,242,354
Commercial mortgage loans 8,143,272 7,555,027 7,275,262 6,724,200 6,482,695
Real estate construction loans 611,031 679,492 579,864 581,454 678,805
Installment and other loans 4,284 3,100 5,050 4,349 5,170
Gross loans 16,342,479 15,644,396 15,075,481 13,995,788 12,870,290
Less:
Allowance for loan losses (136,157 ) (166,538 ) (123,224 ) (122,391 ) (123,279 )
Unamortized deferred loan fees (4,321 ) (2,494 ) (626 ) (1,565 ) (3,245 )
Total loans, net $ 16,202,001 $ 15,475,364 $ 14,951,631 $ 13,871,832 $ 12,743,766
Loans held for sale $ - $ - $ - $ - $ 8,000
The loan maturities in the table below are based on contractual maturities as of
December 31, 2021 . As is customary in the banking industry, loans that meet
underwriting criteria can be renewed by mutual agreement between us and the
borrower. Because we are unable to estimate the extent to which our borrowers
will renew their loans, the table is based on contractual maturities. As a
result, the data shown below should not be viewed as an indication of future
cash flows.
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Contractual Maturity of Loan Portfolio
As of December 31, 2021
Within One One to Five Over Five
Year Years Years Total
(In thousands)
Commercial loans
Floating rate $ 2,199,317 $ 440,483 $ 123,380 $ 2,763,180
Fixed rate 84,255 110,524 24,440 219,219
Residential mortgage loans and equity lines
Floating rate 45 524 3,017,285 3,017,854
Fixed rate 5,749 20,347 1,557,543 1,583,639
Commercial mortgage loans
Floating rate 451,166 1,801,562 3,581,961 5,834,689
Fixed rate 335,501 1,556,906 416,176 2,308,583
Real estate construction loans
Floating rate 392,149 214,589 4,285 611,023
Fixed rate 8 - - 8
Installment and other loans
Floating rate 4,274 10 - 4,284
Fixed rate - - - -
Gross loans $ 3,472,464 $ 4,144,945 $ 8,725,070 $ 16,342,479
Floating rate 3,046,951 2,457,168 6,726,911 12,231,030
Fixed rate 425,513 1,687,777 1,998,159 4,111,449
Gross loans $ 3,472,464 $ 4,144,945 $ 8,725,070 $ 16,342,479
Allowance for loan losses (136,157 )
Unamortized deferred loan fees (4,321 )
Total loans, net $ 16,202,001
Deposits
The Bank primarily uses customer deposits to fund its operations, and to a
lesser extent advances from the Federal Home Loan Bank ("FHLB"), and other
borrowings. The Bank's deposits are generally obtained from the Bank's
geographic market area. The Bank utilizes traditional marketing methods to
attract new customers and deposits, by offering a wide variety of products and
services and utilizing various forms of advertising media. Although the vast
majority of the Bank's deposits are retail in nature, the Bank does engage in
certain wholesale activities, primarily accepting deposits generated by brokers.
The Bank considers wholesale deposits to be an alternative borrowing source
rather than a customer relationship and, as such, their levels are determined by
management's decisions as to the most economic funding sources.
Brokered-deposits totaled $394.0 million , or 2.2%, of total deposits, at
December 31, 2021 , compared to $1.2 billion , or 7.2%, at December 31, 2020 .
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The Bank's total deposits increased$2.0 billion , or 12.4%, to$18.1 billion atDecember 31, 2021 , from$16.1 billion atDecember 31, 2020 , primarily due to a$1.3 billion , or 37.3%, increase in money market deposits, a$1.1 billion , or 33.5%, increase in non-interest-bearing demand deposits, a$596.3 million , or 31.0%, increase in NOW deposits offset by a$1.2 billion , or 17.3% decrease in time deposits. The following table displays the deposit mix balances as of the end of the past three years: Deposit Mix Year Ended December 31, 2021 2020 2019 Amount % Amount % Amount % (In thousands) Deposits Non-interest-bearing demand deposits$ 4,492,054 24.9 %$ 3,365,086 20.9 %$ 2,871,444 19.5 % Interest bearing demand deposits 2,522,442 14.0 1,926,135 12.0 1,358,152 9.2 Money market deposits 4,611,579 25.5 3,359,191 20.8 2,260,764 15.4 Savings deposits 915,515 5.1 785,672 4.9 758,903 5.2 Time deposits 5,517,252 30.5 6,673,317 41.4 7,443,045 50.7 Total deposits$ 18,058,842 100.0 %$ 16,109,401 100.0 %$ 14,692,308 100.0 %
Average total deposits increased
The following table displays average deposits and rates for the past five years:
Average Deposits and Average Rates
Year Ended December 31,
2021 2020 2019 2018 2017
Amount % Amount % Amount % Amount % Amount %
(In thousands)Deposits Non-interest-bearing demand deposits$ 3,751,626 - %$ 3,158,828 - %$ 2,837,946 - %$ 2,819,711 - %$ 2,599,109 - % Interest bearing demand deposits 2,047,177 0.11 1,591,924 0.18 1,290,752 0.18 1,389,326 0.20 1,304,052 0.17 Money market deposits 4,034,246 0.45 2,903,837 0.74 2,012,306 1.07 2,200,847 0.74 2,360,188 0.64 Savings deposits 897,663 0.09 759,581
0.13 731,027 0.20 791,982 0.20 834,973 0.21 Time deposits
5,979,191 0.68 7,268,738 1.54 7,459,800 2.05 6,031,061 1.43 4,947,052 0.95 Total deposits
$ 16,709,903 0.37 %$ 15,682,908
0.87 %
Management considers the Bank's time deposits of$250 thousand or more, which totaled$2.9 billion atDecember 31, 2021 , to be generally less volatile than other wholesale funding sources primarily because approximately 92.7% of the Bank's CDs of$250 thousand or more have been on deposit with the Bank for two years or more. Management monitors the CDs of$250 thousand or more portfolio to help identify any changes in the deposit behavior in the market and of the Bank's customers. 71
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Approximately 96.4% of the Bank's CDs mature within one year as of
Time Deposits by Maturity
At December 31, 2021
Time Deposits - Time Deposits - Total Time
under $100,000 $100,000 and over Deposits
(In thousands)
Less than three months $ 411,064 $ 1,789,581 $ 2,200,645
Three to six months 97,319 880,230 977,549
Six to twelve months 177,505 1,963,107 2,140,612
Over one year 63,665 134,781 198,446
Total $ 749,553 $ 4,767,699 $ 5,517,252
Percent of total deposits 4.2 % 26.4 % 30.6 %
The following table displays time deposits with a remaining term of more than
one year at
Maturities of Time Deposits with a Remaining Term
of More Than One Year for Each
of the Five Years Following December 31, 2021
(In thousands)
2023 $ 139,734
2024 $ 58,088
2025 $ 144
2026 $ 467
2027 $ 13
Borrowings
Borrowings include securities sold under agreements to repurchase, Federal funds
purchased, funds obtained as advances from the FHLB of
As ofDecember 31, 2021 , there were no over-night borrowings from the FHLB in both 2021 and 2020. As ofDecember 31, 2021 , the advances from the FHLB were$20.0 million at a weighted average rate of 2.89% compared to$150.0 million at a weighted average rate of 2.15% as ofDecember 31, 2020 . As ofDecember 31, 2021 , final maturity for the FHLB advances is$20.0 million inMay 2023 . 72
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Long-term Debt
We established three special purpose trusts in 2003 and two in 2007 for the
purpose of issuing Guaranteed Preferred Beneficial Interests in their
Subordinated Debentures to outside investors ("Capital Securities"). The
proceeds from the issuance of the Capital Securities as well as our purchase of
the common stock of the special purpose trusts were invested in Junior
Subordinated Notes of the Company ("Junior Subordinated Notes"). The trusts
exist for the purpose of issuing the Capital Securities and investing in Junior
Subordinated Notes. Subject to some limitations, payment of distributions out of
the monies held by the trusts and payments on liquidation of the trusts, or the
redemption of the Capital Securities, are guaranteed by the Company to the
extent the trusts have funds on hand at such time. The obligations of the
Company under the guarantees and the Junior Subordinated Notes are subordinate
and junior in right of payment to all indebtedness of the Company and will be
structurally subordinated to all liabilities and obligations of the Company's
subsidiaries. The Company has the right to defer payments of interest on the
Junior Subordinated Notes at any time or from time to time for a period of up to
twenty consecutive quarterly periods with respect to each deferral period. Under
the terms of the Junior Subordinated Notes, the Company may not, with certain
exceptions, declare or pay any dividends or distributions on its capital stock
or purchase or acquire any of its capital stock if it has deferred payment of
interest on any Junior Subordinated Notes.
At December 31, 2021 , Junior Subordinated Notes totaled $119.1 million with a
weighted average interest rate of 2.38%, compared to $119.1 million with a
weighted average rate of 2.40% at December 31, 2020 . The Junior Subordinated
Notes have a stated maturity term of 30 years and qualify as Total Capital for
these periods.
Off-Balance-Sheet Arrangements, Commitments, Guarantees, and Contractual Obligations
In the normal course of business, we enter into various transactions, which, in
accordance with GAAP, are not included in the 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.
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Table of Contents Capital Resources Stockholders' Equity Total equity was$2.4 billion atDecember 31, 2021 , an increase of$28.1 million , or 1.2%, from$2.4 billion atDecember 31, 2020 , primarily due to net income of$298.3 million , proceeds from dividend reinvestment of$3.6 million , and stock based compensation of$6.0 million , offset by other comprehensive income of$8.4 million , shares withheld related to net share settlement of RSUs of$2.6 million , purchase of treasury stock of$167.1 million , and common stock cash dividends of$99.3 million . The Company paid cash dividends of$1.27 per common share in 2021,$1.24 per common share in 2020, and$1.24 per common share in 2019. OnApril 1, 2021 , the Board of Directors approved a stock repurchase program to buy back up to$75.0 million of Bancorp's common stock. The$75 million share repurchased program was completed onAugust 5, 2021 , with the repurchase of 1,832,481 shares for a total of$75.0 million , at an average cost of$40.93 per share. OnSeptember 2, 2021 , the Board of Directors approved a new stock repurchase program to buy back up to$125.0 million of the Bancorp's common stock. As ofDecember 31, 2021 , the Company repurchased 2,153,576 shares of common stock for a total of$92.1 million , at an average cost of$42.77 per share. Capital Adequacy 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 primary measure of capital adequacy is based on the ratio of risk-based capital to risk-weighted assets. AtDecember 31, 2021 , the Company's Tier 1 risk-based capital ratio of 12.80%, total risk-based capital ratio of 14.41%, and Tier 1 leverage capital ratio of 10.40%, calculated under theBasel III Capital Rules, continue to place the Company in the "well capitalized" category for regulatory purposes, which is defined as institutions with a Tier 1 risk-based capital ratio equal to or greater than 8%, a total risk-based capital ratio equal to or greater than 10%, and a Tier 1 leverage capital ratio equal to or greater than 5%. AtDecember 31, 2020 , the Company's Tier 1 risk-based capital ratio was 13.53%, total risk-based capital ratio was 15.47%, and Tier 1 leverage capital ratio was 10.94%.
A table displaying the Bancorp's and the Bank's capital and leverage ratios at
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 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. Substantially all of the revenues of the Company available for payment of dividends derive from amounts paid to it by the Bank. The Bank paid dividends to the Bancorp totaling$230.0 million during 2021,$146.0 million during 2020, and$239.0 million during 2019. 74
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TheFederal Reserve Board issued Federal Reserve Supervision and Regulation Letter SR-09-4 that states that bank holding companies are expected to inform and consult with theFederal Reserve supervisory staff prior to declaring and paying a dividend that exceeds earnings for the period for which the dividend is being paid. Under California State banking law, the Bank may not without regulatory approval pay a cash dividend which exceeds the lesser of the Bank's retained earnings or its net income for the last three fiscal years, less any cash distributions made during that period. Under this regulation, the amount of retained earnings available for cash dividends to the Company immediately afterDecember 31, 2021 , was restricted to approximately$207.8 million . For additional information on statutory and regulatory limitations on the ability of Bancorp to pay dividends to its shareholders and on the Bank to pay dividends to Bancorp, see "Item 1. Business-Regulation and Supervision - Dividends."
Risk Elements of the Loan Portfolio
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 principal or either interest 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 see 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 are placed under closer supervision with consideration given to placing the loan on non-accrual status, the need for an additional allowance for loan losses, and (if appropriate) partial or full charge-off. Total non-performing portfolio assets decreased$5.9 million , or 7.6%, to$71.7 million atDecember 31, 2021 , compared to$77.6 million atDecember 31, 2020 , primarily due to a decrease of$3.5 million ,$1.8 million and$0.6 million in accruing loans past due 90 days or more, nonaccrual loans and OREO, respectively. 75
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As a percentage of gross loans, excluding loans held for sale, plus OREO, our non-performing assets decreased to 0.44% atDecember 31, 2021 , from 0.50% atDecember 31, 2020 . The non-performing portfolio loan, excluding loans held for sale, coverage ratio, defined as the allowance for credit losses to non-performing loans, excluding loans held for sale, decreased to 212.9% atDecember 31, 2021 , from 237.3% atDecember 31, 2020 . The following table presents the breakdown of total non-accrual, past due, and restructured loans for the past five years: Non-accrual, Past Due and Restructured Loans As of December 31, 2021 2020 2019 2018 2017 (In thousands) Accruing loans past due 90 days or more$ 1,439 $ 4,982 $ 6,409 $ 3,773 $ - Non-accrual loans 65,846 67,684 40,523 41,815 48,787 Total non-performing loans 67,285 72,666 46,932 45,588 48,787 Other real estate owned 4,368 4,918 10,244 12,674 9,442 Total non-performing assets$ 71,653 $ 77,584 $ 57,176 $ 58,262 $ 58,229 Accruing troubled debt restructurings (TDRs)$ 12,837 $ 27,721 $ 35,336 $ 65,071 $ 68,565 Non-accrual TDRs (included in non-accrual loans)$ 8,175 $ 8,985 $ 18,048 $ 24,189 $ 33,416 Non-accrual loans held for sale $ - $ - $ - $ -$ 8,000 Non-performing assets as a percentage of gross loans and OREO at year-end 0.44 % 0.50 % 0.38 % 0.42 % 0.45 % Allowance for credit losses as a percentage of gross loans 0.88 % 1.10 % 0.84 % 0.89 % 0.99 % Allowance for credit losses as a percentage of non-performing loans 212.91 % 237.27 % 270.77 % 273.41 % 262.09 % The effect of non-accrual loans on interest income for the past five years is presented below: Year Ended December 31, 2021 2020 2019 2018 2017 (In thousands) Non-accrual Loans Contractual interest due$ 4,032 $ 3,093 $ 1,775 $ 1,618 $ 3,254 Interest recognized 1,074 1,008 85 66 86 Net interest foregone$ 2,958 $ 2,085 $ 1,690 $ 1,552 $ 3,168 As ofDecember 31, 2021 , there were no commitments to lend additional funds to those borrowers whose loans had been restructured, were considered impaired, or were on non-accrual status. Non-accrual Loans Total non-accrual portfolio loans were$65.8 million atDecember 31, 2021 , decreased$1.9 million , or 2.8%, from$67.7 million atDecember 31, 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. 76
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The following tables present the type of properties securing the non-accrual
portfolio loans and the type of businesses the borrowers engaged in as of the
dates indicated:
December 31, 2021 December 31, 2020
Real Real
Estate (1) Commercial Estate (1) Commercial
(In thousands)
Type of Collateral
Single/multi-family residence $ 12,456 $ 7,697 $ 7,126 $ 9,031
Commercial real estate 36,832 338 37,471 338
Land - 2,744 - 2,634
Personal property (UCC) - 5,779 - 11,084
Total $ 49,288 $ 16,558 $ 44,597 $ 23,087 (1) Real estate includes commercial mortgage loans, real estate construction loans, and residential mortgage loans and equity lines.
December 31, 2021 December 31, 2020
Real Real
Estate (1) Commercial Estate (1) Commercial
(In thousands)
Type of Business
Real estate development $ 13,775 $ - $ 12,875 $ 33
Wholesale/Retail 24,600 12,468 25,291 11,290
Import/Export - 3,190 - 6,191
Other 10,913 900 6,431 5,573
Total $ 49,288 $ 16,558 $ 44,597 $ 23,087 (1) Real estate includes commercial mortgage loans, real estate construction loans, and residential mortgage loans and equity lines.
Troubled Debt Restructurings
A troubled debt restructuring ("TDR") is a formal modification of the terms of a
loan when the Bank, for economic or legal reasons related to the borrower's
financial difficulties, grants a concession to the borrower. The concessions may
be granted in various forms, including reduction of the stated interest rate,
reduction of the amount of principal amortization, forgiveness of a portion of a
loan balance or accrued interest, or an extension of the maturity date. Although
these loan modifications are considered under ASC Subtopic 310-40 to be TDRs,
the loans must have, pursuant to the Bank's policy, performed under the
restructured terms and have demonstrated sustained performance under the
modified terms for six months before being returned to accrual status. The
sustained performance considered by management pursuant to its policy includes
the periods prior to the modification if the prior performance met or exceeded
the modified terms. This would include cash paid by the borrower prior to the
restructure to set up interest reserves. Loans classified as TDRs are reported
as individually evaluated loans.
The allowance for credit loss on a TDR is measured using the same method as all
other loans held for investment, except when the value of a concession cannot be
measured using a method other than the discounted cash flow method. When the
value of a concession is measured using the discounted cash flow method, the
allowance for credit loss is determined by discounting the expected future cash
flows at the original interest rate of the loan.
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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. Such conditions include 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 .
A summary of TDRs by type of loan and by accrual/non-accrual status as of the dates indicated is shown below:
December 31, 2021
Rate Reduction
Payment and Payment
Accruing TDRs Deferral Rate Reduction Deferral Total
(In thousands)
Commercial loans $ 3,368 $ - $ - $ 3,368
Commercial mortgage loans 438 5,522 168 6,128
Residential mortgage loans 1,464 249 1,628 3,341
Total accruing TDRs $ 5,270 $ 5,771 $ 1,796 $ 12,837
December 31, 2021
Rate Reduction
Payment and Payment
Non-accrual TDRs Deferral Rate Reduction Deferral Total
(In thousands)
Commercial loans $ 7,717 $ - $ - $ 7,717
Residential mortgage loans 458 - - 458
Total non-accrual TDRs $ 8,175 $ - $ - $ 8,175
December 31, 2020
Rate Reduction
Payment and Payment
Accruing TDRs Deferral Rate Reduction Deferral Total
(In thousands)
Commercial loans $ 3,983 $ - $ - $ 3,983
Commercial mortgage loans 515 5,635 13,425 19,575
Residential mortgage loans 1,724 275 2,164 4,163
Total accruing TDRs $ 6,222 $ 5,910 $ 15,589 $ 27,721
December 31, 2020
Rate Reduction
Payment and Payment
Non-accrual TDRs Deferral Rate Reduction Deferral Total
(In thousands)
Commercial loans $ 8,462 $ - $ - $ 8,462
Residential mortgage loans 523 - - 523
Total non-accrual TDRs $ 8,985 $ - $ - $ 8,985
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Table of Contents Impaired Loans Prior toJanuary 1, 2021 , a loan was considered to be impaired when it was probable that we would 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 of over 90 days or receipt of information indicating that full collection of principal is doubtful, or when the loan has been restructured in a TDRs. Those loans with a balance less than our defined selection criteria, generally when a loan amount is$500,000 or less, were treated as a homogeneous portfolio. If loans meeting the defined criteria were not collateral dependent, we measured 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 were collateral dependent, we measured the impairment by using the loan's observable market price or the fair value of the collateral. We generally obtained an appraisal to determine the amount of impairment at the date that the loan became impaired. The appraisals were based on "as is" or bulk sale valuations. To ensure that appraised values remained current, we obtained an updated appraisal every twelve months from qualified independent appraisers. If the fair value of the collateral, less cost to sell, was less than the recorded amount of the loan, we then recognized impairment by creating or adjusting an existing valuation allowance with a corresponding charge to the provision for loan losses. If an impaired loan was expected to be collected through liquidation of the collateral, the amount of impairment, excluding disposal costs (which range between 3% to 6% of the fair value, depending on the size of impaired loan), is charged off against the allowance for loan losses. Non-accrual impaired loans, including TDRs, were not returned to accrual status unless the unpaid interest has been brought current and full repayment of the recorded balance was expected or if the borrower had made six consecutive monthly payments of the scheduled amounts due, and TDRs were reviewed for continued impairment until they are no longer reported as TDRs. As ofDecember 31, 2021 , recorded investment in non-accrual loans was$65.8 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 10.7% of the contractual balances for non-accrual loans as ofDecember 31, 2021 . For impaired loans, the amounts previously charged off represents 7.1% as ofDecember 31, 2020 , of the contractual balances for impaired loans. As ofDecember 31, 2021 ,$49.3 million , or 74.9%, of the$65.8 million of non-accrual loans were secured by real estate compared to$44.6 million , or 65.9% of the$67.7 million of non-accrual loans that were secured by real estate as ofDecember 31, 2020 . The Bank generally seeks to obtain current appraisals, sales contracts, or other available market price information intended to provide updated factors in evaluating potential loss.
At
The allowance for loan losses to non-performing loans was 202.4% atDecember 31, 2021 , compared to 229.2% atDecember 31, 2020 , primarily due to an increase in the non-accrual loans. Non-accrual loans also include those TDRs that do not qualify for accrual status. 79
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The following table presents non-accrual loans and the related allowance as ofDecember 31, 2021 : As of December 31, 2021 Unpaid Principal Recorded Balance Investment Allowance (In thousands) With no allocated allowance: Commercial loans$ 15,879 $ 11,342 $ - Commercial mortgage loans 24,437 21,209 - Residential mortgage 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 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 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 : Impaired Loans As of 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 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 and equity lines 5,005 4,452 145 Subtotal$ 49,842 $ 41,827 $ 6,429 Total impaired loans$ 108,658 $ 95,405 $ 6,429 80
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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 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 ofDecember 31, 2021 , construction loans of$520.5 million were disbursed with pre-established interest reserves of$51.1 million compared to$643.5 million of such loans disbursed with pre-established interest reserves of$71.0 million atDecember 31, 2020 . The balance for construction loans with interest reserves which have been extended was$20.4 million with pre-established interest reserves of$0.4 million atDecember 31, 2021 , compared to$127.0 million with pre-established interest reserves of$4.4 million atDecember 31, 2020 . Land loans of$46.2 million were disbursed with pre-established interest reserves of$0.6 million atDecember 31, 2021 , compared to$24.7 million land loans disbursed with pre-established interest reserves of$0.5 million atDecember 31, 2020 . The balance for land loans with interest reserves which have been renewed was$0.9 million atDecember 31, 2021 , with pre-established interest reserves of$58 thousand , compared to$0.9 million land loans with pre-established interest reserves of$58 thousand atDecember 31, 2020 . AtDecember 31, 2021 andDecember 31, 2020 , the Bank had no loans on non-accrual status with available interest reserves. AtDecember 31, 2021 and 2020, there was zero 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 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 ;Nevada ;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 our 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 are no loan concentrations to multiple borrowers in similar activities that exceeded 10% of total loans as ofDecember 31, 2021 , or as ofDecember 31, 2020 . 81
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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 31% of total risk-based capital as ofDecember 31, 2021 , and 35% as ofDecember 31, 2020 . Total CRE loans represented 285% of total risk-based capital as ofDecember 31, 2021 , and 273% as ofDecember 31, 2020 , which were within the Bank's internal limit of 400%, of total capital. See Part I - Item 1A - "Risk Factors" for a discussion of some of the factors that may affect us. 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 inherent risks in the loan portfolio and off-balance sheet unfunded credit commitments. Allowance for credit losses is comprised of allowances 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 Board of Directors of the Bank 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 is based on management's current judgment about the credit quality of the loan portfolio and takes into consideration known relevant internal and external factors that affect collectability when determining the appropriate level for the allowance for 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 can result in an increase in the number of delinquencies, bankruptcies, and defaults, and a higher level of non-performing assets, net charge-offs, and provision for loan losses. See Part I - Item 1A - "Risk Factors" for additional factors that could cause actual results to differ materially from forward-looking statements or historical performance. The allowance for loan losses was$136.2 million and the allowance for off-balance sheet unfunded credit commitments was$7.1 million atDecember 31, 2021 , which represented the amount believed by management to be appropriate to absorb credit losses inherent in the loan portfolio. The allowance for credit losses, which is the sum of the allowances for loan losses and for off-balance sheet unfunded credit commitments, was$143.3 million atDecember 31, 2021 , compared to$172.4 million atDecember 31, 2020 , a decrease of$29.1 million , or 16.9%. The allowance for credit losses represented 0.9% of period-end gross loans and 212.9% of non-performing loans atDecember 31, 2021 . The comparable ratios were 1.10% of period-end gross loans and 237.3% of non-performing loans atDecember 31, 2020 . 82
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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 this Annual Report Form 10-K. For more information, please also see Note 1, Summary of Significant Accounting Policies contained in Item 8, Financial Statements and Supplementary Data.
Expected Credit Losses Estimate for Loans
InJanuary 2021 , we adopted ASC 326, which replaces the incurred loss methodology with an expected loss methodology. 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 1 and 4 to the Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data." In calculating our allowance for credit losses for the year ended 2021, the change in Moody's forecast of future GDP, unemployment rates, CRE and home price indexes, resulted in a decrease 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.
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 theDecember 31, 2021 , 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 double-dip recession due to resurgent COVID infections that results in negative GDP growth, rising unemployment, and deteriorating credit conditions in early 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
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 the information relating to the allowance for loan losses, charge-offs, recoveries, and the reserve for off-balance sheet credit commitments for the past five years:
Allowance for Credit Losses
Amount
Outstanding as of
2021 2020 2019 2018 2017
(In thousands)
Allowance for loan losses
Balance at beginning of year $ 166,538 $ 123,224 $ 122,391 $ 123,279 $ 118,966
Impact of ASU 2016-13 adoption (1,560 ) - - - -
Adjusted beginning balance $ 164,978 $ 123,224 $ 122,391 $ 123,279 $ 118,966
(Reversal)/provision for credit
losses (11,210 ) 57,500 (7,000 ) (4,500 ) (2,500 )
Charge-offs :
Commercial loans (20,051 ) (21,996 ) (6,997 ) (629 ) (3,313 )
Real estate loans (3 ) - - (2,577 ) (860 )
Total charge-offs (20,054 ) (21,996 ) (6,997 ) (3,206 ) (4,173 )
Recoveries:
Commercial loans 1,706 7,267 4,155 1,875 3,402
Construction loans 76 - 4,612 177 229
Real estate loans 661 543 6,063 4,766 7,336
Installment loans and other loans - - - - 19
Total recoveries 2,443 7,810 14,830 6,818 10,986
Balance at end of period $ 136,157 $ 166,538 Reserve for off-balance sheet credit commitments Balance at beginning of year$ 5,880 $ 3,855 $ 2,250 $ 4,588 $ 3,224 Impact of ASU 2016-13 adoption 6,018 - - - - Adjusted beginning balance$ 11,898 $ 3,855 $ 2,250 $ 4,588 $ 3,224 (Reversal)/provision for credit losses (4,798 ) 2,025 1,605 (2,338 ) 1,364 Balance at the end of period$ 7,100 $ 5,880
Average loans outstanding during the year (1)$ 15,827,550 $ 15,500,910 $ 14,510,678 $ 13,280,665 $ 11,936,389 Ratio of net charge-offs/(recoveries) to average loans outstanding during the year (1) 0.11 % 0.09 % (0.05 )% (0.03 )% (0.06 )% Provision/(reversal) for credit losses to average loans outstanding during the year (1) (0.07 )% 0.37 % (0.05 )% (0.03 )% (0.02 )% Allowance for credit losses to non-performing portfolio loans at year-end (2) 212.91 % 237.27 % 270.77 % 273.41 % 262.09 % Allowance for credit losses to gross loans at year-end (1) 0.88 % 1.10 % 0.84 % 0.89 % 0.99 % (1) Excluding loans held for sale (2) Excluding non-accrual loans held for sale 84
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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 types and common risk characteristics.
The non-impaired loans are grouped into 19 segments: two commercial
segments, ten commercial real estate segments, one residential construction
segment, one non-residential construction segment, one SBA segment, one
installment loans segment, one residential mortgage segment, one equity
lines of credit segment, and one overdrafts segment. The allowance is
provided for each segmented group based on the group's historical loan loss
experience aggregated based on loan risk classifications which take into
account the current financial condition of the borrowers and guarantors, the
prevailing value of the underlying collateral if collateral dependent,
charge-off history, management's knowledge of the portfolio, general
economic conditions, environmental factors including the trends in
delinquency and non-accrual, and other significant factors, such as the
national and local economy, volume and composition of the portfolio,
strength of management and loan staff, underwriting standards, andconcentration of credit. Management also reviews reports on past-due loans
to ensure appropriate classification. In the fourth quarter of 2016,
management reevaluated and increased the look back period from five to eight
years to capture historical loan losses from the last recession. The look
back period is anchored from the first quarter of 2009 and has been extended
through forty-eight quarters through the fourth quarter of 2020. The general
allowance is affected by loan volumes, quarterly net charge-offs/recoveries
and historical loss rates. In addition, risk factor calculations for pass
rated loans included a specified loss emergence period and were determined
based on five-year average of observed net losses, unless trends would
indicate that a different weighting would be appropriate. These refinements
maintained the Bank's allowance at a level consistent with the prior
quarter.
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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 total
loans as of the dates indicated:
Allocation of Allowance for Loan Losses
As of December 31,
2021 2020 2019 2018 2017
Percentage Percentage Percentage Percentage Percentage
of Loans in of Loans in of Loans in of Loans in of Loans in
Each Each Each Each Each
Category Category Category Category Category
to Average to Average to Average to Average to Average
Amount Gross Loans Amount Gross Loans Amount Gross Loans Amount Gross Loans Amount Gross Loans
(In thousands)
Type of Loans:
Commercial loans $ 43,394 18.4 % $ 68,742 18.8 % $ 57,021 18.9 % $ 54,978 19.1 % $ 49,796 19.1 %
Residential
mortgage loans and equity lines 25,379 28.7 17,737 29.4 13,108 29.1 14,282 26.9 11,013 24.5 Commercial mortgage loans 61,081 48.7 49,205 47.8 33,602 48.0 33,487 49.5 37,610 51.2 Real estate construction loans 6,302 4.2 30,854 4.0 19,474 4.0 19,626 4.5 24,838 5.2 Installment and other loans 1 - - - 19 - 18 - 22 - Total$ 136,157 100.0 %$ 166,538 100.0 %$ 123,224 100.0 %$ 122,391 100.0 % $
123,279 100.0 % The allowance allocated to commercial loans was$43.4 million atDecember 31, 2021 , compared to$68.7 million atDecember 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$18.3 million offset by a provision for loan losses of$24.5 million . The allowance allocated to residential mortgage loans and equity lines was$25.4 million atDecember 31, 2021 , compared to$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$11.9 million related to improvements in projected future macro-economic conditions in 2021. The allowance allocated to commercial mortgage loans was$61.1 million atDecember 31, 2021 , compared to$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 2021. The allowance allocated for construction loans decreased to$6.3 million atDecember 31, 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. Please also see Part I - Item 1A - "Risk Factors" for additional factors that could cause actual results to differ materially from forward-looking statements or historical performance. 86
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Table of Contents 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. ForDecember 2021 , our average monthly liquidity ratio (defined as net cash plus short-term and marketable securities to net deposits and short-term liabilities) was 17.3% compared to 14.7% forDecember 2020 . The Bank is a shareholder of the FHLB, which enables the Bank to have access to lower-cost FHLB financing when necessary. AtDecember 31, 2021 , the Bank had an approved credit line with the FHLB ofSan Francisco totaling$5.0 billion . Total advances from the FHLB ofSan Francisco were$20 million and standby letter of credits issued by FHLB on the Company's behalf were$676.4 million as ofDecember 31, 2021 . These borrowings bear fixed rates and are secured by loans. See Note 8 to the Consolidated Financial Statements. AtDecember 31, 2021 , the Bank pledged$773.3 thousand of its commercial loans to theFederal Reserve Bank's Discount Window under the Borrower-in-Custody program. The Bank had borrowing capacity of$2.4 million from the Federal Reserve Bank Discount Window atDecember 31, 2021 . Liquidity can also be provided through the sale of liquid assets, which consist of federal funds sold, securities purchased under agreements to resell, securities available-for-sale and equity securities. AtDecember 31, 2021 , securities available-for-sale totaled$1.1 billion , with$30.5 million pledged as collateral for borrowings and other commitments. The remaining$1.1 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
The business activities of the Bancorp consist primarily of the operation of the Bank and limited activities in other investments. The Bancorp obtains funding for its activities primarily through dividend income contributed by the Bank, proceeds from the issuance of the Bancorp common stock through our Dividend Reinvestment Plan and the exercise of stock options. Dividends paid to the Bancorp by the Bank are subject to regulatory limitations. Management believes the Bancorp's liquidity generated from its prevailing sources is sufficient to meet its operational needs.
Please also see Note 12 to the Consolidated Financial Statements regarding commitments and contingencies.
Recent Accounting Pronouncements
InMarch 2020 , the FASB issued ASU No. 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." ASU No. 2020-04 is effective for all entities as ofMarch 12, 2020 , throughDecember 31, 2022 . This ASU provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The ASU is intended to help stakeholders during the global market-wide reference rate transition period. Therefore, it will be in effect for a limited time throughDecember 31, 2022 . InJanuary 2021 , the FASB issued ASU 2021-01 as subsequent amendments, which expanded the scope of Topic 848 to include all affected derivatives and clarified certain optional expedients and exceptions regarding the hedge accounting for derivative contracts affected by the discounting transition. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements. 87
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Please see Note 1 to the Consolidated Financial Statements for details of other recent accounting pronouncements and their expected impact, if any, on the Consolidated Financial Statements.
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