Cathay General Bancorp(CATY) - 2021 Q3 - Quarterly Report

PART I – FINANCIAL INFORMATION This section presents the unaudited consolidated financial statements, offering a snapshot of the company's interim financial position and performance Item 1. FINANCIAL STATEMENTS (Unaudited) This section details the unaudited consolidated financial statements, including balance sheets, statements of operations, comprehensive income, equity changes, and cash flows Consolidated Balance Sheets This section provides a summary of the company's assets, liabilities, and equity at specific points in time Consolidated Balance Sheet Highlights (In thousands) | Metric | Sep 30, 2021 | Dec 31, 2020 | | :----- | :----------- | :----------- | | Total Assets | $19,860,440 | $19,043,134 | | Total Liabilities | $17,397,149 | $16,624,990 | | Total Deposits | $17,006,870 | $16,109,401 | | Loans, net | $15,841,001 | $15,475,364 | | Allowance for loan losses | $(131,945) | $(166,538) | - Total assets increased by $817.3 million, or 4.3%, from December 31, 2020, primarily due to an increase in short-term investments and commercial mortgage loans[269] Consolidated Statements of Operations and Comprehensive Income This section outlines the company's revenues, expenses, net income, and other comprehensive income for the reported periods Consolidated Statements of Operations Highlights (In thousands) | Metric | Three months ended Sep 30, 2021 | Three months ended Sep 30, 2020 | Nine months ended Sep 30, 2021 | Nine months ended Sep 30, 2020 | | :----- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Total interest and dividend income | $168,627 | $172,234 | $497,322 | $532,978 | | Total interest expense | $16,143 | $34,730 | $55,019 | $120,688 | | Net interest income before provision for credit losses | $152,484 | $137,504 | $442,303 | $412,290 | | Provision for credit losses | $3,050 | $12,500 | $(19,508) | $62,500 | | Net income | $72,397 | $56,794 | $222,980 | $157,967 | | Basic Net Income Per Common Share | $0.93 | $0.71 | $2.83 | $1.98 | | Diluted Net Income Per Common Share | $0.93 | $0.71 | $2.82 | $1.98 | - Net income for the third quarter of 2021 increased by $15.6 million (27.5%) to $72.4 million compared to the same quarter a year ago, driven by a decrease in interest expense from deposits[244][247] - For the nine months ended September 30, 2021, net income increased by $65.0 million (41.1%) to $223.0 million compared to the same period a year ago[259] Consolidated Statements of Changes in Stockholders' Equity This section details the changes in the company's equity, including net income, dividends, and stock transactions Changes in Stockholders' Equity (In thousands) | Item | Three months ended Sep 30, 2021 | Nine months ended Sep 30, 2021 | | :--- | :------------------------------ | :----------------------------- | | Balance at June 30, 2021 / Dec 31, 2020 | $2,452,357 | $2,418,144 | | Net income | $72,397 | $222,980 | | Purchases of treasury stock | $(37,139) | $(100,668) | | Cash dividends paid per common share | $(24,137) | $(73,335) | | Other comprehensive loss, net of tax | $(2,740) | $(5,678) | | Balance at September 30, 2021 | $2,463,291 | $2,463,291 | - Total equity increased by $45.1 million to $2.46 billion as of September 30, 2021, from $2.42 billion at December 31, 2020, primarily due to net income, stock-based compensation, and dividend reinvestment, partially offset by treasury stock purchases and cash dividends[217][339] Consolidated Statements of Cash Flows This section presents the cash inflows and outflows from operating, investing, and financing activities Consolidated Statements of Cash Flows Highlights (In thousands) | Cash Flow Activity | Nine months ended Sep 30, 2021 | Nine months ended Sep 30, 2020 | | :----------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $237,547 | $233,120 | | Net cash used for investing activities | $(428,160) | $(175,281) | | Net cash provided by financing activities | $593,697 | $782,449 | | Decrease in cash, cash equivalents, and restricted cash | $403,084 | $840,288 | | Cash, cash equivalents, and restricted cash, end of the period | $1,824,162 | $1,434,066 | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) This section provides detailed explanations and disclosures for the financial statements, covering business, accounting policies, and financial instrument specifics - The unaudited Consolidated Financial Statements are prepared in accordance with GAAP for interim financial information, with management's estimates and judgments, particularly for the allowance for loan losses, being significant[32][33] Note 1. Business Overview This note describes Cathay General Bancorp's operations, including its banking services and branch network - Cathay General Bancorp is the holding company for Cathay Bank, which offers a wide range of financial services and operates 53 branches across several US states and one in Hong Kong, with representative offices in Taipei, Beijing, and Shanghai[31] Note 2. Basis of Presentation and Summary of Significant Accounting Policies This note outlines the basis of financial statement presentation and summarizes the company's significant accounting policies Securities Available for Sale Accounting This sub-section details the accounting treatment for debt securities classified as available-for-sale - Effective January 1, 2021, with the adoption of ASU 2016-13, debt securities available-for-sale (AFS) are measured at fair value and subject to impairment testing, requiring recognition of credit-related losses through an allowance for credit loss and non-credit related changes in other comprehensive income[37] Allowance for Credit Losses on Available for Sale Securities This sub-section explains the methodology for assessing and recognizing credit losses on available-for-sale debt securities - For AFS debt securities in an unrealized loss position, the Company assesses intent/requirement to sell before recovery of amortized cost; if met, amortized cost is written down to fair value with credit loss recognized as an allowance and non-credit loss in OCI[40] - The Company has elected not to measure an allowance for credit losses for accrued interest receivables on AFS debt securities, as previously accrued interest is reversed when the debt security remains in default for an extended period[42] Loans Held for Investment Accounting This sub-section describes the accounting policies for loans intended to be held until maturity - Loans held for investment are stated at outstanding principal, reduced by an allowance for loan losses and net of deferred loan fees or costs, with interest generally calculated using the simple-interest method[45] - Loans are typically placed on nonaccrual status when 90 days past due or when full collection of principal or interest becomes uncertain, with accrued interest reversed against income[46] Loans Held for Sale Accounting This sub-section outlines the accounting treatment for loans designated as held for sale - Loans held for sale are carried at the lower of aggregate cost or fair value, with gains and losses recorded in non-interest income based on sales proceeds versus carrying value[47] Allowance for Credit Losses on Loans Held for Investment This sub-section details the Current Expected Credit Loss (CECL) methodology for loans held for investment - Effective January 1, 2021, the Company adopted the Current Expected Credit Loss (CECL) approach, requiring immediate recognition of estimated credit losses over the asset's life, considering historical experience, current conditions, and reasonable economic forecasts[48][51] - The CECL methodology utilizes econometric models for six loan portfolios (residential mortgages, C&I, construction, CRE for multifamily, owner-occupied, and other CRE) and a simplified loss-rate method for three smaller portfolios (SBA, HELOCs, cash-secured loans)[53][57] - Management judgment is crucial in determining the allowance for credit losses under CECL, involving segmentation, loss history, model selection, forecast scenarios, and qualitative factors, acknowledging the inherent imprecision of economic forecasts[59] Individually Evaluated Loans This sub-section describes the criteria and process for individually evaluating certain loans for impairment - Loans that do not share similar risk characteristics, such as those on nonaccrual status, modified under troubled debt restructuring, or 90+ days delinquent, are individually evaluated for impairment and excluded from collective pools[61] Troubled Debt Restructured Loans (TDR) This sub-section defines troubled debt restructurings and relevant accounting guidance, including CARES Act provisions - A TDR involves a formal modification of loan terms due to a borrower's financial difficulties, granting concessions like reduced interest rates, loan balances, or extended maturity dates[63] - The CARES Act and CAA permit suspension of GAAP TDR requirements for COVID-19 related loan modifications made between March 1, 2020, and January 1, 2022 (or 60 days after emergency declaration), provided the loan was not more than 30 days past due as of December 31, 2019[65] Unfunded Loan Commitments This sub-section explains the accounting for expected credit losses on unfunded loan commitments - The Company estimates expected credit losses over the contractual period of unfunded loan commitments, using the same loss factors as for loan losses, with the reserve included in 'other liabilities' on the Consolidated Balance Sheets[69] Note 3. Recent Accounting Pronouncements This note discusses recently adopted and pending accounting standards and their impact on the financial statements Accounting Standards Adopted in 2021 This sub-section details the accounting standards adopted by the company in 2021, including CECL - Effective January 1, 2021, the Company adopted ASU 2016-13 (CECL), replacing the incurred loss approach with immediate recognition of expected credit losses over the asset's life, resulting in a cumulative effect adjustment to decrease retained earnings by $3.1 million (net of taxes)[72][73][75] Cumulative Effect of ASC 326 Adoption on Balance Sheet (January 1, 2021, In thousands) | Item | Balance at Dec 31, 2020 | Adjustments due to Adoption of ASC 326 | Balance at Jan 1, 2021 | | :--- | :---------------------- | :------------------------------------- | :--------------------- | | Allowance for credit losses on loans | $166,538 | $(1,560) | $164,978 | | Deferred tax assets | $85,610 | $1,319 | $86,929 | | Allowance for unfunded commitments | $5,880 | $6,018 | $11,898 | | Retained earnings, net of tax | $2,418,144 | $(3,140) | $2,415,004 | - The adoption of ASU 2017-11 (Earnings per Share, Distinguishing Liabilities from Equity, and Derivatives and Hedging), ASU 2019-12 (Income Taxes), and ASU 2020-01 (Investments—Equity Securities) did not have a material impact on the Company's Consolidated Financial Statements[76][78][79] Other Accounting Standards Pending Adoption This sub-section outlines accounting standards that are pending adoption and their anticipated impact - ASU No. 2020-04, 'Reference Rate Reform,' provides temporary optional guidance to ease accounting burdens for LIBOR transition, with the Company planning to offer SOFR as the primary alternative rate; adoption is not expected to have a material impact[80] Note 4. Cash, Cash Equivalents and Restricted Cash This note provides details on the composition of cash, cash equivalents, and restricted cash balances - Cash and cash equivalents include cash on hand, amounts due from banks, and short-term investments with original maturities of three months or less[82] Restricted Cash Balances (In millions) | Item | Sep 30, 2021 | Dec 31, 2020 | | :--- | :----------- | :----------- | | Cash margin account for interest rate swaps | $31.9 | $34.7 | | Restricted escrow account for alternative energy investments | $1.0 | $9.3 | Note 5. Earnings per Share This note presents the calculation of basic and diluted earnings per common share Earnings Per Common Share | Metric | Three months ended Sep 30, 2021 | Three months ended Sep 30, 2020 | Nine months ended Sep 30, 2021 | Nine months ended Sep 30, 2020 | | :----- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net income (in thousands) | $72,397 | $56,794 | $222,980 | $157,967 | | Basic EPS | $0.93 | $0.71 | $2.83 | $1.98 | | Diluted EPS | $0.93 | $0.71 | $2.82 | $1.98 | | Cash dividends paid per common share | $0.31 | $0.31 | $0.93 | $0.93 | | Basic weighted-average shares outstanding | 77,846,424 | 79,628,372 | 78,841,899 | 79,599,288 | | Diluted weighted-average shares outstanding | 78,153,408 | 79,764,318 | 79,128,644 | 79,758,943 | Note 6. Stock-Based Compensation This note describes the company's stock-based compensation plans and related expenses - The Company grants various stock-based awards, including Restricted Stock Units (RSUs), which generally vest over three years or cliff vest after one or three years, with performance-based RSUs adjusting based on goal attainment[85][86][87] Stock-Based Compensation Expense (In millions) | Period | Compensation Expense | | :----- | :------------------- | | Three months ended Sep 30, 2021 | $1.7 | | Three months ended Sep 30, 2020 | $1.3 | | Nine months ended Sep 30, 2021 | $4.1 | | Nine months ended Sep 30, 2020 | $3.8 | - Unrecognized stock-based compensation expense related to RSUs was $10.3 million as of September 30, 2021, expected to be recognized over the next 1.9 years[89] Note 7. Investment Securities This note provides detailed information on the company's investment securities portfolio Securities Available-for-Sale Details This sub-section presents the composition and fair value of securities available-for-sale Securities Available-for-Sale (In thousands) | Category | Amortized Cost (Sep 30, 2021) | Fair Value (Sep 30, 2021) | Amortized Cost (Dec 31, 2020) | Fair Value (Dec 31, 2020) | | :------- | :---------------------------- | :------------------------ | :---------------------------- | :------------------------ | | U.S. treasury securities | $40,206 | $40,211 | $80,948 | $80,948 | | U.S. government agency entities | $89,823 | $90,943 | $99,944 | $99,839 | | Mortgage-backed securities | $798,905 | $805,067 | $709,709 | $727,068 | | Collateralized mortgage obligations | $9,792 | $9,561 | $10,358 | $10,324 | | Corporate debt securities | $134,348 | $133,434 | $118,271 | $118,371 | | Total | $1,073,074 | $1,079,216 | $1,019,230 | $1,036,550 | - As of September 30, 2021, securities available-for-sale totaled $1.1 billion, an increase from $1.0 billion at December 31, 2020, representing 5.4% of total assets at both dates[274] AFS Securities by Contractual Maturities (Sep 30, 2021, In thousands) | Maturity | Amortized Cost | Fair Value | | :------- | :------------- | :--------- | | Due in one year or less | $45,215 | $45,234 | | Due after one year through five years | $117,088 | $115,615 | | Due after five years through ten years | $149,474 | $153,657 | | Due after ten years | $761,297 | $764,710 | | Total | $1,073,074 | $1,079,216 | Equity Securities Details This sub-section provides information on the company's equity securities and related gains or losses - The Company recognized a net gain of $3 thousand from equity securities for the three months ended September 30, 2021, compared to a net loss of $1.6 million for the same period in 2020[95][277] - For the nine months ended September 30, 2021, a net loss of $3.6 million was recognized from equity securities, compared to a net loss of $1.9 million for the same period in 2020[95][277] - Equity securities decreased to $20.1 million as of September 30, 2021, from $23.7 million at December 31, 2020[95][277] Allowance for Credit Losses on Securities This sub-section discusses the assessment and recognition of credit losses on investment securities - The Company concluded that unrealized losses on securities available-for-sale at September 30, 2021, were primarily due to yield curve movement and widened spreads, not credit-related losses, thus no allowance for credit losses was recorded[99] - The Company expects to recover the amortized cost basis of its securities and has no present intent or requirement to sell impaired AFS securities before recovery[99] Note 8. Loans This note provides a detailed breakdown of the company's loan portfolio, including composition, credit quality, and related allowances - The Company's business activities are concentrated in high-density Asian-populated areas across several US states and Hong Kong, with loans generally secured by real property or other collateral[101][302] Loan Portfolio Composition This sub-section details the types and amounts of loans within the company's portfolio Loan Portfolio Composition (In thousands) | Loan Type | Sep 30, 2021 | Dec 31, 2020 | % of Gross Loans (Sep 30, 2021) | | :-------- | :----------- | :----------- | :------------------------------ | | Commercial loans | $2,871,693 | $2,836,833 | 18.0% | | Residential mortgage loans | $4,144,789 | $4,145,389 | 25.9% | | Commercial mortgage loans | $7,835,528 | $7,555,027 | 49.1% | | Real estate construction loans | $688,195 | $679,492 | 4.3% | | Equity lines | $433,206 | $424,555 | 2.7% | | Installment and other loans | $3,370 | $3,100 | 0.0% | | Gross loans | $15,976,781 | $15,644,396 | 100% | | Allowance for loan losses | $(131,945) | $(166,538) | | | Unamortized deferred loan fees, net | $(3,835) | $(2,494) | | | Total loans, net | $15,841,001 | $15,475,364 | | - Gross loans increased by $332.4 million (2.1%) to $16.0 billion at September 30, 2021, primarily driven by increases in commercial mortgage loans ($280.5 million, 3.71%) and commercial loans ($106.4 million, 4.1%)[280] Non-Accrual Loans This sub-section provides information on loans placed on non-accrual status and their impact on interest income Non-Accrual Loans and Interest Income (In thousands) | Loan Type | Average Recorded Investment (3 months ended Sep 30, 2021) | Interest Income Recognized (3 months ended Sep 30, 2021) | Average Recorded Investment (9 months ended Sep 30, 2021) | Interest Income Recognized (9 months ended Sep 30, 2021) | | :-------- | :-------------------------------------------------------- | :------------------------------------------------------- | :-------------------------------------------------------- | :------------------------------------------------------- | | Commercial loans | $16,379 | $0 | $22,989 | $0 | | Real estate construction loans | $4,548 | $50 | $4,310 | $220 | | Commercial mortgage loans | $37,017 | $140 | $37,964 | $297 | | Residential mortgage loans and equity lines | $9,831 | $7 | $8,976 | $23 | | Total non-accrual loans | $67,775 | $197 | $74,239 | $540 | - Total non-accrual loans increased by $1.0 million (1.5%) to $68.7 million at September 30, 2021, from $67.7 million at December 31, 2020[287] Non-Accrual Loans and Allowance (Sep 30, 2021, In thousands) | Category | Unpaid Principal Balance | Recorded Investment | Allowance | | :------- | :----------------------- | :------------------ | :-------- | | With no allocated allowance | $47,443 | $41,153 | $0 | | With allocated allowance | $38,295 | $27,529 | $6,530 | | Total non-accrual loans | $85,738 | $68,682 | $6,530 | Individually Evaluated Loans (Pre-CECL) This sub-section presents historical information on individually evaluated impaired loans prior to CECL adoption - In connection with the adoption of ASU 2016-13, the Company no longer provides information on impaired loans after December 31, 2020[105][109][147] Impaired Loans and Allowance (Dec 31, 2020, In thousands) | Category | Unpaid Principal Balance | Recorded Investment | Allowance | | :------- | :----------------------- | :------------------ | :-------- | | With no allocated allowance | $58,816 | $53,578 | $0 | | With allocated allowance | $49,842 | $41,827 | $6,429 | | Total impaired loans | $108,658 | $95,405 | $6,429 | Troubled Debt Restructured Loans (TDR) Activity This sub-section details the activity and types of concessions for troubled debt restructured loans - As of September 30, 2021, accruing TDRs were $24.4 million and non-accrual TDRs were $8.3 million, compared to $27.7 million and $9.0 million, respectively, at December 31, 2020[115] TDRs by Type of Concession (Sep 30, 2021, In thousands) | Type of Concession | Accruing TDRs | Non-accrual TDRs | | :----------------- | :------------ | :--------------- | | Rate Reduction | $3,620 | $7,784 | | Payment Deferral | $5,803 | $0 | | Rate Reduction and Payment Deferral | $14,983 | $500 | | Total | $24,406 | $8,284 | TDRs Activity (Nine months ended Sep 30, 2021, In thousands) | Item | Accruing TDRs | Non-accrual TDRs | | :--- | :------------ | :--------------- | | Beginning balance | $27,721 | $8,985 | | New restructurings | $479 | $0 | | Payments | $(3,553) | $(710) | | Restructured loans placed on non-accrual status | $(241) | $241 | | Ending balance | $24,406 | $8,284 | Loan Portfolio by Risk Rating (Pre-CECL) This sub-section provides historical risk rating information for the loan portfolio prior to CECL adoption - The Company no longer provides information on impaired loans by risk rating after December 31, 2020, due to the adoption of ASU 2016-13[143] Loan Portfolio by Risk Rating (Dec 31, 2020, In thousands) | Loan Type | Pass/Watch | Special Mention | Substandard | Doubtful | Total | | :-------- | :--------- | :-------------- | :---------- | :------- | :---------- | | Commercial loans | $2,581,128 | $141,344 | $108,788 | $5,573 | $2,836,833 | | Real estate construction loans | $593,196 | $82,010 | $4,286 | $0 | $679,492 | | Commercial mortgage loans | $7,202,568 | $186,283 | $166,176 | $0 | $7,555,027 | | Residential mortgage loans and equity lines | $4,547,052 | $11,647 | $11,245 | $0 | $4,569,944 | | Installment and other loans | $3,100 | $0 | $0 | $0 | $3,100 | | Total gross loans | $14,927,044 | $421,284 | $290,495 | $5,573 | $15,644,396 | Allowance for Loan Losses Activity This sub-section details the changes in the allowance for loan losses, including provisions, charge-offs, and recoveries Allowance for Loan Losses Activity (Three months ended Sep 30, 2021, In thousands) | Item | Commercial Loans | Real Estate Construction Loans | Commercial Mortgage Loans | Residential Mortgage Loans and Equity Lines | Installment and Other Loans | Total | | :--- | :--------------- | :----------------------------- | :------------------------ | :------------------------------------------ | :-------------------------- | :---- | | Beginning Balance (June 30, 2021) | $40,067 | $6,119 | $58,026 | $27,043 | $1 | $131,256 | | Provision/(reversal) for credit losses | $674 | $149 | $2,786 | $(609) | $0 | $3,000 | | Net (charge-offs)/recoveries | $(2,528) | $76 | $144 | $(3) | $0 | $(2,311) | | Ending Balance (Sep 30, 2021) | $38,213 | $6,344 | $60,956 | $26,431 | $1 | $131,945 | Allowance for Loan Losses Activity (Nine months ended Sep 30, 2021, In thousands) | Item | Commercial Loans | Real Estate Construction Loans | Commercial Mortgage Loans | Residential Mortgage Loans and Equity Lines | Installment and Other Loans | Total | | :--- | :--------------- | :----------------------------- | :------------------------ | :------------------------------------------ | :-------------------------- | :---- | | Adjusted beginning balance (Jan 1, 2021) | $37,276 | $6,547 | $84,198 | $36,948 | $9 | $164,978 | | Provision/(reversal) for credit losses | $18,891 | $(279) | $(23,526) | $(10,788) | $(8) | $(15,710) | | Net (charge-offs)/recoveries | $(17,954) | $76 | $284 | $271 | $0 | $(17,323) | | Ending Balance (Sep 30, 2021) | $38,213 | $6,344 | $60,956 | $26,431 | $1 | $131,945 | - The allowance for loan losses decreased by $30.5 million (44.4%) for commercial loans and $24.5 million (79.3%) for real estate construction loans, primarily due to the adoption of ASU 2016-13 and changes in methodology[323][325] - The allowance for loan losses increased by $11.8 million (24.0%) for commercial mortgage loans and $8.7 million (49.0%) for residential mortgage loans and equity lines, mainly due to the adoption of ASU 2016-13, partially offset by reversals from improved macroeconomic conditions[326][327] COVID-19 Loan Modifications and PPP This sub-section provides an overview of loan modifications due to COVID-19 and Paycheck Protection Program loans - As of September 30, 2021, the Company had 6 outstanding COVID-19 CRE loan modifications totaling $44.8 million (0.6% of CRE loans) and 3 commercial loan modifications totaling $2.8 million (0.1% of commercial loans)[154] - There were 7 COVID-19 residential mortgage loan modifications outstanding, totaling $5.1 million (0.1% of the residential mortgage portfolio) as of September 30, 2021[155] - As of September 30, 2021, 1,514 PPP loans with a balance of $169.4 million were outstanding, and an additional $264.4 million in PPP loans had been forgiven by the U.S. Government[154] Loan Interest Reserves This sub-section details the balances and usage of pre-established interest reserves for various loan types - As of September 30, 2021, construction loans of $583.4 million were disbursed with pre-established interest reserves of $48.0 million, and land loans of $38.5 million had interest reserves of $1.4 million[299] - The balance for extended construction loans with interest reserves was $50.2 million (reserves of $1.9 million), and for extended land loans was $942 thousand (reserves of $58 thousand) as of September 30, 2021[299] - At September 30, 2021, there were no loans on non-accrual status with available interest reserves, and $4.1 million of non-accrual non-residential construction loans had pre-established interest reserves[301] Loan Concentration This sub-section discusses the company's loan concentrations and adherence to internal risk limits - The Company has no specific industry concentration, and its loans are generally secured by real property or other collateral, with repayment expected from operating profits, refinancing, or collateral sale[302] - As of September 30, 2021, total loans for construction, land development, and other land represented 34% of the Bank's total risk-based capital, and total CRE loans represented 276% of total risk-based capital, both below internal limits[303] Note 9. Commitments and Contingencies This note discloses information on the company's legal proceedings, off-balance sheet commitments, and other contingencies - The Company is involved in litigation in the ordinary course of business, but management believes liabilities from such litigation would not materially impact consolidated financial condition, results of operations, or liquidity[156] - Off-balance sheet financial instruments, including commitments to extend credit and letters of credit, expose the Company to varying degrees of risk beyond amounts recognized on the balance sheet[158] - Unfunded commitments for affordable housing and alternative energy partnerships were $119.0 million at September 30, 2021, up from $103.1 million at December 31, 2020[160] Note 10. Leases This note details the company's operating lease arrangements, including ROU assets, lease liabilities, and related expenses - The Company primarily enters into operating lease contracts for branch locations, office space, and equipment, recognizing a Right-of-Use (ROU) asset and lease liability on the balance sheet for leases longer than 12 months[161][163] Operating Lease Balances (In millions) | Metric | Sep 30, 2021 | Dec 31, 2020 | | :----- | :----------- | :----------- | | ROU assets | $29.2 | $30.9 | | Lease liabilities | $32.0 | $33.5 | | Weighted-average remaining lease term (in years) | 4.5 | 4.7 | | Weighted-average discount rate | 2.62% | 2.77% | Operating Lease Expense and Cash Flows (In millions) | Period | Operating Lease Expense | Operating Cash Flows from Operating Leases | | :----- | :---------------------- | :----------------------------------------- | | Three months ended Sep 30, 2021 | $3.2 | $2.5 | | Three months ended Sep 30, 2020 | $3.1 | $2.2 | | Nine months ended Sep 30, 2021 | $9.5 | $7.4 | | Nine months ended Sep 30, 2020 | $8.8 | $6.8 | Note 11. Borrowed Funds This note provides information on the company's borrowed funds, including FHLB advances and junior subordinated notes Advances from Federal Home Loan Bank (FHLB) This sub-section details the company's borrowings from the Federal Home Loan Bank - Advances from the FHLB decreased significantly to $20.0 million at a weighted average rate of 2.89% as of September 30, 2021, from $150.0 million at 2.15% as of December 31, 2020[168][331] - The outstanding FHLB advances of $20.0 million are set to mature in May 2023[168][331] Junior Subordinated Notes This sub-section provides information on the company's junior subordinated notes and their terms - Junior Subordinated Notes totaled $119.1 million at September 30, 2021, with a weighted average interest rate of 2.36%, slightly down from 2.40% at December 31, 2020[171][332] - These notes have a stated maturity term of 30 years, and the Company has the right to defer interest payments for up to twenty consecutive quarterly periods[169][171] Note 12. Income Taxes This note presents information on the company's income tax expense, effective tax rates, and uncertain tax positions - The effective tax rate for the first nine months of 2021 was 21.3%, significantly higher than 8.6% for the same period in 2020, due to the impact of low-income housing and alternative energy investment tax credits[172][267] - The Company's tax returns are open for audit by the IRS back to 2018 and by the California Franchise Tax Board back to 2017[172] Note 13. Fair Value Measurements and Fair Value of Financial Instruments This note describes the company's fair value measurements for financial instruments, categorized by a three-level hierarchy - The Company uses fair value to measure certain assets and liabilities on a recurring basis (e.g., securities available-for-sale, derivatives) and on a nonrecurring basis for impairment adjustments (e.g., individually evaluated loans, OREO)[174] - Fair value measurements are classified into a three-level hierarchy based on the observability of inputs: Level 1 (quoted prices in active markets), Level 2 (observable prices for similar assets/liabilities or derived from observable data), and Level 3 (unobservable inputs based on management judgment)[175][176] Financial Assets and Liabilities Measured at Fair Value (Recurring) This sub-section details financial assets and liabilities measured at fair value on a recurring basis Financial Assets Measured at Fair Value (Recurring, Sep 30, 2021, In thousands) | Asset Category | Level 1 | Level 2 | Level 3 | Total Fair Value | | :------------- | :------ | :------ | :------ | :--------------- | | Securities available-for-sale | $40,211 | $1,039,005 | $0 | $1,079,216 | | Equity securities | $20,117 | $0 | $0 | $20,117 | | Warrants | $0 | $0 | $22 | $22 | | Interest rate swaps | $0 | $5,187 | $0 | $5,187 | | Foreign exchange contracts | $0 | $1,319 | $0 | $1,319 | | Total Assets | $60,328 | $1,045,511 | $22 | $1,105,861 | Financial Liabilities Measured at Fair Value (Recurring, Sep 30, 2021, In thousands) | Liability Category | Level 1 | Level 2 | Level 3 | Total Fair Value | | :----------------- | :------ | :------ | :------ | :--------------- | | Interest rate swaps | $0 | $9,037 | $0 | $9,037 | | Foreign exchange contracts | $0 | $1,723 | $0 | $1,723 | | Total Liabilities | $0 | $10,760 | $0 | $10,760 | Financial Assets and Liabilities Measured at Fair Value (Non-Recurring) This sub-section presents financial assets and liabilities measured at fair value on a non-recurring basis - For the periods ended September 30, 2021, and December 31, 2020, there were no material adjustments to fair value for assets and liabilities measured on a nonrecurring basis[183] Financial Assets Measured at Fair Value (Non-Recurring, Sep 30, 2021, In thousands) | Asset Category | Level 1 | Level 2 | Level 3 | Total Fair Value Measurements | | :------------- | :------ | :------ | :------ | :---------------------------- | | Loans held-for-investment | $0 | $0 | $20,964 | $20,914 | | Other real estate owned (OREO) | $0 | $0 | $5,497 | $5,497 | | Investments in venture capital and private company stock | $0 | $0 | $1,007 | $1,007 | | Total Assets | $0 | $0 | $27,468 | $27,418 | - Significant unobservable (Level 3) inputs for collateral-dependent individually evaluated loans are based on appraised values adjusted by estimated sales costs and commissions, with new appraisals generally obtained every twelve months[187] Fair Value Hierarchy for Financial Instruments This sub-section outlines the three-level hierarchy used for fair value measurements of financial instruments Estimated Fair Value Measurements by Hierarchy Level (Sep 30, 2021, In thousands) | Financial Instrument | Total Estimated Fair Value | Level 1 | Level 2 | Level 3 | | :------------------- | :------------------------- | :------ | :------ | :------ | | Financial Assets: | | | | | | Cash and due from banks | $156,287 | $156,287 | $0 | $0 | | Short-term investments | $1,667,875 | $1,667,875 | $0 | $0 | | Securities available-for-sale | $1,079,216 | $40,211 | $1,039,005 | $0 | | Loans, net | $16,301,993 | $0 | $0 | $16,301,993 | | Equity securities | $20,117 | $20,117 | $0 | $0 | | Investment in Federal Home Loan Bank stock | $17,250 | $0 | $17,250 | $0 | | Warrants | $22 | $0 | $0 | $22 | | Financial Liabilities: | | | | | | Deposits | $17,007,694 | $0 | $0 | $17,007,694 | | Advances from Federal Home Loan Bank | $20,856 | $0 | $20,856 | $0 | | Other borrowings | $19,164 | $0 | $0 | $19,164 | | Long-term debt | $62,274 | $0 | $62,274 | $0 | Note 14. Goodwill and Goodwill Impairment This note provides information on the company's goodwill balance and its annual impairment assessment - Total goodwill remained constant at $372.2 million as of both September 30, 2021, and December 31, 2020[197] - The Company assesses goodwill for impairment annually or when triggering events occur, and no goodwill impairment was determined as of December 31, 2020[197] Note 15. Financial Derivatives This note details the company's use of financial derivatives to manage interest rate and foreign currency risks - The Company uses financial derivatives, such as interest rate swaps and foreign exchange contracts, to mitigate exposure to interest rate and foreign currency risks, not for speculation[199][347] - All financial derivatives are recognized as assets or liabilities at fair value on the Consolidated Balance Sheets, with accounting treatment of fair value changes dependent on hedge designation (cash flow, fair value, or economic hedges)[200][201][348][349] Cash Flow Hedges This sub-section describes the company's cash flow hedge instruments, primarily interest rate swaps - Bancorp uses interest rate swap contracts with a notional amount of $119.1 million to hedge quarterly interest payments on Junior Subordinated Debentures against LIBOR rate variability, with no significant ineffective portion as of September 30, 2021[203][351] Cash Flow Swap Hedges (In thousands) | Metric | Sep 30, 2021 | Dec 31, 2020 | | :----- | :----------- | :----------- | | Notional | $119,136 | $119,136 | | Weighted average fixed rate-pay | 2.61% | 2.61% | | Weighted average variable rate-receive | 0.15% | 0.44% | | Unrealized loss, net of taxes | $(4,696) | $(6,890) | Fair Value Hedges This sub-section details the company's fair value hedge instruments, primarily interest rate swaps on fixed-rate loans - The Bank uses interest rate swap contracts with a notional amount of $779.4 million (Sep 30, 2021) to hedge fixed-rate CRE loans against fair value changes due to interest rates, with no significant ineffective portion[204][354] Fair Value Swap Hedges (In thousands) | Metric | Sep 30, 2021 | Dec 31, 2020 | | :----- | :----------- | :----------- | | Notional | $779,392 | $478,266 | | Weighted average fixed rate-pay | 2.48% | 4.56% | | Weighted average variable rate spread | 1.22% | 2.46% | | Weighted average variable rate-receive | 1.31% | 3.11% | | Net unrealized loss | $(8,255) | $(15,082) | - The Company designated a $404.7 million notional as a last-of-layer hedge on fixed-rate loan pools to reduce exposure to higher interest rates, converting this tranche into a floating rate instrument[205][355] Foreign Exchange Contracts This sub-section provides information on foreign exchange contracts used to mitigate currency fluctuations - The Company enters into foreign exchange forward contracts to mitigate foreign currency exchange rate fluctuations for foreign exchange certificates of deposit or client contracts; these are not designated as hedging instruments and are recorded at fair value[208][358] Foreign Exchange Contracts (In thousands) | Metric | Sep 30, 2021 | Dec 31, 2020 | | :----- | :----------- | :----------- | | Notional amounts (positive fair value) | $161,535 | $151,244 | | Notional amounts (negative fair value) | $70,184 | $132,813 | | Fair value (positive) | $1,319 | $4,658 | | Fair value (negative) | $1,723 | $(2,200) | Note 16. Balance Sheet Offsetting This note explains the company's policies regarding the offsetting of financial instruments on the balance sheet - The Company's financial instruments, including derivatives, may be eligible for offset under master netting arrangements, but are generally not offset for financial reporting purposes[209] Balance Sheet Offsetting (Sep 30, 2021, In thousands) | Item | Gross Amounts Recognized | Gross Amounts Offset in the Balance Sheet | Net Amounts Presented in the Balance Sheet | | :--- | :----------------------- | :---------------------------------------- | :----------------------------------------- | | Assets: Derivatives | $5,187 | $0 | $5,187 | | Liabilities: Derivatives | $20,107 | $(11,067) | $9,040 | Note 17. Revenue from Contracts with Customers This note provides a breakdown of non-interest income derived from contracts with customers Non-Interest Income from Contracts with Customers (In thousands) | Revenue Stream | Three months ended Sep 30, 2021 | Three months ended Sep 30, 2020 | Nine months ended Sep 30, 2021 | Nine months ended Sep 30, 2020 | | :------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Fees and service charges on deposit accounts | $2,130 | $2,018 | $6,386 | $5,945 | | Wealth management fees | $3,578 | $2,628 | $11,074 | $7,974 | | Other service fees | $3,735 | $3,676 | $11,109 | $10,038 | | Total noninterest income (in-scope) | $9,443 | $8,322 | $28,569 | $23,957 | | Noninterest income (not in-scope) | $2,773 | $1,655 | $6,230 | $7,412 | | Total noninterest income | $12,216 | $9,977 | $34,799 | $31,369 | - The Company applies practical expedients under ASC 606, not disclosing unsatisfied performance obligations for short-term contracts (less than one year) and not adjusting consideration for significant financing components[215][216] Note 18. Stockholders' Equity This note details the changes in stockholders' equity, including net income, dividends, and other comprehensive income - Total equity increased by $45.1 million to $2.46 billion as of September 30, 2021, from $2.42 billion at December 31, 2020, driven by net income, stock-based compensation, and dividend reinvestment, partially offset by treasury stock purchases, cash dividends, and a decrease in other comprehensive income[217][339] Changes in Stockholders' Equity This sub-section provides a summary of the factors contributing to changes in total equity Net Increase in Total Equity (Nine months ended Sep 30, 2021, In thousands) | Item | Amount | | :--- | :----- | | Net income | $222,980 | | Cumulative effect of change in accounting principle related to ASC 326, net of tax | $(3,139) | | Proceeds from shares issued through the Dividend Reinvestment Plan | $2,619 | | Shares withheld related to net share settlement of RSUs | $(2,632) | | Stock issued to directors | $850 | | Purchase of treasury stock | $(100,668) | | Share-based compensation | $4,149 | | Cash dividends paid to common stockholders | $(73,335) | | Other comprehensive income | $(5,678) | | Net increase in total equity | $45,147 | Accumulated Other Comprehensive Income (AOCI) Activity This sub-section details the components and changes in accumulated other comprehensive income AOCI Activity (Nine months ended Sep 30, 2021, In thousands) | Item | Pre-tax | Tax expense/(benefit) | Net-of-tax | | :--- | :------ | :-------------------- | :--------- | | Beginning balance, gain/(loss), net of tax | | | $5,310 | | Net unrealized gains/(losses) arising during the period | $(7,207) | $(2,130) | $(5,077) | | Reclassification adjustment for net losses in net income | $(853) | $(252) | $(601) | | Total other comprehensive income/(loss) | $(8,060) | $(2,382) | $(5,678) | | Ending balance, gain/(loss), net of tax | | | $(368) | Note 19. Stock Repurchase Program This note outlines the company's stock repurchase activities and authorized programs - The Company completed a $75.0 million stock repurchase program on August 5, 2021, repurchasing 1,832,481 shares at an average cost of $40.93 per share[226] - A new $125.0 million stock repurchase program was approved on September 2, 2021, under which 942,613 shares were repurchased for $37.1 million at an average cost of $39.40 per share during the quarter ended September 30, 2021[227] Note 20. Subsequent Events This note discloses any material events occurring after the reporting period that require recognition or disclosure - The Company has evaluated events subsequent to September 30, 2021, and found no material events requiring recognition or disclosure in the financial statements[228] Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. This section provides management's analysis of financial condition and results of operations, including key performance indicators, COVID-19 impact, and balance sheet changes Critical Accounting Policies This section identifies and discusses the company's critical accounting policies that involve significant judgment - The allowance for loan losses is identified as a critical accounting policy, involving significant management judgments and assumptions that materially impact the carrying value of net loans[232][308] Recent Developments: Impact of and Response to COVID-19 Pandemic This section discusses the impact of the COVID-19 pandemic on the company's operations and its response measures - The COVID-19 pandemic has significantly heightened challenges and risks for the Company, with potential for longer recovery periods in certain industries[233][235] Industry Exposure to COVID-19 This sub-section details the company's loan exposure to industries significantly affected by COVID-19 Industry Exposure to COVID-19 (Sep 30, 2021, In millions) | Industry | Loan Balance | Percent of Total Loan Portfolio | | :------- | :----------- | :------------------------------ | | Restaurants | $153.8 | 0.1% | | Hotels/motels | $299.7 | 1.1% | | Retail businesses/properties | $1,738.7 | 2.4% | | Total | $2,192.2 | 3.6% | Loan Modifications due to COVID-19 This sub-section provides information on loan modifications granted in response to the COVID-19 pandemic - As of September 30, 2021, the Company had 7 outstanding COVID-19 residential mortgage loan modifications ($5.1 million) and 3 commercial loan modifications ($2.8 million)[237] - There were 6 CRE loan modifications outstanding ($44.8 million) as of September 30, 2021, all of which were paying interest[238] - The Company applies CARES Act guidance to qualifying loan modifications, anticipating continued increases in short-term modifications[240] Paycheck Protection Program (PPP) This sub-section details the company's involvement in the Paycheck Protection Program - As of September 30, 2021, the Company had $169.4 million in outstanding PPP loans, with $264.4 million already forgiven by the U.S. Treasury, and these loans generally do not represent a material credit risk due to SBA guarantees[241] Quarterly Statement of Operations Review This section provides a detailed review of the company's quarterly statement of operations, comparing current and prior periods - Total loans, excluding PPP loans, increased by 9.1% annualized in Q3 2021[243] - Total deposits, excluding time deposits, increased by $686.3 million, or 25.9% annualized, for the quarter[243] Net Income and Performance Ratios (Q3 2021 vs Q3 2020) This sub-section analyzes net income and key performance ratios for the third quarter of 2021 versus 2020 Financial Performance (Three months ended Sep 30) | Metric | 2021 | 2020 | | :----- | :--- | :--- | | Net income (in millions) | $72.4 | $56.8 | | Basic earnings per common share | $0.93 | $0.71 | | Diluted earnings per common share | $0.93 | $0.71 | | Return on average assets | 1.45% | 1.18% | | Return on average total stockholders' equity | 11.61% | 9.53% | - Net income increased by $15.6 million (27.5%) to $72.4 million in Q3 2021 compared to Q3 2020[244] - Diluted earnings per share increased by 31.0% to $0.93 in Q3 2021 from $0.71 in Q3 2020[243][244] Net Interest Income Before Provision for Credit Losses (Q3 2021 vs Q3 2020) This sub-section examines changes in net interest income before provision for credit losses for Q3 2021 versus Q3 2020 - Net interest income before provision for credit losses increased by $15.0 million (10.9%) to $152.5 million in Q3 2021 compared to Q3 2020, primarily due to a decrease in interest expense from deposits[247] - The net interest margin increased to 3.22% in Q3 2021 from 3.02% in Q3 2020[243][247] Average Yields and Rates (Three months ended Sep 30) | Metric | 2021 | 2020 | | :----- | :--- | :--- | | Yield on average interest-earning assets | 3.56% | 3.78% | | Cost of funds on average interest-bearing liabilities | 0.48% | 1.04% | | Cost of interest-bearing deposits | 0.44% | 0.99% | | Net interest spread | 3.08% | 2.74% | Provision for Credit Losses (Q3 2021 vs Q3 2020) This sub-section discusses the provision for credit losses for the third quarter of 2021 compared to 2020 - The Company recorded a provision for credit losses of $3.1 million in Q3 2021, compared to a $12.5 million provision in Q3 2020 (under incurred loss method) and a $9.0 million reversal in Q2 2021[253] - The Q3 2021 provision was driven by net charge-offs and loan growth, while the allowance for loan losses increased by $689 thousand to $131.9 million (0.83% of gross loans)[253] Net Charge-offs (Three months ended Sep 30, In thousands) | Item | 2021 | 2020 | | :--- | :--- | :--- | | Total charge-offs | $2,652 | $6,956 | | Total recoveries | $341 | $3,906 | | Net charge-offs | $2,311 | $3,050 | Non-Interest Income (Q3 2021 vs Q3 2020) This sub-section analyzes non-interest income for the third quarter of 2021 compared to 2020 - Non-interest income increased by $2.2 million (22.0%) to $12.2 million in Q3 2021 compared to Q3 2020, primarily due to a $1.6 million decrease in net loss from equity securities and a $1.0 million increase in wealth management fees[256] Non-Interest Expense (Q3 2021 vs Q3 2020) This sub-section examines non-interest expense for the third quarter of 2021 compared to 2020 - Non-interest expense decreased by $3.8 million (5.0%) to $72.2 million in Q3 2020 compared to Q3 2021, mainly due to lower amortization expense of investments in low-income housing and alternative energy partnerships[257] - The efficiency ratio improved to 43.85% in Q3 2021 from 51.53% in Q3 2020[257] Income Taxes (Q3 2021 vs Q3 2020) This sub-section discusses income tax expense and effective tax rates for Q3 2021 versus Q3 2020 - The effective tax rate for Q3 2021 was 19.05%, significantly higher than 3.7% in Q3 2020, with the prior year's lower rate attributed to higher tax credits from a new alternative energy investment[258] Year-to-Date Statement of Operations Review This section provides a detailed review of the company's year-to-date statement of operations, comparing current and prior periods Net Income and Performance Ratios (YTD Q3 2021 vs YTD Q3 2020) This sub-section analyzes net income and key performance ratios for the nine months ended September 30, 2021, versus 2020 - Net income for the nine months ended September 30, 2021, increased by $65.0 million (41.1%) to $223.0 million compared to the same period a year ago[259] - Diluted earnings per share increased to $2.82 from $1.98 for the same period[259] Year-to-Date Financial Performance (Nine months ended Sep 30) | Metric | 2021 | 2020 | | :----- | :--- | :--- | | Return on average stockholders' equity | 12.11% | 8.99% | | Return on average assets | 1.54% | 1.13% | | Efficiency ratio | 44.71% | 46.98% | Net Interest Income Before Provision for Credit Losses (YTD Q3 2021 vs YTD Q3 2020) This sub-section examines changes in net interest income before provision for credit losses for the nine months ended September 30, 2021, versus 2020 - The net interest margin for the nine months ended September 30, 2021, was 3.22%, up from 3.12% for the same period a year ago[259][263] Average Yields and Rates (Nine months ended Sep 30) | Metric | 2021 | 2020 | | :----- | :--- | :--- | | Yield on average interest-earning assets | 3.62% | 4.03% | | Cost of funds on average interest-bearing liabilities | 0.56% | 1.24% | | Net interest spread | 3.06% | 2.79% | - Changes in net interest income were primarily driven by a $17.5 million increase due to volume and a $12.5 million increase due to rate changes, totaling a $30.0 million increase[264] Non-Interest Income (YTD Q3 2021 vs YTD Q3 2020) This sub-section analyzes non-interest income for the nine months ended September 30, 2021, compared to 2020 - Non-interest income increased by $3.4 million (10.8%) to $34.8 million for the nine months ended September 30, 2021, primarily due to a $3.1 million increase in wealth management fees and a $1.9 million increase in derivative fees[265] Non-Interest Expense (YTD Q3 2021 vs YTD Q3 2020) This sub-section examines non-interest expense for the nine months ended September 30, 2021, compared to 2020 - Non-interest expense increased by $4.9 million (2.4%) to $213.3 million for the nine months ended September 30, 2021, driven by higher salaries and employee benefits ($6.4 million), increased computer and equipment expense ($1.9 million), and marketing expense ($1.4 million)[266] - This increase was partially offset by an $8.3 million decrease in amortization expense of investments in low-income housing and alternative energy partnerships[266] Income Taxes (YTD Q3 2021 vs YTD Q3 2020) This sub-section discusses income tax expense and effective tax rates for the nine months ended September 30, 2021, versus 2020 - The effective tax rate for the nine months ended September 30, 2021, was 21.3%, compared to 8.6% for the same period in 2020, with the prior year's lower rate due to higher tax credits from alternative energy investments[267] Balance Sheet Review This section provides a detailed review of the company's balance sheet, highlighting changes in assets, liabilities, and equity Assets Overview This sub-section provides an overview of the company's total assets and their primary drivers of change - Total assets increased by $817.3 million (4.3%) to $19.9 billion as of September 30, 2021, from $19.0 billion at December 31, 2020, primarily due to increases in short-term investments and commercial mortgage loans[269] Securities Available-for-Sale This sub-section details the company's securities available-for-sale portfolio and related unrealized gains or losses - Securities available-for-sale were $1.1 billion as of September 30, 2021, up from $1.0 billion at December 31, 2020, representing 5.4% of total assets at both dates[274] - The Company determined that unrealized losses on AFS securities were not credit-related but rather due to market interest rate levels and pricing changes, recognizing these losses in 'other comprehensive income'[272] - Securities with a carrying value of $30.1 million were pledged as collateral as of September 30, 2021, compared to $22.7 million at December 31, 2020[275] Equity Securities This sub-section provides information on the company's equity securities and their fair value changes - Equity securities decreased to $20.1 million as of September 30, 2021, from $23.7 million at December 31, 2020[277] - A net gain of $3 thousand was recognized for the three months ended September 30, 2021, compared to a net loss of $1.6 million for the same period in 2020[277] Loans Portfolio This sub-section details the composition and growth of the company's gross loan portfolio - Gross loans increased by $332.4 million (2.1%) to $16.0 billion at September 30, 2021, from $15.6 billion at December 31, 2020, primarily due to increases in commercial mortgage loans and commercial loans[280] Non-performing Assets This sub-section discusses the company's non-performing assets, including non-accrual loans and other real estate owned - The ratio of non-performing assets to total assets remained at 0.4% at September 30, 2021, and December 31, 2020[283] - Total non-performing assets increased by $0.7 million (0.9%) to $78.3 million at September 30, 2021, primarily due to a $1.0 million increase in non-accruing loans[283] Non-performing Assets and TDRs (In thousands)