Cathay General Bancorp(CATY) - 2024 Q2 - Quarterly Report

FORM 10-Q Filing Information This section outlines Cathay General Bancorp's quarterly report filing details, including registrant, type, status, and common stock - Registrant: Cathay General Bancorp (Bancorp), Cathay Bank (Bank)[1][4] - Filing Type: Quarterly Report (Form 10-Q) for the period ended June 30, 2024[1] - Filer Status: Large accelerated filer[1] - Common Stock: CATY, Nasdaq Global Select Market, 72,170,433 shares outstanding as of July 31, 2024[1][2] Forward-Looking Statements This section cautions that forward-looking statements are based on management's estimates and assumptions, subject to various economic and regulatory risks - Forward-looking statements are based on management's estimates, beliefs, projections, and assumptions, and are not guarantees of future performance[5] - Key risks include local, regional, national, and international economic conditions, potential loan losses, credit risks, extensive laws and regulations, higher capital requirements (Basel III), liquidity risk, interest rate fluctuations, and real estate market conditions[5] - The Company does not intend or undertake any obligation to update forward-looking statements, except as required by law[6] PART I – FINANCIAL INFORMATION This part presents the unaudited consolidated financial statements, management's discussion, market risk, and controls Item 1. FINANCIAL STATEMENTS (Unaudited) This section provides the unaudited consolidated financial statements and accompanying notes, detailing the Company's financial position, performance, and cash flows Consolidated Balance Sheets This section presents the Company's financial position, detailing assets, liabilities, and stockholders' equity at specific reporting dates Consolidated Balance Sheet Highlights (In thousands) | Metric | June 30, 2024 | December 31, 2023 | | :------------------------------------- | :------------ | :---------------- | | Assets | | | | Total assets | $23,235,245 | $23,081,534 | | Loans held for investment, net | $19,193,335 | $19,382,858 | | Securities available-for-sale | $1,648,731 | $1,604,570 | | Liabilities | | | | Total deposits | $19,773,017 | $19,325,447 | | Non-interest-bearing deposits | $3,161,632 | $3,529,018 | | Advances from FHLB | $165,000 | $540,000 | | Stockholders' Equity | | | | Total stockholders' equity | $2,793,242 | $2,736,575 | - Total assets increased by $153.7 million (0.7%) from December 31, 2023, to June 30, 2024[7][157] - Total deposits increased by $447.6 million (2.3%) from December 31, 2023, to June 30, 2024[7][209] Consolidated Statements of Operations and Comprehensive Income This section details the Company's financial performance, including net interest income, credit loss provisions, net income, and earnings per share Consolidated Statements of Operations Highlights (In thousands, except per share data) | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :-------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net interest income before provision for credit losses | $165,316 | $181,533 | $333,888 | $373,968 | | Provision for credit losses | $6,600 | $9,155 | $8,500 | $17,255 | | Net income | $66,829 | $93,220 | $138,264 | $189,227 | | Basic Net Income Per Common Share | $0.92 | $1.29 | $1.90 | $2.61 | | Diluted Net Income Per Common Share | $0.92 | $1.28 | $1.90 | $2.60 | | Cash dividends paid per common share | $0.34 | $0.34 | $0.68 | $0.68 | - Net income for Q2 2024 decreased by $26.4 million (28.3%) YoY to $66.8 million. Diluted EPS decreased to $0.92 from $1.28 YoY[8][140] - Net interest income before provision for credit losses decreased by $16.2 million (8.9%) YoY to $165.3 million in Q2 2024, primarily due to increased interest expense from deposits, partially offset by higher interest income from loans and securities[8][142] Consolidated Statements of Changes in Stockholders' Equity This section outlines changes in the Company's equity, reflecting net income, dividends, stock-based compensation, and other comprehensive income or loss Changes in Stockholders' Equity (Six Months Ended June 30, 2024, In thousands) | Metric | Amount | | :--------------------------------------------------- | :----- | | Balance at December 31, 2023 | $2,736,575 | | Net income | $138,264 | | Dividend Reinvestment Plan | $1,488 | | Restricted stock units vested | $2 | | Stock issued to directors | $850 | | Shares withheld related to net share settlement of RSUs | $(3,708) | | Purchases of treasury stock | $(25,301) | | Stock-based compensation | $2,189 | | Cash dividends of $0.68 per share | $(49,473) | | Other comprehensive loss | $(7,644) | | Balance at June 30, 2024 | $2,793,242 | - Total stockholders' equity increased by $56.7 million to $2.79 billion as of June 30, 2024, from $2.74 billion at December 31, 2023[10][129][216] - The increase was primarily driven by net income of $138.3 million, stock-based compensation of $2.2 million, and dividend reinvestment proceeds of $1.5 million, partially offset by cash dividends of $49.5 million and treasury stock purchases of $25.3 million[10][129][216] Consolidated Statements of Cash Flows This section summarizes cash flows from operating, investing, and financing activities, providing insight into the Company's liquidity and solvency Consolidated Statements of Cash Flows Highlights (Six Months Ended June 30, In thousands) | Metric | 2024 | 2023 | | :------------------------------------------ | :----- | :----- | | Net cash provided by operating activities | $161,087 | $211,847 | | Net cash provided/(used) for investing activities | $119,472 | $(746,023) | | Net cash (used)/provided by financing activities | $(4,359) | $854,039 | | Increase in cash, cash equivalents, and restricted cash | $276,200 | $319,863 | | Cash, cash equivalents, and restricted cash, end of the period | $1,105,001 | $1,482,265 | - Net cash provided by operating activities decreased to $161.1 million in H1 2024 from $211.8 million in H1 2023[11] - Net cash from investing activities significantly improved, turning from a use of $746.0 million in H1 2023 to a provision of $119.5 million in H1 2024[11] - Net cash from financing activities shifted from a provision of $854.0 million in H1 2023 to a use of $4.4 million in H1 2024[11] Notes to Consolidated Financial Statements (Unaudited) This section provides detailed explanations and additional information supporting the unaudited consolidated financial statements, covering accounting policies and disclosures 1. Business This note describes Cathay General Bancorp's operations, including banking services, branch network, and FDIC insurance status - Cathay General Bancorp is the holding company for Cathay Bank, offering a wide range of financial services since 1962[12] - The Bank operates 24 branches in Southern California, 19 in Northern California, 9 in New York, 4 in Washington, 2 in Illinois, 2 in Texas, and one each in Maryland, Massachusetts, Nevada, and New Jersey, plus a branch in Hong Kong and representative offices in Taipei, Beijing, and Shanghai[12] - Deposit accounts at the Hong Kong branch are not FDIC insured[12] 2. Basis of Presentation and Summary of Significant Accounting Policies This note explains the preparation of unaudited financial statements under GAAP and highlights management's estimates, especially for loan losses - Unaudited Consolidated Financial Statements are prepared in accordance with GAAP for interim financial information and Form 10-Q instructions[13] - Management's estimates and judgments affect reported amounts, with the allowance for loan losses being the most significant estimate subject to change[14] 3. Recent Accounting Pronouncements This note discusses the impact and effective dates of recent accounting standards updates (ASUs) and SEC rules on financial statements - ASU 2023-02 (Investments-Equity Method and Joint Ventures) on accounting for tax equity investments became effective after December 15, 2023; the Company elected not to apply the proportional amortization method[15] - ASU 2022-03 (Fair Value Measurement) on contractual sale restrictions for equity securities did not have a significant impact on financial statements[16] - ASU No. 2023-07 (Segment Reporting) and ASU No. 2023-09 (Income Taxes) are effective for fiscal years beginning after December 15, 2024, and the Company is evaluating their impact[17][19] - SEC's final rules on climate-related disclosures (SEC Release No. 33-11275) will apply to the Company's fiscal year beginning January 1, 2025, but are currently stayed pending judicial review[18] 4. Cash, Cash Equivalents and Restricted Cash This note defines cash and cash equivalents, and breaks down restricted cash balances for swaps and alternative energy investments - Cash and cash equivalents include cash on hand, due from banks, short-term investments, and interest-bearing deposits with original maturities of three months or less[21] Restricted Cash Balances (In millions) | Metric | June 30, 2024 | December 31, 2023 | | :------------------------------------------------ | :------------ | :---------------- | | Cash margin for interest rate swaps (restricted portion) | $8.4 | $8.6 | | Restricted escrow account for alternative energy investments | $14.8 | $6.4 | 5. Earnings per Share This note presents basic and diluted earnings per common share for quarterly and year-to-date periods, reflecting per-share profitability Earnings Per Common Share (Three Months Ended June 30) | Metric | 2024 | 2023 | | :-------------------------------------- | :--- | :--- | | Basic Net Income Per Common Share | $0.92 | $1.29 | | Diluted Net Income Per Common Share | $0.92 | $1.28 | Earnings Per Common Share (Six Months Ended June 30) | Metric | 2024 | 2023 | | :-------------------------------------- | :--- | :--- | | Basic Net Income Per Common Share | $1.90 | $2.61 | | Diluted Net Income Per Common Share | $1.90 | $2.60 | - Diluted EPS for Q2 2024 was $0.92, down from $1.28 in Q2 2023. For the six months ended June 30, 2024, diluted EPS was $1.90, down from $2.60 in the prior year[23] 6. Stock-Based Compensation This note details the Company's stock-based award programs, including RSUs, vesting schedules, activity, and recognized compensation expense - The Company grants various stock-based awards, including Restricted Stock Units (RSUs), which generally vest over one to three years, with some being performance-based[24][25] RSU Activity (Six Months Ended June 30, 2024) | Metric | Time-Based Shares | Performance-Based Shares | | :--------------------------- | :---------------- | :----------------------- | | Balance at December 31, 2023 | 194,389 | 349,661 | | Granted | 75,827 | 121,412 | | Vested | (41,186) | (113,764) | | Forfeited | (23,424) | (17,395) | | Balance at June 30, 2024 | 205,606 | 339,914 | Stock-Based Compensation Expense (In millions) | Period | 2024 | 2023 | | :-------------------------------- | :--- | :--- | | Three months ended June 30 | $1.3 | $1.4 | | Six months ended June 30 | $2.2 | $3.0 | - Unrecognized stock-based compensation expense related to RSUs was $13.5 million as of June 30, 2024, expected to be recognized over the next 2.3 years[28] 7. Investment Securities This note breaks down investment securities, especially AFS securities, their fair values, and unrealized gains or losses Securities Available-for-Sale (AFS) Fair Value (In thousands) | Security Type | June 30, 2024 | December 31, 2023 | | :--------------------------------- | :------------ | :---------------- | | U.S. treasury securities | $545,000 | $495,300 | | U.S. government agency entities | $11,010 | $48,169 | | U.S. government sponsored entities | $79,734 | N/A | | Mortgage-backed securities | $728,764 | $786,723 | | Collateralized mortgage obligations | $26,079 | $28,044 | | Corporate debt securities | $258,144 | $246,334 | | Total Securities AFS | $1,648,731 | $1,604,570 | - The Company recognized an unrealized net loss of $1.4 million on equity securities for Q2 2024, compared to a net gain of $10.7 million for Q2 2023[32] - As of June 30, 2024, the Company had 203 AFS securities in a gross unrealized loss position ($131.7 million total gross unrealized losses) with no credit impairment, primarily mortgage-backed securities[33] - Unrealized losses were primarily attributed to yield curve movement, widened liquidity spreads, and credit spreads, not credit losses. No allowance for credit losses was recorded against these securities[35] 8. Loans This note details the loan portfolio composition, including types, geographic concentrations, non-accrual status, and CECL methodology - Most business activities are with clients in high-density Asian-populated areas across California, New York, Texas, Washington, Massachusetts, Illinois, Maryland, and Nevada, and also in Hong Kong[36][179] Loans Held for Investment (In thousands) | Loan Type | June 30, 2024 | December 31, 2023 | | :--------------------------------- | :------------ | :---------------- | | Commercial loans | $3,090,763 | $3,305,048 | | Construction loans | $356,978 | $422,647 | | Commercial real estate loans | $9,886,030 | $9,729,581 | | Residential mortgage loans | $5,782,202 | $5,838,747 | | Equity lines | $235,277 | $245,919 | | Installment and other loans | $6,274 | $6,198 | | Gross loans | $19,357,524 | $19,548,140 | | Allowance for loan losses | $(153,404) | $(154,562) | | Total loans held for investment, net | $19,193,335 | $19,382,858 | - Gross loans held for investment decreased by $190.6 million (1.0%) to $19.36 billion at June 30, 2024, primarily due to decreases in commercial loans, construction loans, and residential mortgage loans, partially offset by an increase in commercial real estate loans[36][166] Non-Accrual Loans (Recorded Investment, In thousands) | Loan Type | June 30, 2024 | December 31, 2023 | | :-------------------------------------- | :------------ | :---------------- | | Commercial loans | $4,075 | $14,404 | | Construction loans | $22,998 | $7,736 | | Commercial real estate loans | $60,085 | $32,030 | | Residential mortgage loans and equity lines | $20,112 | $12,511 | | Total non-accrual loans | $107,270 | $66,681 | - Total non-accrual loans increased by $40.6 million (60.9%) to $107.3 million at June 30, 2024, from $66.7 million at December 31, 2023[36][171] - The Company adopted ASU 2022-02 for Troubled Debt Restructurings (TDR) and Vintage Disclosures, applying it prospectively and excluding accrued interest receivable from disclosed amortized cost basis of loan modifications[44] - The allowance for credit losses (ACL) is based on management's best estimate of lifetime expected credit losses, considering historical experience, current conditions, and reasonable and supportable economic forecasts (CECL approach)[60][62] - The CECL methodology utilizes an eight-quarter reasonable and supportable forecast period and a four-quarter reversion period, blending multiple economic forecasts from Moody's Analytics[65][66] - As of June 30, 2024, the allowance for loan losses was $153.4 million, and the reserve for unfunded loan commitments was $9.6 million, totaling $163.0 million for credit losses[73][191] - The allowance for credit losses represented 0.84% of period-end gross loans and 147.21% of non-performing loans at June 30, 2024[191] 9. Commitments and Contingencies This note discusses the Company's legal proceedings and unfunded commitments for housing and alternative energy partnerships - The Company is party to litigation in the ordinary course of business, but management believes liabilities would not have a material adverse impact on financial condition, results of operations, or liquidity[80] - Unfunded commitments related to affordable housing and alternative energy partnerships were $107.5 million as of June 30, 2024, down from $130.3 million at December 31, 2023[82] 10. Borrowed Funds This note details the Company's borrowed funds, including FHLB advances and junior subordinated notes, with their rates and capacities Federal Home Loan Bank (FHLB) Advances (In millions) | Metric | June 30, 2024 | December 31, 2023 | | :-------------------------------- | :------------ | :---------------- | | Advances from FHLB | $165.0 | $540.0 | | Weighted average rate | 5.62% | 5.64% | | Unused borrowing capacity from FHLB | $7,300.0 | $6,600.0 | | Unpledged securities | $1,630.0 | $1,470.0 | Junior Subordinated Notes (In millions) | Metric | June 30, 2024 | December 31, 2023 | | :-------------------------- | :------------ | :---------------- | | Total Junior Subordinated Notes | $119.1 | $119.1 | | Weighted average interest rate | 7.90% | 7.54% | - The Company has the right to defer interest payments on Junior Subordinated Notes for up to twenty consecutive quarterly periods, which would restrict dividend payments on capital stock[84] 11. Income Taxes This note presents the effective tax rate, discusses influencing factors like tax credits, and outlines open audit periods for tax returns Effective Tax Rate | Period | 2024 | 2023 | | :-------------------------- | :--- | :--- | | Six months ended June 30 | 9.4% | 13.2% | - The effective tax rate includes the impact of low-income housing and alternative energy investment tax credits[86] - The Company's tax returns are open for audit by the IRS back to 2020 and by the California Franchise Tax Board back to 2019[86] 12. Fair Value Measurements and Fair Value of Financial Instruments This note explains the Company's fair value measurements for assets and liabilities, categorizing them into a three-level hierarchy, and provides detailed tables - The Company uses fair value to measure certain assets and liabilities on a recurring basis (e.g., AFS securities, derivatives) and nonrecurring basis (e.g., individually evaluated loans, OREO)[87] - Fair value measurements are classified into Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1), and Level 3 (unobservable inputs based on management judgment)[88] Financial Assets Measured at Fair Value on a Recurring Basis (June 30, 2024, In thousands) | Asset Type | Level 1 | Level 2 | Level 3 | Total Fair Value | | :--------------------------------- | :------ | :-------- | :------ | :--------------- | | Securities AFS | $545,000 | $1,103,731 | $0 | $1,648,731 | | Equity securities | $29,949 | $0 | $0 | $29,949 | | Interest rate swaps | $0 | $52,192 | $0 | $52,192 | | Foreign exchange contracts | $0 | $226 | $0 | $226 | | Total Assets | $574,949 | $1,156,149 | $0 | $1,731,098 | Financial Liabilities Measured at Fair Value on a Recurring Basis (June 30, 2024, In thousands) | Liability Type | Level 1 | Level 2 | Level 3 | Total Fair Value | | :------------------------- | :------ | :-------- | :------ | :--------------- | | Interest rate swaps | $0 | $39,962 | $0 | $39,962 | | Foreign exchange contracts | $0 | $241 | $0 | $241 | | Total Liabilities | $0 | $40,203 | $0 | $40,203 | - During Q2 2024, the Company entered into a restructuring support agreement and received Level 3 equity securities in a private company, valued using projected earnings and cash on hand[94] 13. Goodwill and Other Intangible Assets This note reports the carrying value of goodwill and core deposit intangibles, including amortization expense and impairment assessments - Goodwill remained unchanged at $375.7 million as of June 30, 2024, and was not impaired[106] Core Deposit Intangibles (In thousands) | Metric | June 30, 2024 | December 31, 2023 | | :------------------------- | :------------ | :---------------- | | Gross balance | $10,562 | $10,562 | | Accumulated amortization | $(5,792) | $(5,291) | | Impairment | $(1,324) | $(1,227) | | Net carrying balance | $3,446 | $4,044 | - Amortization expense for core deposit intangibles was $259 thousand for Q2 2024 (down from $559 thousand in Q2 2023) and $598 thousand for H1 2024 (down from $809 thousand in H1 2023)[108] 14. Financial Derivatives This note describes the Company's use of financial derivatives to manage interest rate risk, their fair value recognition, and outstanding contract details - The Company uses financial derivatives (e.g., interest rate swaps, caps, floors) to mitigate exposure to interest rate risks, not for speculation[109] - All financial derivatives are recognized as assets or liabilities at fair value on the Consolidated Balance Sheets[111] - As of June 30, 2024, outstanding interest rate derivative contracts with clients and third-party financial institutions had a notional amount of $618.4 million and a fair value of $40.0 million[112] - The Bank's outstanding fair value interest rate swap contracts matched to individual fixed-rate commercial real estate loans had a notional amount of $82.8 million with a fair value of $4.5 million as of June 30, 2024[114] - The Company has designated a partial-term hedging election of $754.4 million notional as a last-of-layer hedge on pools of loans to reduce interest rate exposure[115] 15. Balance Sheet Offsetting This note clarifies the Company's policy regarding offsetting financial instruments, particularly derivatives, on the consolidated balance sheets - Certain financial instruments, including derivatives, may be eligible for offset in the Consolidated Balance Sheets or subject to master netting arrangements, but the Company generally does not offset them for financial reporting purposes[121] Derivative Offsetting Information (June 30, 2024, In thousands) | Metric | Gross Amounts Recognized | Offset Balance | Net Amounts Presented in Balance Sheet | Collateral Posted | Net Amount | | :---------- | :----------------------- | :------------- | :------------------------------------- | :---------------- | :--------- | | Assets: Derivatives | $52,192 | $1,282 | $50,910 | $47,276 | $3,634 | | Liabilities: Derivatives | $39,962 | $0 | $39,962 | $0 | $39,962 | 16. Revenue from Contracts with Clients This note breaks down non-interest income from client contracts, highlighting changes in fees, wealth management fees, and other service fees Non-Interest Income from Contracts with Clients (In thousands) | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :----------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Fees and service charges on deposit accounts | $2,450 | $2,336 | $4,687 | $4,855 | | Wealth management fees | $5,678 | $3,639 | $11,316 | $7,536 | | Other service fees | $4,737 | $4,591 | $8,787 | $8,135 | | Total noninterest income (in-scope) | $12,865 | $10,566 | $24,790 | $20,526 | | Noninterest income (not in-scope) | $350 | $12,544 | $(4,964) | $16,828 | | Total noninterest income | $13,215 | $23,110 | $19,826 | $37,354 | - Total non-interest income for Q2 2024 decreased by $9.9 million (42.9%) to $13.2 million, compared to $23.1 million in Q2 2023[148] - The decrease was primarily due to a $12.1 million increase in unrealized loss on equity securities, partially offset by a $2.0 million increase in Wealth Management fees[148] - The Company applies practical expedients for revenue recognition, not disclosing unsatisfied performance obligations for contracts less than one year and not adjusting for significant financing components in short-term contracts[128] 17. Stockholders' Equity This note details changes in total equity, including net income, dividends, stock-based compensation, treasury stock, and other comprehensive income or loss - Total equity increased by $56.7 million to $2.79 billion as of June 30, 2024, driven by net income, stock-based compensation, and dividend reinvestment, offset by cash dividends, treasury stock purchases, and other comprehensive loss[129][216] Changes in Total Equity (Six Months Ended June 30, 2024, In thousands) | Metric | Amount | | :--------------------------------------------------- | :----- | | Net income | $138,264 | | Proceeds from shares issued through the Dividend Reinvestment Plan | $1,488 | | Shares withheld related to net share settlement of RSUs | $(3,708) | | Purchase of treasury stock | $(25,301) | | Stock-based compensation | $2,189 | | Cash dividends paid to common stockholders | $(49,473) | | Restricted stock units vested | $2 | | Stock issued to directors | $850 | | Other comprehensive loss | $(7,644) | | Net increase in total equity | $56,667 | Accumulated Other Comprehensive Income/(Loss) (Net-of-tax, In thousands) | Metric | June 30, 2024 | June 30, 2023 | | :-------------------------------- | :------------ | :------------ | | Beginning balance | $(85,416) | $(102,295) | | Net unrealized gains/(losses) arising during the period | $(7,644) | $3,246 | | Reclassification adjustment for net losses in net income | $0 | $0 | | Ending balance | $(93,060) | $(99,049) | 18. Stock Repurchase Program This note details the Company's stock repurchase activities, including new program announcements and shares repurchased under existing plans - On May 28, 2024, the Company announced a new stock repurchase program to buy back up to $125.0 million of common stock[133] - During Q2 2024, the Company repurchased 0.7 million shares at an average cost of $36.41 per share, totaling $25.1 million[133] - The previous $125.0 million share repurchase program was completed on February 21, 2023, with 2,897,628 shares repurchased at an average cost of $43.14[133] 19. Subsequent Events This note confirms the Company evaluated post-balance sheet events and found no material items requiring disclosure - The Company evaluated events subsequent to June 30, 2024, and found no material events requiring recognition or disclosure[134] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on financial condition and results, highlighting key performance indicators, income, expenses, balance sheet items, accounting policies, market risk, and liquidity Critical Accounting Policies This section discusses accounting policies requiring management's most subjective judgments and estimates, particularly the allowance for loan losses - The discussion relies on unaudited Consolidated Financial Statements prepared in accordance with GAAP, requiring management estimates and judgments[136] - The allowance for loan losses is identified as a critical accounting policy due to significant judgments and assumptions that materially impact the carrying value of net loans[138] Highlights This section summarizes key financial performance indicators and significant corporate actions for the quarter, including net interest margin, EPS, and stock repurchase programs - Net interest margin decreased to 3.01% in Q2 2024 from 3.05% in Q1 2024[139] - Diluted EPS decreased to $0.92 for Q2 2024 from $0.98 for Q1 2024, mainly due to higher provision for loan losses[139] - A new $125.0 million stock repurchase program was announced on May 28, 2024, following the completion of the previous program[139] Quarterly Statement of Operations Review This section analyzes the Company's quarterly financial performance, examining net income, net interest income, credit loss provision, non-interest income, expense, and income taxes Net Income (Quarterly) This subsection reviews the Company's quarterly net income, earnings per share, and key profitability ratios like return on assets and equity Quarterly Net Income and EPS (In millions, except per share data) | Metric | Q2 2024 | Q2 2023 | | :-------------------------------------- | :------ | :------ | | Net income | $66.8 | $93.2 | | Basic earnings per common share | $0.92 | $1.29 | | Diluted earnings per common share | $0.92 | $1.28 | | Return on average assets | 1.15% | 1.67% | | Return on average total stockholders' equity | 9.63% | 14.47% | | Efficiency ratio | 55.65% | 45.36% | - Net income for Q2 2024 decreased by $26.4 million (28.3%) to $66.8 million compared to $93.2 million in Q2 2023[140] - Diluted EPS for Q2 2024 was $0.92, down from $1.28 in Q2 2023[140] Net Interest Income Before Provision for Credit Losses (Quarterly) This subsection analyzes quarterly changes in net interest income, net interest margin, and factors influencing interest income and expense - Net interest income before provision for credit losses decreased by $16.2 million (8.9%) to $165.3 million in Q2 2024, primarily due to increased interest expense from deposits, offset by higher interest income from loans and securities[142] - Net interest margin was 3.01% for Q2 2024, down from 3.44% for Q2 2023[142] Key Interest Rate Metrics (Q2 2024 vs. Q2 2023) | Metric | Q2 2024 | Q2 2023 | | :------------------------------------------ | :------ | :------ | | Yield on average interest-earning assets | 6.05% | 5.68% | | Cost of funds on average interest-bearing liabilities | 3.97% | 2.99% | | Average cost of interest-bearing deposits | 3.94% | 2.91% | | Net interest spread | 2.08% | 2.69% | Changes in Interest Income and Expense (Q2 2024 vs. Q2 2023, In thousands) | Category | Changes in Volume | Changes in Rate | Total Change | | :-------------------------------- | :---------------- | :-------------- | :----------- | | Total changes in interest income | $13,419 | $19,336 | $32,755 | | Total changes in interest expense | $10,497 | $38,475 | $48,972 | | Changes in net interest income | $2,922 | $(19,139) | $(16,217) | Provision for Credit Losses (Quarterly) This subsection examines quarterly provision for credit losses, changes in allowance, and net charge-offs, reflecting loan portfolio risk assessment - Provision for credit losses decreased to $6.6 million in Q2 2024 from $9.2 million in Q2 2023[147] - The allowance for credit losses decreased by $0.7 million to $163.0 million (0.84% of gross loans) at June 30, 2024, from $163.7 million (0.84% of gross loans) at December 31, 2023[147] Net Charge-offs (Three Months Ended June 30, In thousands) | Metric | 2024 | 2023 | | :-------------------- | :----- | :----- | | Total charge-offs | $8,257 | $2,483 | | Total recoveries | $260 | $503 | | Net charge-offs | $7,997 | $1,980 | Non-Interest Income (Quarterly) This subsection analyzes quarterly non-interest income trends, identifying key drivers like wealth management fees and unrealized gains or losses - Non-interest income decreased by $9.9 million (42.9%) to $13.2 million in Q2 2024, compared to $23.1 million in Q2 2023[148] - The decrease was primarily due to a $12.1 million increase in unrealized loss on equity securities, partially offset by a $2.0 million increase in Wealth Management fees[148] Non-Interest Expense (Quarterly) This subsection reviews quarterly non-interest expense changes, highlighting factors like salaries, amortization, OREO, and their impact on efficiency - Non-interest expense increased by $6.6 million (7.1%) to $99.4 million in Q2 2024 compared to $92.8 million in Q2 2023[150] - Key drivers of the increase were a $3.4 million rise in salaries and employee benefits, a $1.7 million increase in amortization of low-income housing and alternative energy partnerships, and a $1.4 million increase in OREO expenses[150] - The efficiency ratio worsened to 55.65% in Q2 2024 from 45.36% in Q2 2023[150] Income Taxes (Quarterly) This subsection discusses the quarterly effective tax rate and influencing factors like alternative energy and low-income housing tax credits - The effective tax rate for Q2 2024 was 7.9%, down from 9.2% for Q2 2023, influenced by alternative energy investments and low-income housing tax credits[151] Year-to-Date Statement of Operations Review This section analyzes the Company's year-to-date financial performance, covering net income and net interest income before credit loss provision Net Income (Year-to-Date) This subsection reviews the Company's year-to-date net income, diluted EPS, and key profitability ratios, comparing current to prior year - Net income for H1 2024 was $138.3 million, a decrease of $51.0 million (26.9%) compared to $189.2 million in H1 2023[152] - Diluted EPS for H1 2024 was $1.90, down from $2.60 in H1 2023[152] - Return on average stockholders' equity was 10.01% and return on average assets was 1.19% for H1 2024, compared to 14.92% and 1.71% respectively for H1 2023[152] Net Interest Income Before Provision for Credit Losses (Year-to-Date) This subsection analyzes year-to-date changes in net interest income, net interest margin, and factors influencing interest income and expense Key Interest Rate Metrics (H1 2024 vs. H1 2023) | Metric | H1 2024 | H1 2023 | | :------------------------------------------ | :------ | :------ | | Yield on average interest-earning assets | 6.03% | 5.61% | | Cost of funds on average interest-bearing liabilities | 3.92% | 2.73% | | Average cost of interest-bearing deposits | 3.86% | 2.66% | | Net interest spread | 2.11% | 2.88% | | Net interest margin | 3.03% | 3.59% | Changes in Interest Income and Expense (H1 2024 vs. H1 2023, In thousands) | Category | Changes in Volume | Changes in Rate | Total Change | | :-------------------------------- | :---------------- | :-------------- | :----------- | | Total changes in interest income | $34,463 | $45,548 | $80,011 | | Total changes in interest expense | $27,906 | $92,185 | $120,091 | | Changes in net interest income | $6,557 | $(46,637) | $(40,080) | Balance Sheet Review This section analyzes the Company's balance sheet, examining changes in assets, securities, loans, credit loss allowance, deposits, and uninsured deposits Assets This subsection reviews overall changes in total assets, providing a high-level overview of the Company's asset growth or contraction - Total assets increased by $153.7 million (0.7%) to $23.24 billion as of June 30, 2024, from $23.08 billion at December 31, 2023[157] Securities Available-for-Sale This subsection discusses the Company's AFS debt securities, including fair value measurement, impairment testing, and unrealized gains or losses - AFS debt securities are measured at fair value and subject to impairment testing, with credit-related losses recognized in earnings and non-credit related components in other comprehensive income[158] - Unrealized losses on AFS securities were determined to be due to market interest rates and supply/demand dynamics, not credit deterioration, and were recognized in other comprehensive income[164] - AFS securities represented 7.1% of total assets ($1.65 billion) as of June 30, 2024, up from 7.0% ($1.60 billion) at December 31, 2023[165] - As of June 30, 2024, $18.9 million of AFS securities were pledged to secure public deposits and other borrowings, down from $134.2 million at December 31, 2023[165] Loans This subsection analyzes the loan portfolio, including gross loans, non-performing assets, and concentrations in construction and commercial real estate (CRE) loans Gross Loans Held for Investment (In millions) | Loan Type | June 30, 2024 | December 31, 2023 | % Change | | :-------------------------------------- | :------------ | :---------------- | :------- | | Commercial loans | $3,090.8 | $3,305.0 | (6.5%) | | Construction loans | $357.0 | $422.6 | (15.5%) | | Commercial real estate loans | $9,886.0 | $9,729.6 | 1.6% | | Residential mortgage loans and equity lines | $6,017.5 | $6,084.7 | (1.1%) | | Installment and other loans | $6.3 | $6.2 | 1.2% | | Total Gross Loans | $19,357.5 | $19,548.1 | (1.0%) | - Gross loans held for investment decreased by $190.6 million (1.0%) to $19.36 billion at June 30, 2024, primarily due to decreases in commercial loans, construction loans, and residential mortgage loans, partially offset by an increase in commercial real estate loans[166] - Non-performing assets increased by $35.7 million (38.3%) to $129.0 million at June 30, 2024, from $93.3 million at December 31, 2023, mainly due to a 60.9% increase in non-accrual loans[168] Non-Performing Assets (In thousands) | Metric | June 30, 2024 | December 31, 2023 | % Change | | :------------------------------------------ | :------------ | :---------------- | :------- | | Accruing loans past due 90 days or more | $3,443 | $7,157 | (52%) | | Non-accrual loans | $107,270 | $66,681 | 61% | | Other real estate owned | $18,277 | $19,441 | (6%) | | Total non-performing assets | $128,990 | $93,279 | 38% | - The allowance for loan losses to non-performing loans decreased to 138.6% at June 30, 2024, from 209.3% at December 31, 2023, primarily due to the increase in non-accrual loans[175] - Construction loans with pre-established interest reserves were $194.5 million with $33.9 million in reserves at June 30, 2024, down from $220.6 million with $41.3 million in reserves at December 31, 2023[177] - The Bank's loans for construction, land development, and other land represented 16% of total risk-based capital at June 30, 2024, and total CRE loans represented 288% of total risk-based capital, both within internal limits[180] Total CREC Loans by Property Type (June 30, 2024, In thousands) | Property Type | Amount | % of Total | | :------------------------- | :------- | :--------- | | Retail | $2,370,805 | 23% | | Multifamily | $2,683,331 | 26% | | Office | $1,505,298 | 15% | | Warehouse | $1,204,716 | 12% | | Industrial and Multi-Use | $587,364 | 6% | | Lodging | $299,299 | 3% | | Construction & Land | $446,007 | 4% | | Other | $1,146,188 | 11% | | Total CREC loans | $10,243,008 | 100% | - The weighted-average loan-to-value (LTV) ratio of the total CREC loan portfolio was 50% as of June 30, 2024, with approximately 84% of total CREC loans having an LTV ratio of 60% or lower[182] - 49% of total CREC loans were concentrated in California as of June 30, 2024[183] Allowance for Credit Losses This subsection details the allowance for credit losses (ACL), its adequacy relative to loans and non-performing assets, and CECL economic scenarios - The allowance for credit losses (ACL) is maintained at a level appropriate to cover estimated and known risks in the loan portfolio and off-balance sheet unfunded credit commitments[189] - The ACL was $163.0 million at June 30, 2024 (0.84% of gross loans and 147.21% of non-performing loans), compared to $163.6 million at December 31, 2023 (0.84% of gross loans and 221.58% of non-performing loans)[191] - The decrease in ACL was primarily due to a decrease in total loans and the charge-off of a previously reserved for loan[195] - The Company's CECL methodology uses an eight-quarter reasonable and supportable forecast period and a four-quarter reversion period, blending multiple economic forecasts[198] - As of June 30, 2024, the Company placed equal weight on its downside and base economic scenarios, with a small weighting on the upside scenario[200] - If 100% weighting had been applied to the downside scenario, the ACL as of June 30, 2024, would have been approximately $52.9 million higher[202] Allowance for Loan Losses Activity (Six Months Ended June 30, In thousands) | Metric | 2024 | 2023 | | :------------------------------------------ | :----- | :----- | | Balance at beginning of period | $154,562 | $146,485 | | Provision for expected credit losses on loans | $7,979 | $15,460 | | Total charge-offs | $(10,450) | $(10,390) | | Total recoveries | $1,313 | $3,554 | | Balance at the end of period | $153,404 | $155,109 | Allowance for Loan Losses by Loan Type (June 30, 2024 vs. December 31, 2023, In thousands) | Loan Type | June 30, 2024 | December 31, 2023 | | :-------------------------------------- | :------------ | :---------------- | | Commercial loans | $48,588 | $53,791 | | Construction loans | $8,912 | $8,180 | | Commercial real estate loans | $78,465 | $74,428 | | Residential mortgage loans and equity lines | $17,416 | $18,140 | | Installment and other loans | $23 | $23 | | Total loans | $153,404 | $154,562 | Deposits This subsection analyzes changes in total deposits and their composition, including non-interest-bearing, NOW, money market, savings, and time deposits - Total deposits increased by $447.6 million (2.3%) to $19.77 billion as of June 30, 2024, from $19.33 billion at December 31, 2023[209] Deposit Mix (June 30, 2024 vs. December 31, 2023, In thousands) | Deposit Type | June 30, 2024 Amount | June 30, 2024 Percentage | December 31, 2023 Amount | December 31, 2023 Percentage | | :-------------------------------- | :------------------- | :----------------------- | :----------------------- | :----------------------- | | Non-interest-bearing demand deposits | $3,161,632 | 16.0% | $3,529,018 | 18.3% | | NOW deposits | $2,145,580 | 10.9% | $2,370,685 | 12.3% | | Money market deposits | $3,182,031 | 16.1% | $3,049,754 | 15.8% | | Savings deposits | $1,014,287 | 5.1% | $1,039,203 | 5.4% | | Time deposits | $10,269,487 | 51.9% | $9,336,787 | 48.2% | | Total deposits | $19,773,017 | 100.0% | $19,325,447 | 100.0% | - Time deposits constituted 51.9% of total deposits at June 30, 2024, with 99.8% maturing within one year or less[210][211][225] FDIC Special Assessment and Uninsured Deposits This subsection provides information on uninsured deposits, available liquidity coverage, and the impact of the FDIC special assessment - Total uninsured deposits were $9.00 billion as of June 30, 2024, an increase of $286.4 million from December 31, 2023[209] - Excluding collateralized deposits, uninsured and uncollateralized deposits were $8.22 billion (41.6% of total deposits) at June 30, 2024[209] - Available liquidity (unused FHLB borrowing capacity of $7.30 billion and unpledged securities of $1.63 billion) exceeded 100% of uninsured and uncollateralized deposits[209] - The Company recognized an additional $2.9 million for the FDIC special assessment in Q1 2024, following an $11.3 million recognition in Q4 2023[212] Off-Balance-Sheet Arrangements and Contractual Obligations This section details the Company's off-balance-sheet financial instruments and contractual obligations, including deposits, borrowings, and operating leases Contractual Obligations (June 30, 2024, In thousands) | Obligation Type | 1 year or less | 1-3 years | 3-5 years | 5 years or more | Total | | :------------------------------------------ | :------------- | :-------- | :-------- | :-------------- | :------------ | | Deposits with stated maturity dates | $10,243,914 | $21,741 | $0 | $3,832 | $10,269,487 | | Advances from the Federal Home Loan Bank | $165,000 | $0 | $0 | $0 | $165,000 | | Other borrowings | $0 | $0 | $0 | $17,838 | $17,838 | | Long-term debt | $0 | $0 | $0 | $119,136 | $119,136 | | Operating leases | $10,968 | $16,800 | $9,579 | $1,111 | $38,458 | | Total contractual obligations | $10,419,882 | $38,541 | $9,579 | $141,917 | $10,609,919 | - The Company enters into off-balance sheet financial instruments, such as commitments to extend credit and standby letters of credit, to meet client financing needs, which involve varying degrees of credit and interest rate risk[214][215] Capital Resources This section discusses the Company's capital management strategy, including capital adequacy ratios and dividend policy, ensuring regulatory compliance and growth Capital Adequacy Review This subsection reviews the Company's capital levels and ratios, demonstrating compliance with Basel III and "well capitalized" thresholds - Management aims to maintain capital levels sufficient for future growth, depositor/stockholder protection, and regulatory compliance[217] Capital Ratios (June 30, 2024, In thousands) | Ratio | Bancorp Actual Ratio | Bank Actual Ratio | Minimum Required Ratio (Basel III) | Required to be Well Capitalized Ratio | | :-------------------------------------- | :------------------- | :---------------- | :--------------------------------- | :------------------------------------ | | Common Equity Tier 1 to Risk-Weighted Assets | 13.26% | 13.61% | 7.00% | 6.50% | | Tier 1 Capital to Risk-Weighted Assets | 13.26% | 13.61% | 8.50% | 8.00% | | Total Capital to Risk-Weighted Assets | 14.74% | 14.47% | 10.50% | 10.00% | | Leverage Ratio | 10.83% | 11.11% | 4.00% | 5.00% | - As of June 30, 2024, capital levels at both Bancorp and the Bank exceeded all capital adequacy requirements under fully phased-in Basel III Capital Rules and the minimum levels to be considered 'well capitalized'[219] Dividend Policy This subsection outlines the Company's common stock dividend policy, including current rate and payment restrictions from junior subordinated notes - Holders of common stock are entitled to dividends as declared by the Board of Directors, but the Company is not required to pay them[219] - The common stock dividend has been $0.34 per share since Q4 2021[219] - Payment of dividends is limited by the terms of Junior Subordinated Notes; if interest payments are deferred, common stock dividends cannot be paid[219] - The Company declared a cash dividend of $0.34 per share on May 30, 2024, totaling $24.8 million paid in Q2 2024[221] Liquidity This section describes the Company's liquidity management, including its ability to meet obligations, primary sources, and available borrowing capacity - Liquidity is the ability to meet financial obligations and client credit needs. Principal sources include deposit growth, security maturities/sales, loan repayments, federal funds, repurchase agreements, and FHLB advances[222] - The average monthly liquidity ratio was 13.7% as of June 30, 2024, consistent with December 31, 2023[222] - The Bank had an approved FHLB credit line of $8.19 billion, with $165.0 million in advances and $950.0 million in standby letters of credit as of June 30, 2024[223] - Investment securities totaled $1.65 billion at June 30, 2024, with $18.9 million pledged as collateral, leaving the remainder available for liquidity[224] - Approximately 99.8% of time deposits mature within one year or less, and management expects them to reprice lower with anticipated Fed funds rate decreases[225] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section describes the Company's market risk management, primarily interest rate risk, using a net interest income simulation model, outlining methodology, assumptions, and impact of rate changes on NII and MVE - The Company uses a net interest income simulation model to measure interest rate risk and project future earnings or market values under alternative interest rate scenarios[226] - The model requires significant assumptions for loan prepayment rates, volumes, pricing, and deposit/borrowing volumes and pricing, which may prove inaccurate[227] - A policy tolerance level limits net interest income volatility to plus or minus 5% and net economic value loss to zero for hypothetical rate changes of plus or minus 200 basis points[228] Estimated Impact of Interest Rate Changes (June 30, 2024) | Change in Interest Rate (Basis Points) | Net Interest Income Volatility (1) | Market Value of Equity Volatility (2) | | :--------------------------------------- | :--------------------------------- | :------------------------------------ | | +200 | 15.68% | -7.6% | | +100 | 7.9% | -3.8% | | -100 | -5.0% | 4.4% | | -200 | -10.3% | 9.5% | Item 4. Controls and Procedures This section confirms the effectiveness of disclosure controls and procedures as of June 30, 2024, with no material changes in internal control over financial reporting during Q2 2024 - The principal executive and financial officers evaluated and concluded that the Company's disclosure controls and procedures are effective as of June 30, 2024[231] - No material changes in internal control over financial reporting occurred during Q2 2024[232] PART II – OTHER INFORMATION This part includes disclosures on legal proceedings, risk factors, equity security sales, and other information not covered in financial statements Item 1. Legal Proceedings This section states the Company is involved in ordinary course legal proceedings, with management believing no material adverse impact on financial condition, results, or liquidity - The Company is a party to litigation arising in the ordinary course of business[233] - Management believes that any liability from such litigation would not have a material adverse impact on the Company's consolidated financial condition, results of operations, or liquidity[233] Item 1A. Risk Factors This section indicates no material changes to 2023 Form 10-K risk factors, advising readers to consider all potential risks that could adversely affect business and financial performance - No material changes to risk factors previously disclosed in the 2023 Form 10-K[234] - Readers should carefully consider the disclosed risk factors, as well as additional unknown or immaterial risks, which could adversely affect the Company's business, financial condition, results of operations, and stock price[234] - Limitations on dividend payments are discussed in the 'Dividend Policy' and 'Liquidity' sections[235] [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=79&type=section&id=Item%202.%20UNREGISTERED%20SALES%20OF%20EQUITY%20SECU RITIES%20AND%20USE%20OF%20PROCEEDS) This section details the Company's Q2 2024 share repurchase activities, including number of shares purchased and average price under announced plans Issuer Purchases of Equity Securities (Q2 2024) | Period | Total Number of Shares Purchased | Average Price per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs | | :----------------------------------- | :------------------------------- | :---------------------- | :------------------------------------------------------------------------------- | :---------------------------------------------------------------------------------------------------------- | | April 1, 2024 - April 30, 2024 | 0 | $0.00 | 0 | $0 | | May 1, 2024 - May 31, 2024 | 150,000 | $36.49 | 150,000 | $119,526,565 | | June 1, 2024 - June 30, 2024 | 539,470 | $36.38 | 539,470 | $99,897,996 | | Total | 689,470 | $36.41 | 689,470 | $99,897,996 | - The Company repurchased 689,470 shares at an average price of $36.41 per share during Q2 2024[235] Item 3. Defaults Upon Senior Securities This section states that there are no defaults upon senior securities to report - Not applicable[237] Item 4. Mine Safety Disclosures This section states that there are no mine safety disclosures to report - Not applicable[237] Item 5. Other Information This section indicates that there is no other information to report - None[237] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including organizational documents, incentive plans, certifications, and XBRL documents - Includes Restated Certificate of Incorporation, Amended and Restated Bylaws, Certificates of Designation for Preferred Stock, and various Restricted Stock Unit Agreements[238] - Contains certifications from the CEO and CFO pursuant to Sarbanes-Oxley Act Sections 302 and 906[238] - Includes Inline XBRL Instance Document and Taxonomy Extension documents[238][239] Signatures This section provides official signatures of the Company's principal executive and financial officers, certifying Form 10-Q accuracy - Report signed by Chang M. Liu, President and Chief Executive Officer, and Heng W. Chen, Executive Vice President and Chief Financial Officer[239] - Date of signing: August 8, 2024[239]