美国
证券交易委员会
华盛顿特区20549
表格
(标记一个)
| | 根据第13或15条提交的季度报告(d1934年证券交易法案 |
| 截至季度结束 |
或
| | 根据1934年证券交易法第13或15条的过渡报告d1934年证券交易法 |
| 过渡期从 | 至 |
| 委员会文件编号 |
国泰万通金控
（依凭章程所载的完整登记名称）
| (其他注册管辖司法管辖区 或其他组织） | (国税局雇主识别号码) 识别号码) |
| (总部办公地址) | (邮递区号) |
| 登记者的电话号码，包括区号： | ( |
(如与上次报告不同，列明前名称、前地址及前财政年度)
根据法案第12(b)条规定注册的证券：
| 每种类别的名称 | 交易符号 | 每个注册交易所的名称 |
| | | |
请勾选以下项目，以判定在过去12个月(或更短期间，该注册人被要求提交报告)内所有根据1934年证券交易法第13条或第15(d)条要求提供报告的报告是否已经提交，并且该注册人在过去90天中是否受到提交报告的要求。
请在核对号勾选方块以指出是否在过去12个月（或注册人所需提交此类档案的较短期间内）按照Regulation S-t的405条款的规定，已电子方式提交所需提交的每个互动数据档案。
根据交易所法案第1202条的定义，请用勾选标明登记者是大幅加速递交者、加速递交者、非加速递交者、较小型报告公司或新兴成长公司。
| 加速提交人 ☐ | ||
| 非加速申报者 ☐ | 较小的报告公司 | 新兴成长型公司 |
如果是新兴成长型企业，在符合任何依据证券交易法第13(a)条所提供的任何新的或修改的财务会计准则的遵循的延伸过渡期方面，是否选择不使用核准记号进行指示。☐
请用勾选表示是否申报人为外壳公司（定义见《交易所法》第120亿2条）。 是
请表示于最近可行日期，每种发行人普通股的流通股数。
Common stock, $0.01 par value,
第3季 2024年度第3季Form 10-Q报告
目 录
| 第一部分 – 财务信息 | 2 | |
| 项目 1。 | 基本报表（未经审核） | 2 |
| 合并基本报表附注（未经审核） | 7 | |
| 项目2。 | 管理’财务条件和营运结果的管理讨论和分析 | 29 |
| 项目3。 | 市场风险相关数量和质量的披露 | 45 |
| 项目 4。 | 控制和程序 | 46 |
| 第II部分 – 其他资讯 | 46 | |
| 第1项 | 法律诉讼 | 46 |
| 第1A项 | 风险因素 | 46 |
| Item 2. | 未注册的股票销售和收益使用 | 46 |
| 第3项。 | 债券不履行标准 | 47 |
| 第4项。 | 矿山安全披露 | 47 |
| 项目5。 | 其他信息 | 47 |
| 项目 6。 | 附件 | 47 |
| 签名 | 48 | |
前瞻性陈述
在本季度报告Form 10-Q中，"Bancorp" 指的是国泰万通金控，而"Bank" 则指的是国泰银行。"Company"、"we"、"us" 和 "our" 这些术语共同指代Bancorp和银行。
The statements in this report include forward-looking statements within the meaning of the applicable provisions of the Private Securities Litigation Reform Act of 1995 regarding management’s beliefs, projections, and assumptions concerning future results and events. We intend such forward-looking statements to be covered by the safe harbor provision for forward-looking statements in these provisions. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including statements about anticipated future operating and financial performance, financial position and liquidity, growth opportunities and growth rates, growth plans, acquisition and divestiture opportunities, business prospects, strategic alternatives, business strategies, financial expectations, regulatory and competitive outlook, loan and deposit growth, investment and expenditure plans, financing needs and availability, level of nonperforming assets, and other similar forecasts and statements of expectation and statements of assumptions underlying any of the foregoing. Words such as “aims,” “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “hopes,” “intends,” “may,” “optimistic,” “plans,” “potential,” “possible,” “predicts,” “projects,” “seeks,” “shall,” “should,” “will,” and variations of these words and similar expressions are intended to identify these forward-looking statements. Forward-looking statements by us are based on estimates, beliefs, projections, and assumptions of management and are not guarantees of future performance. These forward-looking statements are subject to certain risks, uncertainties and other factors that could cause actual results to differ materially from our historical experience and our present expectations or projections. Such risks, uncertainties and other factors include, but are not limited to:
| ● |
本地、区域型、全国和国际经济和市场条件和事件，及其对我们、我们的客户以及我们的业务、资产和负债可能产生的影响； |
| ● |
可能需要额外设定备抵呆帐和核销。 |
| ● |
贷款活动的信贷风险和资产或信贷品质恶化； |
| ● |
我们受到广泛的法律、法规和监管约束，包括可能受到银行监管部门的监管行动； |
| ● |
遵循成本增加以及与法规变化相关的其他风险； |
| ● |
因实施巴塞尔III资本标准，资本要求提高； |
| ● |
符合《银行保密法》和其他反洗钱法规。 |
| ● |
潜在的商誉减值； |
| ● |
liquidity risk; |
| ● |
fluctuations in interest rates; |
| ● |
risks associated with acquisitions and the expansion of our business into new markets; |
| ● |
inflation and deflation; |
| ● |
real estate market conditions and the value of real estate collateral; |
| ● |
environmental liabilities; |
| ● |
our ability to generate anticipated returns from our investments and/or financings in certain tax advantaged-projects; |
| ● |
our ability to compete with larger competitors; |
| ● |
our ability to retain key personnel; |
| ● |
successful management of reputational risk; |
| ● |
natural disasters, public health crises (including the occurrence of a contagious disease or illness) and geopolitical events; |
| ● |
failures, interruptions, or security breaches of our information systems; |
| ● |
our ability to adapt our systems to the expanding use of technology in banking; |
| ● |
risk management processes and strategies; |
| ● |
adverse results in legal proceedings; |
| ● |
the impact of regulatory enforcement actions, if any; |
| ● |
certain provisions in our charter and bylaws that may affect acquisition of the Company; |
| ● |
changes in accounting standards or tax laws and regulations; |
| ● |
market disruption and volatility; |
| ● |
fluctuations in the Bancorp’s stock price; |
| ● |
restrictions on dividends and other distributions by laws and regulations and by our regulators and our capital structure; |
| ● |
issuances of preferred stock; |
| ● |
capital level requirements and successfully raising additional capital, if needed, and the resulting dilution of interests of holders of Bancorp common stock; and |
| ● |
the soundness of other financial institutions. |
These and other factors are further described in Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2023 (Item 1A in particular), other reports and registration statements filed with the Securities and Exchange Commission (“SEC”), and other filings Bancorp makes with the SEC from time to time. Actual results in any future period may also vary from the past results discussed in this report. Given these risks and uncertainties, readers are cautioned not to place undue reliance on any forward-looking statements. We have no intention and undertake no obligation to update any forward-looking statement or to announce publicly any revision of any forward-looking statement to reflect developments, events, occurrences or circumstances after the date of such statement, except as required by law.
Bancorp’s filings with the SEC are available at the website maintained by the SEC at http://www.sec.gov, or by request directed to Cathay General Bancorp, 9650 Flair Drive, El Monte, California 91731, Attention: Investor Relations (626) 279-3296.
PART I – FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS (Unaudited)
CATHAY GENERAL BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
| September 30, 2024 | December 31, 2023 | |||||||
| (In thousands, except share data) | ||||||||
| Assets | ||||||||
| Cash and due from banks | $ | $ | ||||||
| Short-term investments and interest-bearing deposits | ||||||||
| Securities available-for-sale (amortized cost of $ at September 30, 2024, and $ at December 31, 2023) | ||||||||
| Loans held for sale | ||||||||
| Loans held for investment | ||||||||
| Less: Allowance for loan losses | ( | ) | ( | ) | ||||
| Unamortized deferred loan fees, net | ( | ) | ( | ) | ||||
| Loans held for investment, net | ||||||||
| Equity securities | ||||||||
| Federal Home Loan Bank stock | ||||||||
| Other real estate owned, net | ||||||||
| Affordable housing investments and alternative energy partnerships, net | ||||||||
| Premises and equipment, net | ||||||||
| Customers’ liability on acceptances | ||||||||
| Accrued interest receivable | ||||||||
| Goodwill | ||||||||
| Other intangible assets, net | ||||||||
| Right-of-use assets - operating leases | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Deposits: | ||||||||
| Non-interest-bearing | $ | $ | ||||||
| Interest-bearing: | ||||||||
| NOW deposits | ||||||||
| Money market deposits | ||||||||
| Savings deposits | ||||||||
| Time deposits | ||||||||
| Total deposits | ||||||||
| Advances from the Federal Home Loan Bank | ||||||||
| Other borrowings of affordable housing investments | ||||||||
| Long-term debt | ||||||||
| Acceptances outstanding | ||||||||
| Lease liabilities - operating leases | ||||||||
| Other liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | — | — | ||||||
| Stockholders’ Equity | ||||||||
| Common stock, $ par value, shares authorized; issued and outstanding at September 30, 2024, and issued and outstanding at December 31, 2023 | ||||||||
| Additional paid-in-capital | ||||||||
| Accumulated other comprehensive loss, net | ( | ) | ( | ) | ||||
| Retained earnings | ||||||||
| Treasury stock, at cost ( shares at September 30, 2024, and shares at December 31, 2023) | ( | ) | ( | ) | ||||
| Total stockholders' equity | ||||||||
| Total liabilities and stockholders' equity | $ | $ | ||||||
See accompanying Notes to Consolidated Financial Statements.
CATHAY GENERAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME
(Unaudited)
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| 2024 |
2023 |
2024 |
2023 |
|||||||||||||
| (In thousands, except share and per share data) |
||||||||||||||||
| Interest and Dividend Income |
||||||||||||||||
| Loans receivable |
$ | $ | $ | $ | ||||||||||||
| Investment securities |
||||||||||||||||
| Federal Home Loan Bank stock |
||||||||||||||||
| Deposits with banks |
||||||||||||||||
| Total interest and dividend income |
||||||||||||||||
| Interest Expense |
||||||||||||||||
| Time deposits |
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| Other deposits |
||||||||||||||||
| Advances from Federal Home Loan Bank |
||||||||||||||||
| Long-term debt |
||||||||||||||||
| Short-term debt |
||||||||||||||||
| Total interest expense |
||||||||||||||||
| Net interest income before provision for credit losses |
||||||||||||||||
| Provision for credit losses |
||||||||||||||||
| Net interest income after provision for credit losses |
||||||||||||||||
| Non-Interest Income |
||||||||||||||||
| Net gains/(losses) from equity securities |
( |
) | ( |
) | ||||||||||||
| Net gains/(losses) from securities available for sale |
( |
) | ||||||||||||||
| Letters of credit commissions |
||||||||||||||||
| Depository service fees |
||||||||||||||||
| Wealth management fees |
||||||||||||||||
| Other operating income |
||||||||||||||||
| Total non-interest income |
||||||||||||||||
| Non-Interest Expense |
||||||||||||||||
| Salaries and employee benefits |
||||||||||||||||
| Occupancy expense |
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| Computer and equipment expense |
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| Professional services expense |
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| Data processing service expense |
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| FDIC and regulatory assessments |
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| Marketing expense |
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| Other real estate owned expense |
||||||||||||||||
| Amortization of investments in low-income housing and alternative energy partnerships |
||||||||||||||||
| Amortization of core deposit intangibles |
||||||||||||||||
| Other operating expense |
||||||||||||||||
| Total non-interest expense |
||||||||||||||||
| Income before income tax expense |
||||||||||||||||
| Income tax expense |
||||||||||||||||
| Net income |
$ | $ | $ | $ | ||||||||||||
| Other Comprehensive Income/(Loss), net of tax |
||||||||||||||||
| Net holding gains/(losses) on securities available-for-sale |
( |
) | ( |
) | ||||||||||||
| Net holding losses on cash flow hedge derivatives |
( |
) | ( |
) | ( |
) | ||||||||||
| Total other comprehensive income/(loss), net of tax |
( |
) | ( |
) | ||||||||||||
| Total comprehensive income |
$ | $ | $ | $ | ||||||||||||
| Net Income Per Common Share: |
||||||||||||||||
| Basic |
$ | $ | $ | $ | ||||||||||||
| Diluted |
$ | $ | $ | $ | ||||||||||||
| Cash dividends paid per common share |
$ | $ | $ | $ | ||||||||||||
| Average Common Shares Outstanding: |
||||||||||||||||
| Basic |
||||||||||||||||
| Diluted |
||||||||||||||||
See accompanying Notes to Consolidated Financial Statements.
CATHAY GENERAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
| Accumulated | ||||||||||||||||||||||||||||
| Common Stock | Additional | Other | Total | |||||||||||||||||||||||||
| Number of | Paid-in | Comprehensive | Retained | Treasury | Stockholders' | |||||||||||||||||||||||
| Three Months Ended | Shares | Amount | Capital | Loss | Earnings | Stock | Equity | |||||||||||||||||||||
| (In thousands, except share and per share data) | ||||||||||||||||||||||||||||
| Balance at June 30, 2024 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||
| Dividend Reinvestment Plan | ||||||||||||||||||||||||||||
| Restricted stock units vested | ( | ) | ( | ) | ||||||||||||||||||||||||
| Stock issued to directors | ( | ) | ( | ) | ||||||||||||||||||||||||
| Shares withheld related to net share settlement of RSUs | — | ( | ) | ( | ) | |||||||||||||||||||||||
| Purchases of treasury stock | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||||||||||
| Cash dividends of $ per share | — | ( | ) | ( | ) | |||||||||||||||||||||||
| Other comprehensive income | — | |||||||||||||||||||||||||||
| Net income | — | |||||||||||||||||||||||||||
| Balance at September 30, 2024 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||
| Common Stock | Additional | Other | Total | |||||||||||||||||||||||||
| Number of | Paid-in | Comprehensive | Retained | Treasury | Stockholders' | |||||||||||||||||||||||
| Three Months Ended | Shares | Amount | Capital | Loss | Earnings | Stock | Equity | |||||||||||||||||||||
| (In thousands, except share and per share data) | ||||||||||||||||||||||||||||
| Balance at June 30, 2023 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||
| Dividend Reinvestment Plan | ||||||||||||||||||||||||||||
| Restricted stock units vested | ||||||||||||||||||||||||||||
| Stock issued to directors | ||||||||||||||||||||||||||||
| Shares withheld related to net share settlement of RSUs | — | ( | ) | ( | ) | |||||||||||||||||||||||
| Purchases of treasury stock | ||||||||||||||||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||||||||||
| Cash dividends of $ per share | — | ( | ) | ( | ) | |||||||||||||||||||||||
| Other comprehensive loss | — | ( | ) | ( | ) | |||||||||||||||||||||||
| Net income | — | |||||||||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||
See accompanying Notes to Consolidated Financial Statements.
| Accumulated | ||||||||||||||||||||||||||||
| Common Stock | Additional | Other | Total | |||||||||||||||||||||||||
| Number of | Paid-in | Comprehensive | Retained | Treasury | Stockholders' | |||||||||||||||||||||||
| Nine Months Ended | Shares | Amount | Capital | Loss | Earnings | Stock | Equity | |||||||||||||||||||||
| (In thousands, except share and per share data) | ||||||||||||||||||||||||||||
| Balance at December 31, 2023 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||
| Dividend Reinvestment Plan | ||||||||||||||||||||||||||||
| Restricted stock units vested | ||||||||||||||||||||||||||||
| Stock issued to directors | ||||||||||||||||||||||||||||
| Shares withheld related to net share settlement of RSUs | — | ( | ) | ( | ) | |||||||||||||||||||||||
| Purchases of treasury stock | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||||||||||
| Cash dividends of $ per share | — | ( | ) | ( | ) | |||||||||||||||||||||||
| Other comprehensive income | — | |||||||||||||||||||||||||||
| Net income | — | |||||||||||||||||||||||||||
| Balance at September 30, 2024 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||
| Common Stock | Additional | Other | Total | |||||||||||||||||||||||||
| Number of | Paid-in | Comprehensive | Retained | Treasury | Stockholders' | |||||||||||||||||||||||
| Nine Months Ended | Shares | Amount | Capital | Loss | Earnings | Stock | Equity | |||||||||||||||||||||
| (In thousands, except share and per share data) | ||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||
| Dividend Reinvestment Plan | ||||||||||||||||||||||||||||
| Restricted stock units vested | ||||||||||||||||||||||||||||
| Stock issued to directors | ||||||||||||||||||||||||||||
| Shares withheld related to net share settlement of RSUs | — | ( | ) | ( | ) | |||||||||||||||||||||||
| Purchases of treasury stock | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||||||||||
| Cash dividends of $ per share | — | ( | ) | ( | ) | |||||||||||||||||||||||
| Other comprehensive loss | — | ( | ) | ( | ) | |||||||||||||||||||||||
| Net income | — | |||||||||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||
See accompanying Notes to Consolidated Financial Statements.
CATHAY GENERAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Nine Months Ended September 30, |
||||||||
| 2024 |
2023 |
|||||||
| (In thousands) |
||||||||
| Cash Flows from Operating Activities |
||||||||
| Net income |
$ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
| Provision for credit losses |
||||||||
| Provision for losses on other real estate owned |
||||||||
| Deferred tax benefit |
( |
) | ( |
) | ||||
| Depreciation and amortization |
||||||||
| Amortization of right-of-use asset |
||||||||
| Change in operating lease liabilities |
( |
) | ||||||
| Net gains on sale of loans |
( |
) | ||||||
| Loss on sales or disposal of premises and equipment |
||||||||
| Amortization on alternative energy partnerships, venture capital and other investments |
||||||||
| Net gains on sales of securities available-for-sale |
( |
) | ( |
) | ||||
| Amortization/accretion of securities available-for-sale premiums/discounts, net |
( |
) | ( |
) | ||||
| Unrealized loss/(gain) on equity securities |
( |
) | ||||||
| Write-off of securities available-for-sale |
||||||||
| Stock-based compensation and stock issued to officers as compensation |
||||||||
| Net change in accrued interest receivable and other assets |
( |
) | ||||||
| Net change in other liabilities |
( |
) | ||||||
| Net cash provided by operating activities |
||||||||
| Cash Flows from Investing Activities |
||||||||
| Purchase of securities available-for-sale |
( |
) | ( |
) | ||||
| Proceeds from repayments, maturities and calls of securities available-for-sale |
||||||||
| Proceeds from sale of securities available-for-sale |
||||||||
| Purchase of Federal Home Loan Bank stock |
( |
) | ( |
) | ||||
| Redemption of Federal Home Loan Bank stock |
||||||||
| Proceeds from sale of loans originally classified as held-for-investment |
||||||||
| Net decrease/(increase) in loans |
( |
) | ||||||
| Purchase of premises and equipment |
( |
) | ( |
) | ||||
| Net increase in affordable housing investments and alternative energy partnerships |
( |
) | ( |
) | ||||
| Net cash provided/(used) for investing activities |
( |
) | ||||||
| Cash Flows from Financing Activities |
||||||||
| Increase in deposits |
||||||||
| Advances from Federal Home Loan Bank |
||||||||
| Repayment of Federal Home Loan Bank borrowings |
( |
) | ( |
) | ||||
| Cash dividends paid |
( |
) | ( |
) | ||||
| Purchases of treasury stock |
( |
) | ( |
) | ||||
| Proceeds from shares issued under Dividend Reinvestment Plan |
||||||||
| Taxes paid related to net share settlement of RSUs |
( |
) | ( |
) | ||||
| Net cash provided by financing activities |
||||||||
| Increase in cash, cash equivalents, and restricted cash |
||||||||
| Cash, cash equivalents, and restricted cash, beginning of the period |
||||||||
| Cash, cash equivalents, and restricted cash, end of the period |
$ | $ | ||||||
| Supplemental disclosure of cash flow information |
||||||||
| Cash paid during the period: |
||||||||
| Interest |
$ | $ | ||||||
| Income taxes paid |
$ | $ | ||||||
| Non-cash investing and financing activities: |
||||||||
| Net change in unrealized holding gain/(loss) on securities available-for-sale, net of tax |
$ | $ | ( |
) | ||||
| Net change in unrealized holding loss on cash flow hedge derivatives |
$ | ( |
) | $ | ( |
) | ||
| Loans transferred from held-for-investment to held-for-sale |
$ | $ | ||||||
| Transfers to other real estate owned from loans held-for-investment |
$ | $ | ||||||
See accompanying Notes to Consolidated Financial Statements.
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. Business
Cathay General Bancorp (“Bancorp”) is the holding company for Cathay Bank (the “Bank” and, together, with Bancorp, the “Company”), and limited partnerships investing in affordable housing investments in which the Bank is the sole limited partner. Bancorp also owns
2. Basis of Presentation and Summary of Significant Accounting Policies
The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2024. For further information, refer to the audited Consolidated Financial Statements and Notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on February 28, 2024 (the “2023 Form 10-K”).
The preparation of the Consolidated Financial Statements in accordance with GAAP requires management of the Company to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of the Consolidated Financial Statements. Actual results could differ from those estimates. The Company expects that the most significant estimate subject to change is the allowance for loan losses.
3. Recent Accounting Pronouncements
In March 2023, ASU 2023-02, “Investments-Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method". ASU 2023-02 permits reporting entities to elect to account for their tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method if certain conditions are met. ASU 2023-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2023. The Company elected not to apply the proportional method of amortization allowed as an election under ASU 2023-02.
In June 2022, ASU 2022-03, “Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions.” ASU 2022-03 clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. ASU 2022-03 also clarifies that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction and requires certain new disclosures for equity securities subject to contractual sale restrictions. The adoption of ASU 2022-03 did not have a significant impact on our financial statements.
Other Accounting Standards Pending Adoption
In November 2023, ASU No. 2023-07, “Segment Reporting (Topic 280), Improvements to Reportable Segment Disclosures”, was issued. This ASU expands the disclosure requirements for reportable segments of public entities by adding the following disclosure requirements. The amendments require, on an annual and interim basis, significant segment expenses that are regularly provided to the chief operating decision maker (“CODM”) and included within each reported measure of segment profit or loss, on an annual and interim basis, disclose amount and description of composition of other segment items. This amount reconciles segment revenues, less the significant segment expenses, to the reported measure of segment profit or loss; expands the current interim disclosure requirements to require all existing annual disclosures about a reportable segment’s profit or loss and assets also be made on an interim basis; clarifies that if a CODM uses more than one measure of segment profit or loss, then the entity may disclose one or more measures, but at least one measure should be that which is most consistent with GAAP measurement principles; and requires annual disclosure of the title and position of the CODM as well as explanation of how the CODM uses the reported measures in assessing segment performance and allocating resources. The amendments in this update are effective for fiscal years beginning after December 15, 2023, with early adoption permitted. The Company has determined that the adoption of ASU 2023-07 will not have a significant impact on the Company’s Consolidated Financial Statements.”
.
On March 6, 2024, the U.S. Securities and Exchange Commission ("SEC") adopted final rules under SEC Release No. 33-11275, “The Enhancement and Standardization of Climate-Related Disclosures for Investors”. This rule will require that climate-related information be included in a Company’s annual reports and registration statements. The disclosure requirements will apply to the Company's fiscal year beginning January 1, 2025; however, the SEC has determined to stay the application of this rule pending the completion of judicial review in legal challenges related to the rule. The Company is currently evaluating the final rule to determine its impact on the Company's disclosures.
In December 2023, ASU No. 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures” was issued. This ASU amends the disclosure requirements for income taxes, including the requirement for further disaggregation of the income tax rate reconciliation and income taxes paid disclosures. The amendments in this guidance are effective for annual periods beginning after December 15, 2024. These amendments should be applied prospectively, with the option to apply retrospectively. The Company is currently evaluating the impact of this guidance on the Company’s Consolidated Financial Statements.
4. Cash, Cash Equivalents and Restricted Cash
The Company manages its cash and cash equivalents based upon the Company’s operating, investment, and financing activities. Cash and cash equivalents, for the purposes of reporting cash flows, consist of cash and due from banks, short-term investments, and interest-bearing deposits. Cash and due from banks include cash on hand, cash items in transit, cash due from the Federal Reserve Bank of San Francisco (“FRBSF”) and other financial institutions. Short-term investments and interest-bearing deposits include cash placed with other banks with original maturity of three months or less.
The Company had average excess balance with FRBSF of $
5. Earnings per Share
Basic earnings per share excludes dilution and is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock and resulted in the issuance of common stock that then shared in earnings. Restricted stock units (“RSUs”) with anti-dilutive effect were not included in the computation of diluted earnings per share. The following table sets forth earnings per common share calculations:
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| 2024 |
2023 |
2024 |
2023 |
|||||||||||||
| (In thousands, except share and per share data) |
||||||||||||||||
| Net income |
$ | $ | $ | $ | ||||||||||||
| Weighted-average shares: |
||||||||||||||||
| Basic weighted-average number of common shares outstanding |
||||||||||||||||
| Dilutive effect of weighted-average outstanding common share equivalents: |
||||||||||||||||
| RSUs |
||||||||||||||||
| Diluted weighted-average number of common shares outstanding |
||||||||||||||||
| Average restricted stock units with anti-dilutive effect |
||||||||||||||||
| Earnings per common share: |
||||||||||||||||
| Basic |
$ | $ | $ | $ | ||||||||||||
| Diluted |
$ | $ | $ | $ | ||||||||||||
6. Stock-Based Compensation
Pursuant to the Company’s 2005 Incentive Plan, as amended and restated, the Company may grant incentive stock options (employees only), non-statutory stock options, common stock awards, restricted stock, RSUs, stock appreciation rights and cash awards to non-employee directors and eligible employees.
RSUs are generally granted at no cost to the recipient. RSUs generally vest ratably over years or cliff vest after or years of continued employment from the date of the grant. While a portion of RSUs may be time-vesting awards, others may vest subject to the attainment of specified performance goals and are referred to as “performance-based RSUs.” All RSUs are subject to forfeiture until vested.
Performance-based RSUs are granted at the target amount of awards. Based on the Company’s attainment of specified performance goals and consideration of market conditions, the number of shares that vest can be adjusted to a minimum of
Compensation costs for the time-based awards are based on the quoted market price of the Company’s stock at the grant date. Compensation costs associated with performance-based RSUs are based on grant date fair value, which considers both market and performance conditions. Compensation costs of both time-based and performance-based awards are recognized on a straight-line basis from the grant date until the vesting date of each grant.
The following table presents RSU activity during the nine months ended September 30, 2024:
| Time-Based RSUs | Performance-Based RSUs | |||||||||||||||
| Weighted-Average | Weighted-Average | |||||||||||||||
| Grant Date | Grant Date | |||||||||||||||
| Shares | Fair Value | Shares | Fair Value | |||||||||||||
| Balance at December 31, 2023 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Vested | ( | ) | ( | ) | ||||||||||||
| Forfeited | ( | ) | ( | ) | ||||||||||||
| Balance at September 30, 2024 | $ | $ | ||||||||||||||
The compensation expense recorded for RSUs was $
As of September 30, 2024,
7. Investment Securities
The following tables set forth the amortized cost, gross unrealized gains, gross unrealized losses, and fair value of securities available-for-sale ("AFS") as of September 30, 2024, and December 31, 2023
| September 30, 2024 | ||||||||||||||||
| Gross | Gross | |||||||||||||||
| Amortized | Unrealized | Unrealized | ||||||||||||||
| Cost | Gains | Losses | Fair Value | |||||||||||||
| (In thousands) | ||||||||||||||||
| Securities AFS | ||||||||||||||||
| U.S. treasury securities | $ | $ | $ | $ | ||||||||||||
| U.S. government agency entities | ||||||||||||||||
| Mortgage-backed securities | ||||||||||||||||
| Collateralized mortgage obligations | ||||||||||||||||
| Corporate debt securities | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| December 31, 2023 | ||||||||||||||||
| Gross | Gross | |||||||||||||||
| Amortized | Unrealized | Unrealized | ||||||||||||||
| Cost | Gains | Losses | Fair Value | |||||||||||||
| (In thousands) | ||||||||||||||||
| Securities AFS | ||||||||||||||||
| U.S. treasury securities | $ | $ | $ | $ | ||||||||||||
| U.S. government agency entities | ||||||||||||||||
| Mortgage-backed securities | ||||||||||||||||
| Collateralized mortgage obligations | ||||||||||||||||
| Corporate debt securities | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
As of September 30, 2024, and December 31, 2023, the amortized cost of AFS securities excluded accrued interest receivables of $
The amortized cost and fair value of securities AFS as of September 30, 2024, by contractual maturities, are set forth in the tables below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or repay obligations with or without call or repayment penalties.
| September 30, 2024 | ||||||||
| Securities AFS | ||||||||
| Amortized Cost | Fair Value | |||||||
| (In thousands) | ||||||||
| Due in one year or less | $ | $ | ||||||
| Due after one year through five years | ||||||||
| Due after five years through ten years | ||||||||
| Due after ten years | ||||||||
| Total | $ | $ | ||||||
Equity Securities - The Company recognized an unrealized net gain of $
The following tables set forth the gross unrealized losses and related fair value of the Company’s investment portfolio, aggregated by investment category and the length of time that individual security has been in a continuous unrealized loss position, as of September 30, 2024, and December 31, 2023:
| September 30, 2024 | ||||||||||||||||||||||||
| Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
| Gross | Gross | Gross | ||||||||||||||||||||||
| Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
| Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
| Securities AFS | ||||||||||||||||||||||||
| U.S. government agency entities | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Mortgage-backed securities | ||||||||||||||||||||||||
| Collateralized mortgage obligations | ||||||||||||||||||||||||
| Corporate debt securities | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| December 31, 2023 | ||||||||||||||||||||||||
| Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
| Gross | Gross | Gross | ||||||||||||||||||||||
| Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
| Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
| Securities AFS | ||||||||||||||||||||||||
| U.S. treasury securities | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| U.S. government agency entities | ||||||||||||||||||||||||
| Mortgage-backed securities | ||||||||||||||||||||||||
| Collateralized mortgage obligations | ||||||||||||||||||||||||
| Corporate debt securities | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
As of September 30, 2024, the Company had a total of
In March 2023, the Company recorded a $
Allowance for Credit Losses
The AFS securities that were in an unrealized loss position at September 30, 2024, were evaluated to determine whether the decline in fair value below the amortized cost basis resulted from a credit loss or other factors. For a discussion of the factors and criteria the Company uses in analyzing securities for impairment related to credit losses, see Note 1 - Summary of Significant Accounting Policies - Allowance for Credit Losses on Available for Sale Securities to the Consolidated Financial Statements in the Company’s 2023 Form 10-K.
The Company concluded the unrealized losses were primarily attributed to yield curve movement, together with widened liquidity spreads and credit spreads. The issuers have not, to the Company’s knowledge, established any cause for default on these securities. The Company expects to recover the amortized cost basis of its securities and has no present intent to sell and will not be required to sell securities AFS that have declined below their cost before their anticipated recovery. Accordingly,
AFS securities having a carrying value of $
8. Loans
Most of the Company’s business activities are with clients located in the high-density Asian-populated areas of Southern and Northern California; New York City, New York; Dallas and Houston, Texas; Seattle, Washington; Boston, Massachusetts; Chicago, Illinois; Edison, New Jersey; Rockville, Maryland; and Las Vegas, Nevada. The Company also has loan clients in Hong Kong. The Company has no specific industry concentration, and generally its loans, when secured, are secured by real property or other collateral of the borrowers. The Company generally expects loans to be paid off from the operating profits of the borrowers, from refinancing by other lenders, or through sale by the borrowers of the secured collateral.
The types of loans in the Company’s Consolidated Balance Sheets as of September 30, 2024, and December 31, 2023, were as follows:
| September 30, 2024 | December 31, 2023 | |||||||
| (In thousands) | ||||||||
| Commercial loans | $ | $ | ||||||
| Construction loans | ||||||||
| Commercial real estate loans | ||||||||
| Residential mortgage loans | ||||||||
| Equity lines | ||||||||
| Installment and other loans | ||||||||
| Gross loans | $ | $ | ||||||
| Allowance for loan losses | ( | ) | ( | ) | ||||
| Unamortized deferred loan fees, net | ( | ) | ( | ) | ||||
| Total loans held for investment, net | $ | $ | ||||||
| Loans held for sale | $ | $ | ||||||
As of September 30, 2024, and December 31, 2023, recorded investment in non-accrual loans was $
The following table presents non-accrual loans and the related allowance as of September 30, 2024, and December 31, 2023. There were
| September 30, 2024 | ||||||||||||
| Unpaid Principal Balance | Recorded Investment | Allowance | ||||||||||
| (In thousands) | ||||||||||||
| With no allocated allowance: | ||||||||||||
| Commercial loans | $ | $ | $ | — | ||||||||
| Commercial real estate loans | — | |||||||||||
| Residential mortgage loans and equity lines | — | |||||||||||
| Subtotal | $ | $ | $ | — | ||||||||
| With allocated allowance: | ||||||||||||
| Commercial loans | $ | $ | $ | |||||||||
| Commercial real estate loans | ||||||||||||
| Subtotal | $ | $ | $ | |||||||||
| Total non-accrual loans | $ | $ | $ | |||||||||
| December 31, 2023 | ||||||||||||
| Unpaid Principal Balance | Recorded Investment | Allowance | ||||||||||
| (In thousands) | ||||||||||||
| With no allocated allowance: | ||||||||||||
| Commercial loans | $ | $ | $ | — | ||||||||
| Construction loans | — | |||||||||||
| Commercial real estate loans | — | |||||||||||
| Residential mortgage loans and equity lines | — | |||||||||||
| Subtotal | $ | $ | $ | — | ||||||||
| Total non-accrual loans | $ | $ | $ | |||||||||
The following tables present the average recorded investment and interest income recognized on non-accrual loans for the period indicated:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, 2024 | September 30, 2024 | |||||||||||||||
| Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | |||||||||||||
| (In thousands) | ||||||||||||||||
| Commercial loans | $ | $ | $ | $ | ||||||||||||
| Construction loans | ||||||||||||||||
| Commercial real estate loans | ||||||||||||||||
| Residential mortgage loans and equity lines | ||||||||||||||||
| Total non-accrual loans | $ | $ | $ | $ | ||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, 2023 | September 30, 2023 | |||||||||||||||
| Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | |||||||||||||
| (In thousands) | ||||||||||||||||
| Commercial loans | $ | $ | $ | $ | ||||||||||||
| Construction loans | ||||||||||||||||
| Commercial real estate loans | ||||||||||||||||
| Residential mortgage loans and equity lines | ||||||||||||||||
| Installment and other loans | ||||||||||||||||
| Total non-accrual loans | $ | $ | $ | $ | ||||||||||||
The following tables present the aging of the loan portfolio by type as of September 30, 2024, and as of December 31, 2023:
| September 30, 2024 | ||||||||||||||||||||||||||||
| Accruing | ||||||||||||||||||||||||||||
| 30-59 Days Past Due | 60-89 Days Past Due | 90 Days or More Past Due | Non-accrual Loans | Total Past Due | Loans Not Past Due | Total | ||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||
| Type of Loans: | ||||||||||||||||||||||||||||
| Commercial loans | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Construction loans | ||||||||||||||||||||||||||||
| Commercial real estate loans | ||||||||||||||||||||||||||||
| Residential mortgage loans and equity lines | ||||||||||||||||||||||||||||
| Installment and other loans | ||||||||||||||||||||||||||||
| Total loans | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| December 31, 2023 | ||||||||||||||||||||||||||||
| Accruing | ||||||||||||||||||||||||||||
| 30-59 Days Past Due | 60-89 Days Past Due | 90 Days or More Past Due | Non-accrual Loans | Total Past Due | Loans Not Past Due | Total | ||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||
| Type of Loans: | ||||||||||||||||||||||||||||
| Commercial loans | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Construction loans | ||||||||||||||||||||||||||||
| Commercial real estate loans | ||||||||||||||||||||||||||||
| Residential mortgage loans and equity lines | ||||||||||||||||||||||||||||
| Installment and other loans | ||||||||||||||||||||||||||||
| Total loans | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
The Company has adopted ASU 2022-02, "Financial Instruments – Troubled Debt Restructurings ("TDR") and Vintage Disclosures" effective January 1, 2023. As part of the adoption, the Company has elected to apply the pending content prospectively and the practical expedient to exclude the accrued interest receivable balance from the disclosed amortized cost basis of loan modifications to debtors experiencing financial difficulty, consistent with our Allowance for Credit Losses ("ACL") approach discussed further below in this footnote.
Under this guidance on loan modifications made to borrowers experiencing financial difficulty, when a loan held for investment is modified and is considered to be a continuation of the original loan, the Company uses the post-modification contractual rate to derive the effective interest rate when using a discounted cash flow method to determine the allowance for credit loss.
The amendments in this guidance require that an entity evaluate whether the modification represents a new loan or a continuation of an existing loan.
The Company establishes a specific reserve for individually evaluated loans that do not share similar risk characteristics with the loans included in the quantitative baseline. These individually evaluated loans are removed from the pooling approach for the quantitative baseline, and include non-accrual loans, loan modifications made to borrowers experiencing financial difficulty, and other loans as deemed appropriate by management. The Company applies the loan refinancing and restructuring guidance provided in ASU 2022-02 to determine whether a modification made to a borrower result in a new loan or a continuation of an existing loan.
If economic conditions or other factors worsen relative to the assumptions the Company utilized, the expected loan losses will increase accordingly in future periods.
The following table presents the amortized cost of loans modified to borrowers experiencing financial difficulty disaggregated by class of financing receivable and type of concession granted and the financial effects of the modifications for the three and nine months ended September 30, 2024, and September 30, 2023, by loan class and modification type.
| Three Months Ended September 30, 2024 | Financial Effects of Loan Modifications | |||||||||||||||||||||||||||||||
| Term Extension | Payment Delay | Combo-Rate Reduction/Term Extension/Payment Delay | Total | Modification as a % of Loan Class | Weighted-Average Change in Rate | Weighted-Average Term Extension (in Years) | Weighted-Average Payment Deferral (in Years) | |||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||
| Loan Type | ||||||||||||||||||||||||||||||||
| Commercial loans | $ | $ | $ | $ | % | |||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Nine Months Ended September 30, 2024 | Financial Effects of Loan Modifications | |||||||||||||||||||||||||||||||
| Term Extension | Payment Delay | Combo-Rate Reduction/Term Extension/Payment Delay | Total | Modification as a % of Loan Class | Weighted-Average Change in Rate | Weighted-Average Term Extension (in Years) | Weighted-Average Payment Deferral (in Years) | |||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||
| Loan Type | ||||||||||||||||||||||||||||||||
| Commercial loans | $ | $ | $ | $ | % | |||||||||||||||||||||||||||
| Residential mortgage loans | % | ( | ) | |||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Three Months Ended September 30, 2023 | Financial Effects of Loan Modifications | |||||||||||||||||||||||||||||||
| Term Extension | Payment Delay | Combo-Rate Reduction/Term Extension/Payment Delay | Total | Modification as a % of Loan Class | Weighted-Average Change in Rate | Weighted-Average Term Extension (in Years) | Weighted-Average Payment Deferral (in Years) | |||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||
| Loan Type | ||||||||||||||||||||||||||||||||
| Commercial loans | $ | $ | $ | $ | % | ( | ) | |||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Nine Months Ended September 30, 2023 | Financial Effects of Loan Modifications | |||||||||||||||||||||||||||||||
| Term Extension | Payment Delay | Combo-Rate Reduction/Term Extension/Payment Delay | Total | Modification as a % of Loan Class | Weighted-Average Change in Rate | Weighted-Average Term Extension (in Years) | Weighted-Average Payment Deferral (in Years) | |||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||
| Loan Type | ||||||||||||||||||||||||||||||||
| Commercial loans | $ | $ | $ | $ | % | ( | ) | |||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||||||||
The Company considers a loan to be in payment default once it is
A modified loan may become delinquent and may result in a payment default (generally
The Company closely monitors the performance of modified loans to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts.
The following table presents the performance of loans that were modified for the three and nine months ended September 30, 2024, since the adoption of ASU 2022-02 on January 1, 2023.
| Three Months Ended September 30, 2024 | ||||||||||||||||
| Current | 30–89 Days Past Due | 90+ Days Past Due | Total | |||||||||||||
| (In thousands) | ||||||||||||||||
| Loan Type | ||||||||||||||||
| Commercial loans | $ | $ | $ | $ | ||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| Nine Months Ended September 30, 2024 | ||||||||||||||||
| Current | 30–89 Days Past Due | 90+ Days Past Due | Total | |||||||||||||
| (In thousands) | ||||||||||||||||
| Loan Type | ||||||||||||||||
| Commercial loans | $ | $ | $ | $ | ||||||||||||
| Residential mortgage loans | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| Three Months Ended September 30, 2023 | ||||||||||||||||
| Current | 30–89 Days Past Due | 90+ Days Past Due | Total | |||||||||||||
| (In thousands) | ||||||||||||||||
| Loan Type | ||||||||||||||||
| Commercial loans | $ | $ | $ | $ | ||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| Nine Months Ended September 30, 2023 | ||||||||||||||||
| Current | 30–89 Days Past Due | 90+ Days Past Due | Total | |||||||||||||
| (In thousands) | ||||||||||||||||
| Loan Type | ||||||||||||||||
| Commercial loans | $ | $ | $ | $ | ||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
Under the Company’s internal underwriting policy, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification in order to determine whether a borrower is experiencing financial difficulty.
As of September 30, 2024, there were
As part of the on-going monitoring of the credit quality of our loan portfolio, the Company utilizes a risk grading matrix to assign a risk grade to each loan. Loans are risk rated based on analysis of the current state of the borrower’s credit quality. The analysis of credit quality includes a review of sources of repayment, the borrower’s current financial and liquidity status and other relevant information. The risk rating categories can be generally described by the following grouping for non-homogeneous loans:
| ● | Pass/Watch – These loans range from minimal credit risk to higher than average, but still acceptable, credit risk. The loans have sufficient sources of repayment to repay the loans in full, in accordance with all the terms and conditions and remain currently well protected by collateral values. |
| ● | Special Mention – Borrower is fundamentally sound, and loan is currently protected but adverse trends are apparent that, if not corrected, may affect ability to repay. Primary source of loan repayment remains viable but there is increasing reliance on collateral or guarantor support. |
| ● | Substandard – These loans are inadequately protected by current sound net worth, paying capacity, or collateral. Well-defined weaknesses exist that could jeopardize repayment of debt. Loss may not be imminent, but if weaknesses are not corrected, there is a good possibility of some loss. |
| ● | Doubtful – The possibility of loss is extremely high, but due to identifiable and important pending events (which may strengthen the loan), a loss classification is deferred until the situation is better defined. |
| ● | Loss – These loans are considered uncollectible and of such little value that to continue to carry the loan as an active asset is no longer warranted. |
The following table summarizes the Company’s loans held for investment and current year-to-date gross write-offs as of September 30, 2024, and December 31, 2023, presented by loan portfolio segments, internal risk ratings and vintage year. The vintage year is the year of origination, renewal or major modification. Revolving Loans that are converted to term loans presented in the table below are excluded from the term loans by vintage year columns.
| Loans Amortized Cost Basis by Origination Year | ||||||||||||||||||||||||||||||||||||
| September 30, 2024 | 2024 | 2023 | 2022 | 2021 | 2020 | Prior | Revolving Loans | Revolving Converted to Term Loans | Total | |||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||||||
| Commercial loans | ||||||||||||||||||||||||||||||||||||
| Pass/Watch | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||||||
| Doubtful | ||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| YTD gross write-offs | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Construction loans | ||||||||||||||||||||||||||||||||||||
| Pass/Watch | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| YTD gross write-offs | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Commercial real estate loans | ||||||||||||||||||||||||||||||||||||
| Pass/Watch | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| YTD gross write-offs | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Residential mortgage loans | ||||||||||||||||||||||||||||||||||||
| Pass/Watch | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| YTD gross write-offs | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Equity lines | ||||||||||||||||||||||||||||||||||||
| Pass/Watch | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| YTD gross write-offs | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Installment and other loans | ||||||||||||||||||||||||||||||||||||
| Pass/Watch | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| YTD gross write-offs | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Total loans | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Total YTD gross write-offs | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Loans Amortized Cost Basis by Origination Year | ||||||||||||||||||||||||||||||||||||
| December 31, 2023 | 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Revolving Loans | Revolving Converted to Term Loans | Total | |||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||||||
| Commercial loans | ||||||||||||||||||||||||||||||||||||
| Pass/Watch | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| YTD gross write-offs | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Construction loans | ||||||||||||||||||||||||||||||||||||
| Pass/Watch | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| YTD gross write-offs | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Commercial real estate loans | ||||||||||||||||||||||||||||||||||||
| Pass/Watch | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| YTD gross write-offs | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Residential mortgage loans | ||||||||||||||||||||||||||||||||||||
| Pass/Watch | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| YTD gross write-offs | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Equity lines | ||||||||||||||||||||||||||||||||||||
| Pass/Watch | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| YTD gross write-offs | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Installment and other loans | ||||||||||||||||||||||||||||||||||||
| Pass/Watch | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| YTD gross write-offs | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Total loans | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Total YTD gross write-offs | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
Allowance for Credit Losses
The Company has an allowance framework under ASC Topic 326 for all financial assets measured at amortized cost and certain off-balance sheet credit exposures. The measurement of the allowance for credit losses is based on management’s best estimate of lifetime expected credit losses inherent in the Company’s relevant financial assets. The forward-looking concept of current expected credit loss (“CECL”) approach requires loss estimates to consider historical experience, current conditions and reasonable and supportable economic forecasts of future events and circumstances.
The ACL is the combination of the allowance for loan losses and the reserve for unfunded loan commitments. The allowance for loan losses is reported as a reduction of the amortized cost basis of loans, while the reserve for unfunded loan commitments is included within "other liabilities" on the Consolidated Balance Sheets (Unaudited). The amortized cost basis of loans does not include accrued interest receivable, which is included in "accrued interest receivable" on the Consolidated Balance Sheets. The "Provision for credit losses" on the Consolidated Statements of Operations and Comprehensive Income (Unaudited) is a combination of the provision for loan losses and the provision for unfunded loan commitments.
Under the Company’s CECL approach, management estimates the ACL using relevant available information from internal and external sources, relating to past events, current conditions, and reasonable and supportable economic forecasts that vary by loan portfolio. We use economic forecasts from Moody’s Analytics in this process. The economic forecast is updated monthly; therefore, the one used for each quarter-end calculation is generally based on a one-month lag based on the timing of when the forecast is released. The Company does not consider a one-month lag to create a material difference but considers any subsequent material changes to our estimated loss forecasts as deemed appropriate. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as for changes in environmental conditions, such as changes in gross domestic product (or “GDP”), unemployment rates, property values, or other relevant factors.
Under the CECL methodology, quantitative and qualitative loss factors are applied to our population of loans on a collective pool basis when similar risk characteristics exist. The Company evaluates loans for expected credit losses on an individual basis if, based on current information and events, the loan does not share similar credit risk characteristics with other loans. The Company may choose to measure expected credit losses on an individual loan basis by using one of the following methods: (1) the present value of the expected future cash flows of the loan discounted at the loan’s original effective interest rate, or (2) if the loan is collateral dependent, the fair value of the collateral less costs to sell. For loans that are not collateral-dependent, the Company uses the present value of future cash flows.
Quantitative Factors
Under the Company’s CECL methodology, nine portfolio segments with similar risk characteristics are evaluated for expected loss. Six portfolios are modeled using econometric models and three smaller portfolios are evaluated using a simplified loss-rate method that calculates lifetime expected credit losses for the respective pools (simplified approach). The six portfolios subject to econometric modeling include residential mortgages; commercial and industrial loans (“C&I”); construction loans; commercial real estate (“CRE”) for multifamily loans; CRE for owner-occupied loans; and other CRE loans. We estimate the probability of default during the reasonable and supportable forecast period using separate econometric regression models developed to correlate macroeconomic variables, (GDP, unemployment, CRE prices and residential mortgage prices) to historical credit performance for each of the six loan portfolios from the fourth quarter of 2007 to the fourth quarter of 2022. Loss given default rates are computed based on the charge-offs recognized divided by the exposure at default of defaulted loans starting with the fourth quarter of 2007 through the fourth quarter of 2022. The probability of default and the loss given default rates are applied to the expected amount at default at the loan level based on contractual scheduled payments and estimated prepayments. The amounts so calculated comprise the quantitative portion of the allowance for credit losses.
The Company’s CECL methodology utilizes an eight-quarter reasonable and supportable (“R&S”) forecast period, and a four-quarter reversion period. Management relies on multiple forecasts, blending them into a single loss estimate. Generally speaking, the blended scenario approach would include the Baseline, the Alternative Scenario 1 – Upside – 10th Percentile and the Alternative Scenario 3 – Downside – 90th Percentile forecasts. After the R&S period, the Company reverts linearly for the four-quarter reversion period to the long-term loss rates for each of the six portfolios of loans.
The Company’s CECL methodology estimates expected credit losses over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals, and modifications unless the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company.
The simplified approach portfolios include Small Business Administration (“SBA”) loans, Home Equity Lines of Credit (“HELOCs”) and cash-secured loans, which are not modelled econometrically due to the low loss history for these three pools of loans. The forecasted loss rate is based on the forecasted GDP and unemployment rates during the first eight quarters of the portfolio’s contractual life, reversion loss rates for the next four quarters of the portfolio’s contractual life on a linear declining rate, and the long-term loss rate projected over the remainder of the portfolio’s contractual life.
Qualitative Factors
Under the Company’s CECL methodology, the qualitative portion of the reserve on pooled loans represents management’s judgment of additional considerations to account for internal and external risk factors that are not adequately measured in the quantitative reserve. The qualitative loss factors consider idiosyncratic risk factors, conditions that may not be reflected in quantitatively derived results, or other relevant factors to seek to ensure the allowance for credit losses reflects our best estimate of current expected credit losses. The qualitative reserves include reserves for policy exceptions, experience of management and staff, level of competition in the lending environment, weak risk identification, lack of historical loss experience with residential mortgage loans made to non-U.S. residents, oil & gas, the higher risk characteristics of purchased syndicated loans, model uncertainty, and loans with potential risk of loss given the current environment, including CRE and Office loans, but have not degraded to the point of qualifying for a specific reserve. Current and forecasted economic trends and underlying market values for collateral dependent loans also are considered within the econometric models described above.
The Company’s CECL methodology requires a significant amount of management judgment in determining the appropriate allowance for credit losses. Several of the steps in the methodology involve judgment and are subjective in nature including, among other things:
| ● | Segmenting the loan portfolio |
| ● | Determining the amount of loss history to consider |
| ● | Selecting predictive econometric regression models that use appropriate macroeconomic variables |
| ● | Determining the methodology to forecast prepayments |
| ● | Selecting the most appropriate economic forecast scenario |
| ● | Determining the length of the R&S forecast and reversion periods |
| ● | Estimating expected utilization rates on unfunded loan commitments |
| ● | Assessing relevant and appropriate qualitative factors. |
In addition, the CECL methodology is dependent on economic forecasts that are inherently imprecise and will change from period to period. Although the allowance for credit losses is considered by management to be appropriate, there can be no assurance that it will be sufficient to absorb future losses.
Management believes the allowance for credit losses is appropriate for the CECL in our loan portfolio and associated unfunded commitments, and the credit risk ratings and inherent loss rates currently assigned are reasonable and appropriate as of the reporting date. The criteria for default may include any one of the following: on nonaccrual status, modifications to borrowers experiencing financial difficulty, or payment delinquency of 90 days or more.
Individually Evaluated Loans
When a loan no longer shares similar risk characteristics with other loans, such as in the case of certain nonaccrual loans, the Company estimates the allowance for loan losses on an individual loan basis. Generally, the allowance for loan losses for individually evaluated loans is measured as the difference between the recorded value of the loans and the fair value of the collateral. For loans evaluated individually, the Company uses one of two different asset valuation measurement methods: (1) the fair value of collateral less costs to sell; or (2) the present value of expected future cash flows. If an individually evaluated loan is determined to be collateral dependent, the Company applies the fair value of the collateral less costs to sell method. If an individually evaluated loan is determined not to be collateral dependent, the Company uses the present value of future cash flows.
Unfunded Loan Commitments
Unfunded loan commitments are generally related to providing credit facilities to clients of the Bank and are not actively traded financial instruments. These unfunded commitments are disclosed as off-balance sheet financial instruments in Note 9 in the Notes to Consolidated Financial Statements (Unaudited).
The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company, using the same loss factors as used for the allowance for loan losses. The reserve for unfunded loan commitments uses a one-year historical usage rate of the unfunded commitments during the contractual life of the commitments. The allowance for unfunded commitments is included in “other liabilities” on the Consolidated Balance Sheets. Changes in the allowance for unfunded commitments are included in the provision for credit losses.
The following tables set forth activity in the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2024, and September 30, 2023.
Three months ended September 30, 2024 and 2023
| Residential | ||||||||||||||||||||||||
| Commercial | Mortgage Loans | Installment | ||||||||||||||||||||||
| Commercial | Construction | Real Estate | and | and Other | ||||||||||||||||||||
| Loans | Loans | Loans | Equity Lines | Loans | Total | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
| Allowance for Loan Losses: | ||||||||||||||||||||||||
| June 30, 2024 Ending Balance | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Provision/(reversal) for expected credit losses | ( | ) | ||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Recoveries | ||||||||||||||||||||||||
| Net (charge-offs) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||
| September 30, 2024 Ending Balance | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Allowance for unfunded credit commitments: | ||||||||||||||||||||||||
| June 30, 2024 Ending Balance | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Provision/(reversal) for expected credit losses | ( | ) | ( | ) | ||||||||||||||||||||
| September 30, 2024 Ending Balance | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Residential | ||||||||||||||||||||||||
| Commercial | Mortgage Loans | Installment | ||||||||||||||||||||||
| Commercial | Construction | Real Estate | and | and Other | ||||||||||||||||||||
| Loans | Loans | Loans | Equity Lines | Loans | Total | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
| Allowance for Loan Losses: | ||||||||||||||||||||||||
| June 30, 2023 Ending Balance | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| (Reversal)/provision for expected credit losses | ( | ) | ||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Recoveries | ||||||||||||||||||||||||
| Net (charge-offs) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| September 30, 2023 Ending Balance | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Allowance for unfunded credit commitments: | ||||||||||||||||||||||||
| June 30, 2023 Ending Balance | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Provision/(reversal) for expected credit losses | ( | ) | ||||||||||||||||||||||
| September 30, 2023 Ending Balance | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Nine months ended September 30, 2024 and 2023
| Residential | ||||||||||||||||||||||||
| Commercial | Mortgage Loans | Installment | ||||||||||||||||||||||
| Commercial | Construction | Real Estate | and | and Other | ||||||||||||||||||||
| Loans | Loans | Loans | Equity Lines | Loans | Total | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
| Allowance for Loan Losses: | ||||||||||||||||||||||||
| December 31, 2023 Ending Balance | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Provision/(reversal) for expected credit losses | ||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Recoveries | ||||||||||||||||||||||||
| Net (charge-offs)/recoveries | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| September 30, 2024 Ending Balance | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Allowance for unfunded credit commitments: | ||||||||||||||||||||||||
| December 31, 2023 Ending Balance | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Provision/(reversal) for expected credit losses | ( | ) | ||||||||||||||||||||||
| September 30, 2024 Ending Balance | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Residential | ||||||||||||||||||||||||
| Commercial | Mortgage Loans | Installment | ||||||||||||||||||||||
| Commercial | Construction | Real Estate | and | and Other | ||||||||||||||||||||
| Loans | Loans | Loans | Equity Lines | Loans | Total | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
| Allowance for Loan Losses: | ||||||||||||||||||||||||
| December 31, 2022 Ending Balance | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Provision for expected credit losses | ||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Recoveries | ||||||||||||||||||||||||
| Net (charge-offs)/recoveries | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| September 30, 2023 Ending Balance | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Allowance for unfunded credit commitments: | ||||||||||||||||||||||||
| December 31, 2022 Ending Balance | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Provision/(reversal) for expected credit losses | ( | ) | ||||||||||||||||||||||
| September 30, 2023 Ending Balance | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Loans Held-for-Sale
At the time of commitment to originate or purchase a loan, the loan is determined to be held for investment if it is in the Company’s intent to hold the loan to maturity or for the “foreseeable future,” subject to periodic reviews under the Company’s evaluation processes, including asset/liability and credit risk management. When the Company subsequently changes its intent to hold certain loans, the loans are transferred from held-for-investment to held-for-sale at the lower of cost or fair value. As of September 30, 2024, there were $
Loan Transfers, Sales and Purchases
9. Commitments and Contingencies
From time to time, Bancorp and its subsidiaries are parties to litigation that arises in the ordinary course of business or otherwise is incidental to various aspects of its operations. Based upon information available to the Company and its review of any such litigation with counsel, management presently believes that the liability relating to such litigation, if any, would not be expected to have a material adverse impact on the Company’s consolidated financial condition, results of operations or liquidity taken as a whole. The outcome of litigation and other legal and regulatory matters is inherently uncertain, however, and it is possible that one or more of the legal matters currently pending or threatened against the Company could have a material adverse effect on the Company’s consolidated financial condition, results of operations or liquidity taken as a whole.
Although the Company establishes accruals for legal proceedings when information related to the loss contingencies represented by those matters indicates both that a loss is probable and that the amount of loss can be reasonably estimated, the Company does not have accruals for all legal proceedings where there is a risk of loss. In addition, amounts accrued may not represent the ultimate loss to the Company from the legal proceedings in question. Thus, ultimate losses may be higher or lower, and possibly significantly so, than the amounts accrued for legal loss contingencies.
In the normal course of business, the Company from time to time becomes a party to financial instruments with off-balance sheet risk to meet the financing needs of its clients. These financial instruments include commitments to extend credit in the form of loans, or through commercial or standby letters of credit and financial guarantees. These instruments represent varying degrees of exposure to risk in excess of the amounts included in the accompanying Consolidated Balance Sheets. The contractual or notional amount of these instruments indicates a level of activity associated with a particular class of financial instrument and is not a reflection of the level of expected losses, if any.
The Company’s unfunded commitments related to investments in qualified affordable housing and alternative energy partnerships were $
10. Borrowed Funds
Borrowings from the Federal Home Loan Bank (“FHLB”) – There were
Junior Subordinated Notes – The Company established three special purpose trusts in 2003 and two in 2007 for the purpose of issuing Guaranteed Preferred Beneficial Interests in their Subordinated Debentures to outside investors (“Capital Securities”). The proceeds from the issuance of the Capital Securities as well as our purchase of the common stock of the special purpose trusts were invested in Junior Subordinated Notes of the Company (“Junior Subordinated Notes”). The trusts exist for the purpose of issuing Capital Securities and investing in Junior Subordinated Notes. Subject to some limitations, payment of distributions out of the monies held by the trusts and payments on liquidation of the trusts, or the redemption of the Capital Securities, are guaranteed by the Company to the extent the trusts have funds on hand at such time. The obligations of the Company under the guarantees and the Junior Subordinated Notes are subordinate and junior in right of payment to all indebtedness of the Company and are structurally subordinated to all liabilities and obligations of the Company’s subsidiaries. The Company has the right to defer payments of interest on the Junior Subordinated Notes at any time or from time to time for a period of up to twenty consecutive quarterly periods with respect to each deferral period. Under the terms of the Junior Subordinated Notes, the Company may not, with certain exceptions, declare or pay any dividends or distributions on its capital stock or purchase or acquire any of its capital stock if it has deferred payment of interest on any Junior Subordinated Notes.
At September 30, 2024, Junior Subordinated Notes totaled $
11. Income Taxes
The effective tax rate for the first nine months of 2024 was
The Company’s tax returns are open for audit by the Internal Revenue Service back to and by the California Franchise Tax Board back to .
It is reasonably possible that unrecognized tax benefits could change significantly over the next twelve months. The Company does not expect that any such changes would have a material impact on its annual effective tax rate.
12. Fair Value Measurements and Fair Value of Financial Instruments
The Company uses fair value to measure certain assets and liabilities on a recurring basis, primarily securities available-for-sale and derivatives. For assets measured at the lower of cost or fair value, the fair value measurement criteria may or may not be met during a reporting period and such measurements are therefore considered “nonrecurring” for purposes of disclosing our fair value measurements. Fair value is used on a nonrecurring basis to adjust carrying values for individually evaluated loans and other real estate owned and also to record impairment on certain assets, such as goodwill, CDI, and other long-lived assets.
The Company used valuation methodologies to measure assets at fair value under ASC Topic 820 and ASC Topic 825, as amended by ASU 2016-01 and ASU 2018-03, to estimate the fair value of financial instruments not recorded at fair value. The fair value of the Company’s assets and liabilities is classified and disclosed in one of the following three categories:
| ● |
Level 1 – Quoted prices in active markets for identical assets or liabilities. |
| ● |
Level 2 – Observable prices in active markets for similar assets or liabilities; prices for identical or similar assets or liabilities in markets that are not active; directly observable market inputs for substantially the full term of the asset and liability; market inputs that are not directly observable but are derived from or corroborated by observable market data. |
| ● |
Level 3 – Unobservable inputs based on the Company’s own judgment about the assumptions that a market participant would use. |
The classification of assets and liabilities within the hierarchy is based on whether inputs to the valuation methodology used are observable or unobservable, and the significance of those inputs in the fair value measurement. The Company’s assets and liabilities are classified in their entirety based on the lowest level of input that is significant to their fair value measurements.
Financial assets and liabilities measured at fair value on a recurring basis:
The Company uses the following methodologies to measure the fair value of its financial assets and liabilities on a recurring basis:
Securities Available-for-Sale and Equity Securities - For certain actively traded agency preferred stocks, mutual funds, U.S. Treasury securities, and other equity securities, the Company measures the fair value based on quoted market prices in active exchange markets at the reporting date, a Level 1 measurement. The Company also measures securities by using quoted market prices for similar securities or dealer quotes, a Level 2 measurement. This category generally includes U.S. Government agency securities, U.S. Government sponsored entities, state and municipal securities, mortgage-backed securities (“MBS”), collateralized mortgage obligations and corporate bonds.
Warrants - The Company measures the fair value of warrants based on unobservable inputs based on assumptions and management judgment, a Level 3 measurement.
Interest Rate Swaps – The Company measures the fair value of interest rate swaps using third party models with observable market data, a Level 2 measurement.
Currency Option Contracts and Foreign Exchange Contracts - The Company measures the fair value of currency option contracts and foreign exchange contracts based on observable market rates on a recurring basis, a Level 2 measurement.
The following tables present financial assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2024, and December 31, 2023:
| September 30, 2024 |
||||||||||||||||
| Fair Value Measurements Using |
Total Fair Value |
|||||||||||||||
| Level 1 |
Level 2 |
Level 3 |
Measurements |
|||||||||||||
| (In thousands) |
||||||||||||||||
| Assets |
||||||||||||||||
| Securities AFS |
||||||||||||||||
| U.S. Treasury securities |
$ | $ | $ | $ | ||||||||||||
| U.S. government agency entities |
||||||||||||||||
| Mortgage-backed securities |
||||||||||||||||
| Collateralized mortgage obligations |
||||||||||||||||
| Corporate debt securities |
||||||||||||||||
| Total securities AFS |
||||||||||||||||
| Equity securities |
||||||||||||||||
| Mutual funds |
||||||||||||||||
| Preferred stock of government sponsored entities |
||||||||||||||||
| Other equity securities |
||||||||||||||||
| Total equity securities |
||||||||||||||||
| Interest rate swaps |
||||||||||||||||
| Foreign exchange contracts |
||||||||||||||||
| Total assets |
$ | $ | $ | $ | ||||||||||||
| Liabilities |
||||||||||||||||
| Interest rate swaps |
$ | $ | $ | $ | ||||||||||||
| Foreign exchange contracts |
||||||||||||||||
| Total liabilities |
$ | $ | $ | $ | ||||||||||||
| December 31, 2023 |
||||||||||||||||
| Fair Value Measurements Using |
Total Fair Value |
|||||||||||||||
| Level 1 |
Level 2 |
Level 3 |
Measurements |
|||||||||||||
| (In thousands) |
||||||||||||||||
| Assets |
||||||||||||||||
| Securities AFS |
||||||||||||||||
| U.S. Treasury securities |
$ | $ | $ | $ | ||||||||||||
| U.S. government agency entities |
||||||||||||||||
| Mortgage-backed securities |
||||||||||||||||
| Collateralized mortgage obligations |
||||||||||||||||
| Corporate debt securities |
||||||||||||||||
| Total securities AFS |
||||||||||||||||
| Equity securities |
||||||||||||||||
| Mutual funds |
||||||||||||||||
| Preferred stock of government sponsored entities |
||||||||||||||||
| Other equity securities |
||||||||||||||||
| Total equity securities |
||||||||||||||||
| Interest rate swaps |
||||||||||||||||
| Foreign exchange contracts |
||||||||||||||||
| Total assets |
$ | $ | $ | $ | ||||||||||||
| Liabilities |
||||||||||||||||
| Interest rate swaps |
$ | $ | $ | $ | ||||||||||||
| Foreign exchange contracts |
||||||||||||||||
| Total liabilities |
$ | $ | $ | $ | ||||||||||||
Financial assets and liabilities measured at estimated fair value on a non-recurring basis:
Certain assets or liabilities are required to be measured at estimated fair value on a nonrecurring basis subsequent to initial recognition. Generally, these adjustments are the result of lower-of-cost-or-fair value or other impairment write-downs of individual assets. In determining the estimated fair values during the period, the Company determined that substantially all the changes in estimated fair value were due to declines in market conditions versus instrument specific credit risk. For the periods ended September 30, 2024, and December 31, 2023, there were no material adjustments to fair value for the Company’s assets and liabilities measured at fair value on a nonrecurring basis in accordance with GAAP.
During the second quarter of 2024, the Company entered into a restructuring support agreement and received equity securities for equity interest in a private company, a Level 3 measurement. The fair value of the Company’s Level 3 equity security was measured using the private company’s projected earnings plus cash on hand. The primary inputs and assumptions used in the fair value measurement was derived from the issuer’s projected earnings and collateral, which included cash on hand, the financial standing of the issuer, the business and financial plan of the issuer, among other factors. Significant increases or decreases in any of the inputs or assumptions could result in a significant increase or decrease in the fair value measurement.
For financial assets measured at fair value on a nonrecurring basis that were still reflected in the Consolidated Balance Sheets as of September 30, 2024, and December 31, 2023, the following tables set forth the level of valuation assumptions used to determine each adjustment, the carrying value of the related individual assets as of September 30, 2024, and December 31, 2023, and the total losses for the periods indicated:
| As of September 30, 2024 |
Total Losses |
|||||||||||||||||||||||||||||||
| Fair Value Measurements Using |
Total Fair Value |
For the Three Months Ended |
For the Nine Months Ended |
|||||||||||||||||||||||||||||
| Level 1 |
Level 2 |
Level 3 |
Measurements |
September 30, 2024 |
September 30, 2023 |
September 30, 2024 |
September 30, 2023 |
|||||||||||||||||||||||||
| (In thousands) |
||||||||||||||||||||||||||||||||
| Assets |
||||||||||||||||||||||||||||||||
| Non-accrual loans by type: |
||||||||||||||||||||||||||||||||
| Commercial loans |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Commercial real estate loans |
||||||||||||||||||||||||||||||||
| Residential mortgage loans and equity lines |
||||||||||||||||||||||||||||||||
| Total non-accrual loans |
||||||||||||||||||||||||||||||||
| Other real estate owned (1) |
||||||||||||||||||||||||||||||||
| Other equity securities |
||||||||||||||||||||||||||||||||
| Investments in venture capital |
||||||||||||||||||||||||||||||||
| Total assets |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| (1) Other real estate owned balance of $18.3 million in the Consolidated Balance Sheets is net of estimated disposal costs. |
||||||||||||||||||||||||||||||||
| As of December 31, 2023 |
Total Losses |
|||||||||||||||||||||||
| Fair Value Measurements Using |
Total Fair Value |
For the Twelve Months Ended |
||||||||||||||||||||||
| Level 1 |
Level 2 |
Level 3 |
Measurements |
December 31, 2023 |
December 31, 2022 |
|||||||||||||||||||
| (In thousands) |
||||||||||||||||||||||||
| Assets |
||||||||||||||||||||||||
| Non-accrual loans by type: |
||||||||||||||||||||||||
| Commercial loans |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Commercial real estate loans |
||||||||||||||||||||||||
| Total non-accrual loans |
||||||||||||||||||||||||
| Other real estate owned (1) |
||||||||||||||||||||||||
| Investments in venture capital |
||||||||||||||||||||||||
| Total assets |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| (1) Other real estate owned balance of $19.4 million in the Consolidated Balance Sheets is net of estimated disposal costs. |
||||||||||||||||||||||||
The significant unobservable (Level 3) inputs used in the fair value measurement of collateral for collateral-dependent individually evaluated loans are primarily based on the appraised value of collateral adjusted by estimated sales cost and commissions. The Company generally obtains new appraisal reports every twelve months as appropriate. As the Company’s primary objective in the event of default would be to monetize the collateral to settle the outstanding balance of the loan, less marketable collateral would receive a larger discount. In the current year, the Company used borrower specific collateral discounts with various discount levels.
The fair value of individually evaluated loans is calculated based on the net realizable fair value of the collateral or the observable market price of the most recent sale or quoted price from loans held for sale. The Company does not record loans at fair value on a recurring basis. Nonrecurring fair value adjustments to collateral dependent individually evaluated loans are recorded based on the current appraised value of the collateral, a Level 2 measurement, or management’s judgment and estimation of value using discounted future cash flows or old appraisals which are then adjusted based on recent market trends, a Level 3 measurement.
Loans held for sale are recorded at the lower of cost or fair value upon transfer. Loans held for sale may be measured at fair value on a nonrecurring basis when fair value is less than cost. Fair value is generally determined based on available market data for similar loans and therefore, are classified as Level 2 measurement.
The significant unobservable inputs (Level 3) used in the fair value measurement of other real estate owned (“OREO”) are primarily based on the appraised value of OREO adjusted by estimated sales cost and commissions. The Company applies estimated sales cost and commissions ranging from
Fair value is estimated in accordance with ASC Topic 825. Fair value estimates are made at specific points in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Bank’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Bank’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
The following table sets forth the carrying and notional amounts and estimated fair value of financial instruments as of September 30, 2024, and December 31, 2023:
| September 30, 2024 |
December 31, 2023 |
|||||||||||||||
| Carrying |
Carrying |
|||||||||||||||
| Amount |
Fair Value |
Amount |
Fair Value |
|||||||||||||
| (In thousands) |
||||||||||||||||
| Financial Assets |
||||||||||||||||
| Cash and due from banks |
$ | $ | $ | $ | ||||||||||||
| Short-term investments |
||||||||||||||||
| Securities AFS |
||||||||||||||||
| Loans held-for-sale |
||||||||||||||||
| Loans held for investment, net |
||||||||||||||||
| Equity securities |
||||||||||||||||
| Investment in Federal Home Loan Bank stock |
||||||||||||||||
| Notional |
Notional |
|||||||||||||||
| Amount |
Fair Value |
Amount |
Fair Value |
|||||||||||||
| Foreign exchange contracts |
$ | $ | $ | $ | ||||||||||||
| Interest rate swaps |
||||||||||||||||
| Carrying |
Carrying |
|||||||||||||||
| Amount |
Fair Value |
Amount |
Fair Value |
|||||||||||||
| Financial Liabilities |
||||||||||||||||
| Deposits |
$ | $ | $ | $ | ||||||||||||
| Advances from Federal Home Loan Bank |
||||||||||||||||
| Other borrowings |
||||||||||||||||
| Long-term debt |
||||||||||||||||
| Notional |
Notional |
|||||||||||||||
| Amount |
Fair Value |
Amount |
Fair Value |
|||||||||||||
| Foreign exchange contracts |
$ | $ | $ | $ | ||||||||||||
| Interest rate swaps |
||||||||||||||||
| Notional |
Notional |
|||||||||||||||
| Amount |
Fair Value |
Amount |
Fair Value |
|||||||||||||
| Off-Balance Sheet Financial Instruments |
||||||||||||||||
| Commitments to extend credit |
$ | $ | ( |
) | $ | $ | ( |
) | ||||||||
| Standby letters of credit |
( |
) | ( |
) | ||||||||||||
| Other letters of credit |
( |
) | ( |
) | ||||||||||||
The following tables set forth the level in the fair value hierarchy for the estimated fair values of financial instruments as of September 30, 2024, and December 31, 2023, excluding financial instruments recorded at fair value on a recurring basis already presented in other tables in this note:
| As of September 30, 2024 |
||||||||||||||||
| Fair Value |
Level 1 |
Level 2 |
Level 3 |
|||||||||||||
| (In thousands) |
||||||||||||||||
| Financial Assets |
||||||||||||||||
| Cash and due from banks |
$ | $ | $ | $ | ||||||||||||
| Short-term investments |
||||||||||||||||
| Loans held-for-sale |
||||||||||||||||
| Loans held for investment, net |
||||||||||||||||
| Equity securities |
||||||||||||||||
| Investment in Federal Home Loan Bank stock |
||||||||||||||||
| Financial Liabilities |
||||||||||||||||
| Deposits |
||||||||||||||||
| Advances from Federal Home Loan Bank |
||||||||||||||||
| Other borrowings |
||||||||||||||||
| Long-term debt |
||||||||||||||||
| As of December 31, 2023 |
||||||||||||||||
| Fair Value |
Level 1 |
Level 2 |
Level 3 |
|||||||||||||
| (In thousands) |
||||||||||||||||
| Financial Assets |
||||||||||||||||
| Cash and due from banks |
$ | $ | $ | $ | ||||||||||||
| Short-term investments |
||||||||||||||||
| Loans held for investment, net |
||||||||||||||||
| Equity securities |
||||||||||||||||
| Investment in Federal Home Loan Bank stock |
||||||||||||||||
| Financial Liabilities |
||||||||||||||||
| Deposits |
||||||||||||||||
| Advances from Federal Home Loan Bank |
||||||||||||||||
| Other borrowings |
||||||||||||||||
| Long-term debt |
||||||||||||||||
13. Goodwill and Other Intangible Assets
Goodwill. Total goodwill was $
Core Deposit Intangibles.
The following table presents the gross carrying amount and accumulated amortization of core deposits intangible assets as of September 30, 2024, and December 31, 2023:
| September 30, 2024 | December 31, 2023 | |||||||
| (In thousands) | ||||||||
| Gross balance | $ | $ | ||||||
| Accumulated amortization | ( | ) | ( | ) | ||||
| Impairment | ( | ) | ( | ) | ||||
| Net carrying balance | $ | $ | ||||||
There were
The Company amortizes the core deposit intangibles based on the projected useful lives of the related deposits. The amortization expense related to the core deposit intangible assets was $
The following table presents the estimated aggregate amortization expense of core deposit intangibles for each of the five succeeding years:
| Amount | ||||
| (In thousands) | ||||
| 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Total | $ | |||
14. Financial Derivatives
The Company does not speculate on the future direction of interest rates. As part of the Company’s asset and liability management, however, the Company enters into financial derivatives to seek to mitigate exposure to interest rate risks related to its interest-earning assets and interest-bearing liabilities. The Company believes that these transactions, when properly structured and managed, may provide a hedge against inherent interest rate risk in our assets or liabilities and against risk in specific transactions. In such instances, the Company may protect its position through the purchase or sale of interest rate future contracts for a specific cash or interest rate risk position. Other hedging transactions may be implemented using interest rate swaps, interest rate caps, floors, financial futures, forward rate agreements, and options on futures or bonds. Prior to considering any hedging activities, the Company seeks to analyze the costs and benefits of the hedge in comparison to other viable alternative strategies. All hedges will require an assessment of basis risk and must be approved by the Bancorp or the Bank’s Investment Committee.
The Company follows ASC Topic 815 that establishes accounting and reporting standards for financial derivatives, including certain financial derivatives embedded in other contracts, and hedging activities. It requires the recognition of all financial derivatives as assets or liabilities in the Company’s Consolidated Balance Sheets and measurement of those financial derivatives at fair value. The accounting treatment of changes in fair value is dependent upon whether or not a financial derivative is designated as a hedge and, if so, the type of hedge. Fair value is determined using third-party models with observable market data. For derivatives designated as cash flow hedges, changes in fair value are recognized in other comprehensive income and are reclassified to earnings when the hedged transaction is reflected in earnings. For derivatives designated as fair value hedges, changes in the fair value of the derivatives are reflected in current earnings, together with changes in the fair value of the related hedged item if there is a highly effective correlation between changes in the fair value of the interest rate swaps and changes in the fair value of the underlying asset or liability that is intended to be hedged. If there is not a highly effective correlation between changes in the fair value of the interest rate swap and changes in the fair value of the underlying asset or liability that is intended to be hedged, then only the changes in the fair value of the interest rate swaps are reflected in the Company’s consolidated financial statements.
The Company offers various interest rate derivative contracts to its clients. When derivative transactions are executed with its clients, the derivative contracts are offset by paired trades with third-party financial institutions including with central counterparties (“CCP”). Certain derivative contracts entered with CCPs are settled-to-market daily to the extent the CCP’s rulebooks legally characterize the variation margin as settlement. Derivative contracts are intended to allow borrowers to lock in attractive intermediate and long-term fixed rate financing while not increasing the interest rate risk to the Company. These transactions are generally not linked to specific Company assets or liabilities on the Consolidated Balance Sheets or to forecasted transactions in a hedging relationship and, therefore, are economic hedges. The contracts are marked to market at each reporting period. The changes in fair values of the derivative contracts traded with third-party financial institutions are expected to be largely comparable to the changes in fair values of the derivative transactions executed with clients throughout the terms of these contracts, except for the credit valuation adjustment component. The Company records credit valuation adjustments on derivatives to properly reflect the variances of credit worthiness between the Company and the counterparties, considering the effects of enforceable master netting agreements and collateral arrangements. As of September 30, 2024, and December 31, 2023, the Company had outstanding interest rate derivative contracts with certain clients and third-party financial institutions with a notional amount of $
In May 2014, Bancorp entered into interest rate swap contracts in the notional amount of $
As of September 30, 2024, the Bank’s outstanding fair value interest rate swap contracts matched to individual fixed-rate commercial real estate loans had a notional amount of $
The Company has designated as a partial-term hedging election of $
Interest rate swap contracts involve the risk of dealing with institutional derivative counterparties and their ability to meet contractual terms. Institutional counterparties must have a strong credit profile and be approved by the Company’s Board of Directors. The Company’s credit exposure on interest rate swaps is limited to the net favorable value and interest payments of all swaps by each counterparty. Credit exposure may be reduced by the amount of collateral pledged by the counterparty. Bancorp’s interest rate swaps have been assigned by the counterparties to a derivative clearing organization and daily margin is indirectly maintained with the derivative clearing organization.
The notional amount and net unrealized loss of the Company’s fair value derivative financial instruments as of September 30, 2024, and December 31, 2023, were as follows:
| September 30, 2024 | December 31, 2023 | |||||||
| (In thousands) | ||||||||
| Fair value swap hedges: | ||||||||
| Notional | $ | $ | ||||||
| Weighted average fixed rate-pay | % | % | ||||||
| Weighted average variable rate spread | % | % | ||||||
| Weighted average variable rate-receive | % | % | ||||||
| Net (loss)/gain(1) | $ | ( | ) | $ | ||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, 2024 | September 30, 2023 | September 30, 2024 | September 30, 2023 | |||||||||||||
| Periodic net settlement of swaps (2) | $ | $ | $ | $ | ||||||||||||
| (1) the amount is included in other non-interest income. | ||||||||||||||||
| (2) the amount of periodic net settlement of interest rate swaps was included in interest income. | ||||||||||||||||
Included in the total notional amount of $
The Company enters into foreign exchange forward contracts with various counterparties to mitigate the risk of fluctuations in foreign currency exchange rates for foreign exchange certificates of deposit or foreign exchange contracts entered into with our clients. These contracts are not designated as hedging instruments and are recorded at fair value in our Consolidated Balance Sheets. Changes in the fair value of these contracts as well as the related foreign exchange certificates of deposit and foreign exchange contracts are recognized immediately in net income as a component of non-interest income. Period end gross positive fair values are recorded in other assets and gross negative fair values are recorded in other liabilities.
The notional amount and fair value of the Company’s derivative financial instruments not designated as hedging instruments as of September 30, 2024, and December 31, 2023, not including interest rate swaps cleared through the CCP, were as follows:
| Derivative financial instruments not designated as hedging instruments: | September 30, 2024 | December 31, 2023 | ||||||
| (In thousands) | ||||||||
| Notional amounts: | ||||||||
| Forward, and swap contracts with positive fair value | $ | $ | ||||||
| Forward, and swap contracts with negative fair value | $ | $ | ||||||
| Fair value: | ||||||||
| Forward, and swap contracts with positive fair value | $ | $ | ||||||
| Forward, and swap contracts with negative fair value | $ | ( | ) | $ | ( | ) | ||
15. Balance Sheet Offsetting
Certain financial instruments, including resell and repurchase agreements, securities lending arrangements and derivatives, may be eligible for offset in the Consolidated Balance Sheets and/or subject to master netting arrangements or similar agreements. The Company’s securities sold with agreements to repurchase and derivative transactions with upstream financial institution counterparties are generally executed under International Swaps and Derivative Association master agreements that include “right of set-off” provisions. In such cases, there is generally a legally enforceable right to offset recognized amounts and there may be an intention to settle such amounts on a net basis. Nonetheless, the Company does not generally offset such financial instruments for financial reporting purposes.
Financial instruments that are eligible for offset in the Consolidated Balance Sheets, as of September 30, 2024, and December 31, 2023, are set forth in the following table:
| Gross Amounts Not |
||||||||||||||||||||||||
| Offset in the Balance Sheet |
||||||||||||||||||||||||
| Gross Amounts Recognized | Gross Amounts Offset in the Balance Sheet | Net Amounts Presented in the Balance Sheet | Financial Instruments | Collateral Posted | Net Amount |
|||||||||||||||||||
| (In thousands) |
||||||||||||||||||||||||
| September 30, 2024 |
||||||||||||||||||||||||
| Assets: |
||||||||||||||||||||||||
| Derivatives |
$ | $ | $ | $ | — | $ | $ | |
||||||||||||||||
| Liabilities: |
||||||||||||||||||||||||
| Derivatives |
$ | $ | $ | $ | — | $ | $ | |||||||||||||||||
| December 31, 2023 |
||||||||||||||||||||||||
| Assets: |
||||||||||||||||||||||||
| Derivatives |
$ | $ | $ | $ | — | $ | $ | |||||||||||||||||
| Liabilities: |
||||||||||||||||||||||||
| Derivatives |
$ | $ | $ | $ | — | $ | $ | |||||||||||||||||
16. Revenue from Contracts with Clients
The following is a summary of revenue from contracts with clients that are in-scope and not in-scope under ASC Topic 606:
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| 2024 |
2023 |
2024 |
2023 |
|||||||||||||
| (In thousands) |
||||||||||||||||
| Non-interest income, in-scope: |
||||||||||||||||
| Fees and service charges on deposit accounts |
$ | $ | $ | $ | ||||||||||||
| Wealth management fees |
||||||||||||||||
| Other service fees(1) |
||||||||||||||||
| Total non-interest income |
||||||||||||||||
| Non-interest income/(loss), not in-scope(2) |
( |
) | ||||||||||||||
| Total non-interest income |
$ | $ | $ | $ | ||||||||||||
| (1) Other service fees comprise of fees related to letters of credit, wire fees, fees on foreign exchange transactions and other immaterial individual revenue streams. |
||||||||||||||||
| (2) These amounts primarily represent revenue from contracts with clients that are out of the scope of ASC Topic 606 and primarily represent revenue from interest rate swap fees, unrealized gains and losses on equity securities and other miscellaneous income. |
||||||||||||||||
The major revenue streams by fee type that are within the scope of ASC Topic 606 presented in the above table are described in additional detail below:
Fees and Services Charges on Deposit Accounts
Fees and service charges on deposit accounts include charges for analysis, overdraft, cash checking, ATM, and safe deposit activities executed by our deposit clients, as well as interchange income earned through card payment networks for the acceptance of card-based transactions. Fees earned from our deposit clients are governed by contracts that provide for overall custody and access to deposited funds and other related services and can be terminated at will by either party. Fees received from deposit clients for the various deposit activities are recognized as revenue by the Company once the performance obligations are met.
Wealth Management Fees
The Company employs financial consultants to provide investment planning services for clients including wealth management services, asset allocation strategies, portfolio analysis and monitoring, investment strategies, and risk management strategies. The fees the Company earns are variable and are generally received monthly by the Company. The Company recognizes revenue for the services performed at quarter end based on actual transaction details received from the broker dealer the Company engages.
Practical Expedients and Exemptions
The Company applies the practical expedient in ASC 606-10-50-14 and does not disclose the value of unsatisfied performance obligations as the Company’s contracts with clients generally have a term that is less than one year, are open-ended with a cancellation period that is less than one year or allow the Company to recognize revenue in the amount to which the Company has the right to invoice.
In addition, given the short-term nature of the contracts, the Company also applies the practical expedient in ASC 606-10-32-18 and does not adjust the consideration from clients for the effects of a significant financing component, if at contract inception the period between when the entity transfers the goods or services and when the client pays for that good or service is one year or less.
17. Stockholders’ Equity
Total equity was $
Activity in accumulated other comprehensive income/(loss), net of tax, and reclassification out of accumulated other comprehensive income/(loss) for the three and nine months ended September 30, 2024, and September 30, 2023, was as follows:
| Three Months Ended September 30, 2024 | Three Months Ended September 30, 2023 | |||||||||||||||||||||||
| Pre-tax | Tax expense/ (benefit) | Net-of-tax | Pre-tax | Tax expense/ (benefit) | Net-of-tax | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
| Beginning balance, gain/(loss), net of tax | ||||||||||||||||||||||||
| Securities AFS | $ | ( | ) | $ | ( | ) | ||||||||||||||||||
| Cash flow hedge derivatives | ||||||||||||||||||||||||
| Total | $ | ( | ) | $ | ( | ) | ||||||||||||||||||
| Net unrealized gains/(losses) arising during the period | ||||||||||||||||||||||||
| Securities AFS | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||
| Cash flow hedge derivatives | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Total | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||
| Reclassification adjustment for net losses in net income | ||||||||||||||||||||||||
| Securities AFS | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Cash flow hedge derivatives | ||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||
| Total other comprehensive income/(loss) | ||||||||||||||||||||||||
| Securities AFS | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||
| Cash flow hedge derivatives | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Total | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||
| Ending balance, gain/(loss), net of tax | ||||||||||||||||||||||||
| Securities AFS | $ | ( | ) | $ | ( | ) | ||||||||||||||||||
| Cash flow hedge derivatives | ||||||||||||||||||||||||
| Total | $ | ( | ) | $ | ( | ) | ||||||||||||||||||
| Nine Months Ended September 30, 2024 | Nine Months Ended September 30, 2023 | |||||||||||||||||||||||
| Pre-tax | Tax expense/ (benefit) | Net-of-tax | Pre-tax | Tax expense/ (benefit) | Net-of-tax | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
| Beginning balance, gain/(loss), net of tax | ||||||||||||||||||||||||
| Securities AFS | $ | ( | ) | $ | ( | ) | ||||||||||||||||||
| Cash flow hedge derivatives | ||||||||||||||||||||||||
| Total | $ | ( | ) | $ | ( | ) | ||||||||||||||||||
| Net unrealized gains/(losses) arising during the period | ||||||||||||||||||||||||
| Securities AFS | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||
| Cash flow hedge derivatives | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Total | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||
| Reclassification adjustment for net losses in net income | ||||||||||||||||||||||||
| Securities AFS | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Cash flow hedge derivatives | ||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||
| Total other comprehensive income/(loss) | ||||||||||||||||||||||||
| Securities AFS | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||
| Cash flow hedge derivatives | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Total | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||
| Ending balance, gain/(loss), net of tax | ||||||||||||||||||||||||
| Securities AFS | $ | ( | ) | $ | ( | ) | ||||||||||||||||||
| Cash flow hedge derivatives | ||||||||||||||||||||||||
| Total | $ | ( | ) | $ | ( | ) | ||||||||||||||||||
18. Stock Repurchase Program
On May 28, 2024, the Company announced a new stock repurchase program to buy back up to $
During the third quarter, we repurchased
19. Subsequent Events
The Company has evaluated the effect of events that have occurred subsequent to September 30, 2024, through the date of issuance of the Consolidated Financial Statements, and, based on such evaluation, the Company believes that there have been no material events during such period that would require recognition in the Consolidated Financial Statements or disclosure in the Notes to the Consolidated Financial Statements.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion is based on the assumption that the reader has access to and has read the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.
Critical Accounting Policies
The discussion and analysis of the Company’s financial condition and results of operations are based upon its unaudited Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these Consolidated Financial Statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues, and expenses, and related disclosures of contingent assets and liabilities at the date of the Consolidated Financial Statements. Actual results may differ from these estimates under different assumptions or conditions.
Critical accounting policies involve significant judgments, assumptions and uncertainties and are essential to understanding the Company’s results of operations and financial condition. Management of the Company considers the following to be critical accounting policies:
Accounting for the allowance for loan losses involves significant judgments and assumptions by management, which have a material impact on, among other things, the carrying value of net loans. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances as described in “Allowance for Credit Losses” under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in the 2023 Form 10-K. For more information, please also see Note 2 to the Company’s unaudited Consolidated Financial Statements.
Highlights
| ● |
Total assets increased $429.9 million to $23.27 billion when compared to third quarter of 2023. |
| ● |
Total deposits increased $308.4 million to $19.94 billion when compared to third quarter of 2023. | |
| ● | Total gross loans, excluding loans held for sale, increased $349.8 million to $19.37 billion when compared to third quarter of 2023. |
Quarterly Statement of Operations Review
Net Income
Net income for the quarter ended September 30, 2024, was $67.5 million, a decrease of $14.9 million, or 18.1%, compared to net income of $82.4 million for the same quarter a year ago. Diluted earnings per share for the quarter ended September 30, 2024, was $0.94 per share compared to $1.13 per share for the same quarter a year ago.
Return on average stockholders’ equity was 9.50% and return on average assets was 1.15% for the quarter ended September 30, 2024, compared to a return on average stockholders’ equity of 12.36% and a return on average assets of 1.42% for the same quarter a year ago.
Financial Performance
| Three months ended |
Nine months ended |
|||||||||||||||
| September 30, 2024 |
September 30, 2023 |
September 30, 2024 |
September 30, 2023 |
|||||||||||||
| (In millions, except per share and ratio data) |
||||||||||||||||
| Net income |
$ | 67.5 | $ | 82.4 | $ | 205.8 | $ | 271.6 | ||||||||
| Basic earnings per common share |
$ | 0.94 | $ | 1.14 | $ | 2.84 | $ | 3.74 | ||||||||
| Diluted earnings per common share |
$ | 0.94 | $ | 1.13 | $ | 2.83 | $ | 3.73 | ||||||||
| Return on average assets |
1.15 | % | 1.42 | % | 1.18 | % | 1.61 | % | ||||||||
| Return on average total stockholders' equity |
9.50 | % | 12.36 | % | 9.84 | % | 14.04 | % | ||||||||
| Efficiency ratio |
51.11 | % | 48.57 | % | 53.28 | % | 44.64 | % | ||||||||
Net Interest Income Before Provision for Credit Losses
Net interest income before provision for credit losses decreased $16.4 million, or 8.8%, to $169.2 million during the third quarter of 2024, compared to $185.6 million during the same quarter a year ago. The decrease was due primarily to an increase in interest expense from deposits, offset by an increase in interest income from loans and securities.
The net interest margin was 3.04% for the third quarter of 2024 compared to 3.38% for the third quarter of 2023.
For the third quarter of 2024, the yield on average interest-earning assets was 6.10%, the cost of funds on average interest-bearing liabilities was 3.99%, and the average cost of interest-bearing deposits was 3.95%. In comparison, for the third quarter of 2023, the yield on average interest-earning assets was 5.89%, the cost of funds on average interest-bearing liabilities was 3.33%, and the average cost of interest-bearing deposits was 3.23%. The increase in the yield on average interest-bearing liabilities and on average interest-earning assets resulted mainly from higher interest rates. The net interest spread, defined as the difference between the yield on average interest-earning assets and the cost of funds on average interest-bearing liabilities, was 2.11% for the quarter ended September 30, 2024, compared to 2.56% for the same quarter a year ago.
The following table sets forth information concerning average interest-earning assets, average interest-bearing liabilities, and the average yields and rates paid on those assets and liabilities for the three months ended September 30, 2024, and 2023. The average outstanding amounts included in the table are daily averages.
| Interest-Earning Assets and Interest-Bearing Liabilities |
||||||||||||||||||||||||
| Three Months Ended September 30, |
||||||||||||||||||||||||
| 2024 |
2023 |
|||||||||||||||||||||||
| Interest |
Average |
Interest |
Average |
|||||||||||||||||||||
| Average |
Income/ |
Yield/ |
Average |
Income/ |
Yield/ |
|||||||||||||||||||
| Balance |
Expense |
Rate (1)(2) |
Balance |
Expense |
Rate (1)(2) |
|||||||||||||||||||
| (In thousands) |
||||||||||||||||||||||||
| Interest-earning assets: |
||||||||||||||||||||||||
| Total loans (1) |
$ | 19,455,521 | $ | 310,311 | 6.35 | % | $ | 18,959,444 | $ | 293,108 | 6.13 | % | ||||||||||||
| Investment securities |
1,638,414 | 15,125 | 3.67 | 1,530,767 | 12,698 | 3.29 | ||||||||||||||||||
| Federal Home Loan Bank stock |
17,250 | 375 | 8.65 | 19,141 | 355 | 7.35 | ||||||||||||||||||
| Deposits with banks |
1,035,534 | 13,680 | 5.26 | 1,273,751 | 17,307 | 5.39 | ||||||||||||||||||
| Total interest-earning assets |
22,146,719 | 339,491 | 6.10 | 21,783,103 | 323,468 | 5.89 | ||||||||||||||||||
| Non-interest earning assets: |
||||||||||||||||||||||||
| Cash and due from banks |
159,324 | 178,217 | ||||||||||||||||||||||
| Other non-earning assets |
1,211,110 | 1,200,260 | ||||||||||||||||||||||
| Total non-interest earning assets |
1,370,434 | 1,378,477 | ||||||||||||||||||||||
| Less: Allowance for loan losses |
(153,122 | ) | (154,529 | ) | ||||||||||||||||||||
| Deferred loan fees |
(11,006 | ) | (9,624 | ) | ||||||||||||||||||||
| Total assets |
$ | 23,353,025 | $ | 22,997,427 | ||||||||||||||||||||
| Interest-bearing liabilities: |
||||||||||||||||||||||||
| Interest-bearing demand accounts |
$ | 2,134,807 | $ | 11,286 | 2.10 | % | $ | 2,405,011 | $ | 11,997 | 1.98 | % | ||||||||||||
| Money market accounts |
3,073,384 | 28,991 | 3.75 | 3,036,445 | 22,824 | 2.98 | ||||||||||||||||||
| Savings accounts |
1,212,870 | 5,641 | 1.85 | 1,151,615 | 3,386 | 1.17 | ||||||||||||||||||
| Time deposits |
10,250,601 | 119,786 | 4.65 | 9,145,176 | 90,022 | 3.91 | ||||||||||||||||||
| Total interest-bearing deposits |
16,671,662 | 165,704 | 3.95 | 15,738,247 | 128,229 | 3.23 | ||||||||||||||||||
| Other borrowings |
186,838 | 2,281 | 4.86 | 586,824 | 7,873 | 5.32 | ||||||||||||||||||
| Long-term debt |
119,136 | 2,351 | 7.85 | 119,136 | 1,726 | 5.75 | ||||||||||||||||||
| Total interest-bearing liabilities |
16,977,636 | 170,336 | 3.99 | 16,444,207 | 137,828 | 3.33 | ||||||||||||||||||
| Non-interest bearing liabilities: |
||||||||||||||||||||||||
| Demand deposits |
3,230,150 | 3,603,779 | ||||||||||||||||||||||
| Other liabilities |
316,860 | 305,435 | ||||||||||||||||||||||
| Total equity |
2,828,379 | 2,644,006 | ||||||||||||||||||||||
| Total liabilities and equity |
$ | 23,353,025 | $ | 22,997,427 | ||||||||||||||||||||
| Net interest spread |
2.11 | % | 2.56 | % | ||||||||||||||||||||
| Net interest income |
$ | 169,155 | $ | 185,640 | ||||||||||||||||||||
| Net interest margin |
3.04 | % | 3.38 | % | ||||||||||||||||||||
| (1) Yields and amounts of interest earned include loan fees. Non-accrual loans are included in the average balance. |
||||||||||||||||||||||||
| (2) Calculated by dividing net interest income by average outstanding interest-earning assets. |
||||||||||||||||||||||||
The following table summarizes the changes in interest income and interest expense attributable to changes in volume and changes in interest rates for the three months ended September 30, 2024 and 2023:
| Taxable-Equivalent Net Interest Income — Changes Due to Volume and Rate(1) |
||||||||||||
| Three Months Ended September 30, |
||||||||||||
| 2024-2023 |
||||||||||||
| Increase/(Decrease) in |
||||||||||||
| Net Interest Income Due to |
||||||||||||
| Changes in Volume | Changes in Rate | Total Change | ||||||||||
| (In thousands) |
||||||||||||
| Interest-earning assets: |
||||||||||||
| Loans |
$ | 7,417 | $ | 9,786 | $ | 17,203 | ||||||
| Investment securities |
916 | 1,511 | 2,427 | |||||||||
| Federal Home Loan Bank stock |
(37 | ) | 57 | 20 | ||||||||
| Deposits with other banks |
(3,198 | ) | (429 | ) | (3,627 | ) | ||||||
| Total changes in interest income |
5,098 | 10,925 | 16,023 | |||||||||
| Interest-bearing liabilities: |
||||||||||||
| Interest-bearing demand accounts |
(1,414 | ) | 703 | (711 | ) | |||||||
| Money market accounts |
277 | 5,890 | 6,167 | |||||||||
| Savings accounts |
188 | 2,067 | 2,255 | |||||||||
| Time deposits |
11,558 | 18,206 | 29,764 | |||||||||
| Other borrowed funds |
(4,957 | ) | (635 | ) | (5,592 | ) | ||||||
| Long-term debts |
— | 625 | 625 | |||||||||
| Total changes in interest expense |
5,652 | 26,856 | 32,508 | |||||||||
| Changes in net interest income |
$ | (554 | ) | $ | (15,931 | ) | $ | (16,485 | ) | |||
| (1) Changes in interest income and interest expense attributable to changes in both volume and rate have been allocated proportionately to changes due to volume and changes due to rate. |
||||||||||||
Provision for credit losses
The Company recorded a provision for credit losses of $14.5 million in the third quarter of 2024 compared with $7.0 million in the third quarter of 2023. As of September 30, 2024, the allowance for credit losses, comprised of the reserve for loan losses and the reserve for unfunded loan commitments, increased $9.6 million to $173.2 million, or 0.89% of gross loans, compared to $163.6 million, or 0.84% of gross loans, as of December 31, 2023. The change in the allowance for credit losses during the third quarter of 2024 consisted of a $14.5 million provision for credit losses, and $4.2 million in net charge-offs.
The following table sets forth the charge-offs and recoveries for the periods indicated:
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| 2024 |
2023 |
2024 |
2023 |
|||||||||||||
| (In thousands) |
||||||||||||||||
| Charge-offs: |
||||||||||||||||
| Commercial loans |
$ | 2,666 | $ | 6,254 | $ | 12,862 | $ | 12,517 | ||||||||
| Real estate loans (1) |
1,805 | 1,221 | 2,059 | 5,341 | ||||||||||||
| Installment and other loans |
7 | 8 | 7 | 15 | ||||||||||||
| Total charge-offs |
4,478 | 7,483 | 14,928 | 17,873 | ||||||||||||
| Recoveries: |
||||||||||||||||
| Commercial loans |
88 | 611 | 1,026 | 1,564 | ||||||||||||
| Real estate loans (1) |
187 | 261 | 561 | 2,862 | ||||||||||||
| Installment and other loans |
1 | — | 1 | — | ||||||||||||
| Total recoveries |
276 | 872 | 1,588 | 4,426 | ||||||||||||
| Net charge-offs |
$ | 4,202 | $ | 6,611 | $ | 13,340 | $ | 13,447 | ||||||||
| (1) Real estate loans include commercial real estate loans, residential mortgage loans, and equity lines. |
||||||||||||||||
Non-Interest Income
Non-interest income, which includes revenues from depository service fees, letters of credit commissions, securities gains (losses), wealth management fees, and other sources of fee income, was $20.4 million for the third quarter of 2024, an increase of $12.6 million, or 161.5%, compared to $7.8 million for the third quarter of 2023. The increase was primarily due to an increase of $10.5 million in unrealized gain on equity securities and an increase of $1.4 million in Wealth Management fees, when compared to the same quarter a year ago.
Non-Interest Expense
Non-interest expense increased $2.9 million, or 3.1%, to $96.9 million in the third quarter of 2024 compared to $94.0 million in the same quarter a year ago. The increase in non-interest expense in the third quarter of 2024 was primarily due to an increase of $2.1 million in salaries and employee benefits, and an increase of $0.9 million in amortization expense of investments in low-income housing and alternative energy partnerships when compared to the same quarter a year ago. The efficiency ratio was 51.11% in the third quarter of 2024 compared to 48.57% for the same quarter a year ago.
Income Taxes
The effective tax rate for the third quarter of 2024 was 13.6% compared to 11.0% for the third quarter of 2023. The effective tax rate includes the impact of alternative energy investments and low-income housing tax credits.
Year-to-Date Statement of Operations Review
Net Income
Net income for the nine months ended September 30, 2024, was $205.8 million, a decrease of $65.8 million, or 24.2% compared to net income of $271.6 million for the same quarter a year ago. Diluted earnings per share for the nine months ended September 30, 2024, was $2.83 per share compared to $3.73 per share for the same quarter a year ago.
Return on average stockholders’ equity was 9.84% and return on average assets was 1.18% for the nine months ended September 30, 2024, compared to a return on average stockholders’ equity of 14.04% and a return on average assets of 1.61% for the same quarter a year ago.
The following table sets forth information concerning average interest-earning assets, average interest-bearing liabilities, and the average yields and rates paid on those assets and liabilities for the nine months ended September 30, 2024, and 2023. The average outstanding amounts included in the table are daily averages.
| Interest-Earning Assets and Interest-Bearing Liabilities |
||||||||||||||||||||||||
| Nine Months Ended September 30, |
||||||||||||||||||||||||
| 2024 |
2023 |
|||||||||||||||||||||||
| Interest |
Average |
Interest |
Average |
|||||||||||||||||||||
| Average |
Income/ |
Yield/ |
Average |
Income/ |
Yield/ |
|||||||||||||||||||
| Balance |
Expense |
Rate (1)(2) |
Balance |
Expense |
Rate (1)(2) |
|||||||||||||||||||
| (In thousands) |
||||||||||||||||||||||||
| Interest-earning assets: |
||||||||||||||||||||||||
| Total loans (1) |
$ | 19,464,496 | $ | 916,175 | 6.29 | % | $ | 18,572,222 | $ | 827,765 | 5.96 | % | ||||||||||||
| Investment securities |
1,647,968 | 45,720 | 3.71 | 1,546,951 | 36,832 | 3.18 | ||||||||||||||||||
| Federal Home Loan Bank stock |
19,162 | 1,305 | 9.10 | 18,290 | 957 | 7.00 | ||||||||||||||||||
| Interest-bearing deposits |
1,042,413 | 41,793 | 5.36 | 1,145,398 | 43,405 | 5.07 | ||||||||||||||||||
| Total interest-earning assets |
22,174,039 | 1,004,993 | 6.05 | 21,282,861 | 908,959 | 5.71 | ||||||||||||||||||
| Non-interest earning assets: |
||||||||||||||||||||||||
| Cash and due from banks |
168,027 | 208,618 | ||||||||||||||||||||||
| Other non-earning assets |
1,203,113 | 1,167,992 | ||||||||||||||||||||||
| Total non-interest earning assets |
1,371,140 | 1,376,610 | ||||||||||||||||||||||
| Less: Allowance for loan losses |
(153,414 | ) | (148,749 | ) | ||||||||||||||||||||
| Deferred loan fees |
(11,405 | ) | (7,608 | ) | ||||||||||||||||||||
| Total assets |
$ | 23,380,360 | $ | 22,503,114 | ||||||||||||||||||||
| Interest-bearing liabilities: |
||||||||||||||||||||||||
| Interest-bearing demand accounts |
$ | 2,205,108 | $ | 35,012 | 2.12 | % | $ | 2,361,732 | $ | 27,656 | 1.57 | % | ||||||||||||
| Money market accounts |
3,134,940 | 86,546 | 3.69 | 3,152,703 | 59,236 | 2.51 | ||||||||||||||||||
| Savings accounts |
1,099,331 | 11,660 | 1.42 | 1,056,234 | 5,791 | 0.73 | ||||||||||||||||||
| Time deposits |
10,053,062 | 347,408 | 4.62 | 8,728,133 | 234,171 | 3.59 | ||||||||||||||||||
| Total interest-bearing deposits |
16,492,441 | 480,626 | 3.89 | 15,298,802 | 326,854 | 2.86 | ||||||||||||||||||
| Other borrowings |
383,563 | 15,389 | 5.36 | 473,114 | 17,776 | 5.02 | ||||||||||||||||||
| Long-term debt |
119,136 | 5,935 | 6.65 | 119,136 | 4,721 | 5.30 | ||||||||||||||||||
| Total interest-bearing liabilities |
16,995,140 | 501,950 | 3.95 | 15,891,052 | 349,351 | 2.94 | ||||||||||||||||||
| Non-interest bearing liabilities: |
||||||||||||||||||||||||
| Demand deposits |
3,271,913 | 3,741,982 | ||||||||||||||||||||||
| Other liabilities |
318,923 | 283,532 | ||||||||||||||||||||||
| Total equity |
2,794,384 | 2,586,548 | ||||||||||||||||||||||
| Total liabilities and equity |
$ | 23,380,360 | $ | 22,503,114 | ||||||||||||||||||||
| Net interest spread |
2.10 | % | 2.77 | % | ||||||||||||||||||||
| Net interest income |
$ | 503,043 | $ | 559,608 | ||||||||||||||||||||
| Net interest margin |
3.03 | % | 3.52 | % | ||||||||||||||||||||
| (1) Yields and amounts of interest earned include loan fees. Non-accrual loans are included in the average balance. |
||||||||||||||||||||||||
| (2) Calculated by dividing net interest income by average outstanding interest-earning assets. |
||||||||||||||||||||||||
The following table summarizes the changes in interest income and interest expense attributable to changes in volume and changes in interest rates for the nine months ended September 30, 2024 and 2023:
| Taxable-Equivalent Net Interest Income — Changes Due to Volume and Rate(1) |
||||||||||||
| Nine Months Ended September 30, |
||||||||||||
| 2024-2023 |
||||||||||||
| Increase/(Decrease) in |
||||||||||||
| Net Interest Income Due to |
||||||||||||
| Changes in Volume |
Changes in Rate |
Total Change |
||||||||||
| (In thousands) |
||||||||||||
| Interest-earning assets: |
||||||||||||
| Loans |
$ | 41,182 | $ | 47,228 | $ | 88,410 | ||||||
| Investment securities |
2,530 | 6,358 | 8,888 | |||||||||
| Federal Home Loan Bank stock |
48 | 300 | 348 | |||||||||
| Deposits with other banks |
(4,024 | ) | 2,412 | (1,612 | ) | |||||||
| Total changes in interest income |
39,736 | 56,298 | 96,034 | |||||||||
| Interest-bearing liabilities: |
||||||||||||
| Interest-bearing demand accounts |
(1,940 | ) | 9,295 | 7,355 | ||||||||
| Money market accounts |
(336 | ) | 27,647 | 27,311 | ||||||||
| Savings accounts |
246 | 5,623 | 5,869 | |||||||||
| Time deposits |
39,186 | 74,051 | 113,237 | |||||||||
| Other borrowed funds |
(3,525 | ) | 1,138 | (2,387 | ) | |||||||
| Long-term debts |
— | 1,214 | 1,214 | |||||||||
| Total changes in interest expense |
33,631 | 118,968 | 152,599 | |||||||||
| Changes in net interest income |
$ | 6,105 | $ | (62,670 | ) | $ | (56,565 | ) | ||||
| (1) Changes in interest income and interest expense attributable to changes in both volume and rate have been allocated proportionately to changes due to volume and changes due to rate. |
||||||||||||
Balance Sheet Review
Assets
Total assets were $23.27 billion as of September 30, 2024, an increase of $192.9 million, or 0.8%, from $23.08 billion as of December 31, 2023.
Securities Available-for-Sale
Debt securities available-for-sale are measured at fair value and subject to impairment testing. When an available-for-sale debt security is considered impaired, the Company must determine if the decline in fair value has resulted from a credit-related loss or other factors and then, (1) recognize an allowance for credit losses by a charge to earnings for the credit-related component (if any) of the decline in fair value, and (2) recognize in other comprehensive income (loss) any non-credit related components of the fair value change. If the amount of the amortized cost basis expected to be recovered increases in a future period, the valuation reserve would be reduced, but not more than the amount of the current existing reserve for that security.
For available-for-sale (“AFS”) debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value. For AFS debt securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors.
In making this assessment, management considers the extent to which fair value is less than amortized cost, the payment structure of the security, failure of the issuer of the security to make scheduled interest or principal payments, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. Any fair value changes that have not been recorded through an allowance for credit losses is recognized in other comprehensive income.
Losses are charged against the allowance when management believes the uncollectability of an AFS debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met. Changes in the allowance for credit losses are recorded as provision for credit loss expense.
The amortized cost of the Company’s AFS debt securities exclude accrued interest, which is included in “accrued interest income” on the Consolidated Balance Sheets. The Company has made an accounting policy election not to measure an allowance for credit losses for accrued interest receivables on AFS debt securities since the Company timely reverses any previously accrued interest when the debt security remains in default for an extended period. As each AFS debt security has a unique security structure, where the accrual status is clearly determined when certain criteria listed in the terms are met, the Company assesses the default status of each security as defined by the debt security’s specific security structure. At September 30, 2024, no AFS debt securities were in default.
In the current period, management evaluated the securities in an unrealized loss position and determined that their unrealized losses were a result of the level of market interest rates relative to the types of securities and pricing changes caused by shifting supply and demand dynamics and not a result of downgraded credit ratings or other indicators of deterioration of the underlying issuers' ability to repay. Accordingly, we determined the unrealized losses were not credit-related and recognized the unrealized losses in "other comprehensive income/(loss)" in stockholders' equity. Although we periodically sell securities for portfolio management purposes, we do not foresee having to sell any impaired securities strictly for liquidity needs and believe that it is more likely than not we would not be required to sell any impaired securities before recovery of their amortized cost.
Securities available-for-sale represented 6.5% of total assets as of September 30, 2024, compared to 7.0% of total assets as of December 31, 2023. Securities available-for-sale were $1.51 billion as of September 30, 2024, compared to $1.60 billion as of December 31, 2023.
Securities available-for-sale having a carrying value of $18.4 million as of September 30, 2024, and $134.2 million as of December 31, 2023, were pledged to secure public deposits and other borrowings.
Loans
Gross loans held for investment were $19.37 billion at September 30, 2024, a decrease of $174.5 million, or 0.9%, from $19.55 billion at December 31, 2023. The decrease was primarily due to a decrease of $198.1 million, or 6.0%, in commercial loans, a decrease of $115.6 million, or 27.3% in real estate construction loans, and a decrease of $88.2 million, or 1.5% in residential mortgage loans, offset, in part, by an increase of $245.7 million, or 2.5% in commercial real estate loans.
The loan held for investment balances and composition at September 30, 2024, compared to December 31, 2023, are set forth below:
| September 30, 2024 |
% of Gross Loans |
December 31, 2023 |
% of Gross Loans |
% Change |
||||||||||||||||
| (in thousands) |
||||||||||||||||||||
| Commercial loans |
$ | 3,106,994 | 16.0 | % | $ | 3,305,048 | 16.9 | % | (6.0 | %) | ||||||||||
| Construction loans |
307,057 | 1.6 | 422,647 | 2.2 | (27.3 | ) | ||||||||||||||
| Commercial real estate loans |
9,975,272 | 51.5 | 9,729,581 | 49.8 | 2.5 | |||||||||||||||
| Residential mortgage loans and equity lines |
5,977,384 | 30.9 | 6,084,666 | 31.1 | (1.8 | ) | ||||||||||||||
| Installment and other loans |
6,886 | — | 6,198 | — | 11.1 | |||||||||||||||
| Gross loans held for investment |
$ | 19,373,593 | 100 | % | $ | 19,548,140 | 100 | % | (0.9 | %) | ||||||||||
| Allowance for loan losses |
(163,733 | ) | (154,562 | ) | 5.9 | |||||||||||||||
| Unamortized deferred loan fees |
(10,505 | ) | (10,720 | ) | (2.0 | ) | ||||||||||||||
| Total loans held for investment, net |
$ | 19,199,355 | $ | 19,382,858 | (0.9 | %) | ||||||||||||||
Non-performing Assets
Non-performing assets include loans past due 90 days or more and still accruing interest, non-accrual loans, and OREO. Our policy is to place loans on non-accrual status if interest and/or principal is past due 90 days or more, or in cases where management deems the full collection of principal and interest unlikely. After a loan is placed on non-accrual status, any previously accrued but unpaid interest is reversed and charged against current income and subsequent payments received are generally first applied towards the outstanding principal balance of the loan. Depending on the circumstances, management may elect to continue the accrual of interest on certain past due loans if partial payment is received and/or the loan is well collateralized and in the process of collection. The loan is generally returned to accrual status when the borrower has brought the past due principal and interest payments current and, in the opinion of management, the borrower has demonstrated the ability to make future payments of principal and interest as scheduled.
Management reviews the loan portfolio regularly to seek to identify problem loans. During the ordinary course of business, management may become aware of borrowers that may not be able to meet the contractual requirements of their loan agreements. Such loans generally are placed under closer supervision with consideration given to placing the loans on non-accrual status, the need for an additional allowance for loan losses, and (if appropriate) partial or full charge-off.
The ratio of non-performing assets to total assets was 0.81% as of September 30, 2024, compared to 0.40% as of December 31, 2023. Total non-performing assets increased $94.7 million, or 101.5% to $188.0 million at September 30, 2024, compared to $93.3 million at December 31, 2023, primarily due to an increase of $96.1 million, or 144.1%, in non-accrual loans offset, in part, by a decrease of $1.2 million, or 6.0% in other real estate owned, and a decrease of $0.2 million, or 3.2% in accruing loans past due 90 days or more.
As a percentage of gross loans, excluding loans held for sale, plus OREO, our non-performing assets were 0.97% as of September 30, 2024, compared to 0.48% as of December 31, 2023. The non-performing loan portfolio coverage ratio, defined as the allowance for credit losses to non-performing loans, decreased to 102.07% as of September 30, 2024, from 221.58% as of December 31, 2023.
The following table sets forth the changes in non-performing assets as of September 30, 2024, compared to December 31, 2023, and to September 30, 2023:
| September 30, 2024 |
December 31, 2023 |
% Change |
September 30, 2023 |
% Change |
||||||||||||||||
| (in thousands) |
||||||||||||||||||||
| Non-performing assets |
||||||||||||||||||||
| Accruing loans past due 90 days or more |
$ | 6,931 | $ | 7,157 | (3 | ) | $ | 1,924 | 260 | |||||||||||
| Non-accrual loans: |
||||||||||||||||||||
| Construction loans |
— | 7,736 | (100 | ) | 16,992 | — | ||||||||||||||
| Commercial real estate loans |
87,577 | 32,030 | 173 | 32,539 | 169 | |||||||||||||||
| Commercial loans* |
52,074 | 14,404 | 262 | 14,661 | 255 | |||||||||||||||
| Residential mortgage loans |
23,183 | 12,511 | 85 | 13,138 | 76 | |||||||||||||||
| Total non-accrual loans |
$ | 162,834 | $ | 66,681 | 144 | $ | 77,330 | 111 | ||||||||||||
| Total non-performing loans |
169,765 | 73,838 | 130 | 79,254 | 114 | |||||||||||||||
| Other real estate owned |
18,277 | 19,441 | (6 | ) | 14,407 | 27 | ||||||||||||||
| Total non-performing assets |
$ | 188,042 | $ | 93,279 | 102 | $ | 93,661 | 101 | ||||||||||||
| Allowance for loan losses |
$ | 163,733 | $ | 154,562 | 6 | $ | 154,619 | 6 | ||||||||||||
| Allowance for unfunded loan commitments |
$ | 9,542 | $ | 9,053 | 5 | $ | 11,405 | (16 | ) | |||||||||||
| Total gross loans outstanding, at period-end |
$ | 19,373,593 | $ | 19,548,140 | (1 | ) | $ | 19,023,822 | 2 | |||||||||||
| Allowance for loan losses to non-performing loans, at period-end |
96.45 | % | 209.33 | % | 195.09 | % | ||||||||||||||
| Allowance for credit losses to non-performing loans, at period-end |
102.07 | % | 221.58 | % | 209.48 | % | ||||||||||||||
| Allowance for loan losses to gross loans, at period-end |
0.85 | % | 0.79 | % | 0.81 | % | ||||||||||||||
| * At September 30, 2024, commercial non-accrual loans included $19.5 million of loans that are current. |
||||||||||||||||||||
Non-accrual Loans
As of September 30, 2024, total non-accrual loans were $162.8 million, an increase of $96.1 million, or 144.1%, from $66.7 million at December 31, 2023, and an increase of $85.5 million, or 110.5%, from $77.3 million at September 30, 2023. The allowance for the collateral-dependent loans is calculated based on the difference between the outstanding loan balance and the value of the collateral as determined by recent appraisals, sales contracts, or other available market price information, less cost to sell. The allowance for collateral-dependent loans varies from loan to loan based on the collateral coverage of the loan at the time of designation as non-performing. We continue to monitor the collateral coverage of these loans, based on recent appraisals, on a quarterly basis and adjust the allowance accordingly.
The following tables set forth the type of properties securing the non-accrual portfolio loans and the type of businesses the borrowers engaged in as of the dates indicated:
| September 30, 2024 |
December 31, 2023 |
|||||||||||||||
| Real |
Real |
|||||||||||||||
| Estate (1) |
Commercial |
Estate (1) |
Commercial |
|||||||||||||
| (In thousands) |
||||||||||||||||
| Type of Collateral |
||||||||||||||||
| Single/multi-family residence |
$ | 37,253 | $ | 5,987 | $ | 16,400 | $ | 3,363 | ||||||||
| Commercial real estate |
62,658 | 576 | 35,877 | — | ||||||||||||
| Personal property (UCC) |
10,849 | 45,511 | — | 11,041 | ||||||||||||
| Total |
$ | 110,760 | $ | 52,074 | $ | 52,277 | $ | 14,404 | ||||||||
| (1) Real estate includes commercial real estate loans, construction loans, residential mortgage loans, equity lines and installment & other loans. |
||||||||||||||||
| September 30, 2024 |
December 31, 2023 |
|||||||||||||||
| Real |
Real |
|||||||||||||||
| Estate (1) |
Commercial |
Estate (1) |
Commercial |
|||||||||||||
| (In thousands) |
||||||||||||||||
| Type of Business |
||||||||||||||||
| Real estate development |
$ | 33,869 | $ | — | $ | 25,429 | $ | — | ||||||||
| Wholesale/Retail |
44,864 | 45,244 | 14,350 | 13,215 | ||||||||||||
| Food/Restaurant |
58 | 262 | 71 | 361 | ||||||||||||
| Import/Export |
— | 5,926 | — | 828 | ||||||||||||
| Other |
31,969 | 642 | 12,427 | — | ||||||||||||
| Total |
$ | 110,760 | $ | 52,074 | $ | 52,277 | $ | 14,404 | ||||||||
| (1) Real estate includes commercial real estate loans, construction loans, residential mortgage loans, equity lines and installment & other loans. |
||||||||||||||||
For non-accrual loans, the amounts previously charged-off represent 10.0% of the contractual balances for non-accrual loans as of September 30, 2024, and 15.8% as of December 31, 2023. As of September 30, 2024, $110.8 million, or 68.0%, of the $162.8 million of non-accrual loans were secured by real estate compared to $52.3 million, or 78.4%, of the $66.7 million of non-accrual loans that were secured by real estate as of December 31, 2023. The Bank generally seeks to obtain current appraisals, sales contracts, or other available market price information intended to provide updated factors in evaluating potential loss.
The allowance for loan losses to non-performing loans was 96.4% as of September 30, 2024, compared to 209.3% as of December 31, 2023. The decrease was due primarily to an increase in non-accrual loans. Non-accrual loans also include those modified loans to borrowers experiencing financial difficulty that do not qualify for accrual status.
Loan Interest Reserves
In accordance with customary banking practice, construction loans and land development loans generally are originated where interest on the loan is disbursed from pre-established interest reserves included in the total original loan commitment. Our construction loans and land development loans generally include optional renewal terms after the maturity of the initial loan term. New appraisals are obtained prior to extension or renewal of these loans in part to determine the appropriate interest reserve to be established for the new loan term. Loans with interest reserves are generally underwritten to the same criteria, including loan to value and, if applicable, pro forma debt service coverage ratios, as loans without interest reserves. Construction loans with interest reserves are monitored on a periodic basis to gauge progress towards completion. Interest reserves are frozen if it is determined that additional draws would result in a loan to value ratio that exceeds policy maximums based on collateral property type. Our policy limits in this regard are consistent with supervisory limits and range from 50% in the case of land to 85% in the case of one to four family residential construction projects.
As of September 30, 2024, construction loans of $248.2 million were disbursed with pre-established interest reserves of $32.8 million, compared to $220.6 million with pre-established interest reserves of $41.3 million at December 31, 2023. The balance for construction loans with interest reserves that have been extended was $5.5 million with pre-established interest reserves of $0.2 million at September 30, 2024, compared to $6.4 million with pre-established interest reserves of $0.5 million at December 31, 2023. Land loans of $8.8 million were disbursed with pre-established interest reserves of $59 thousand at September 30, 2024, compared to $12.9 million of land loans disbursed with pre-established interest reserves of $0.4 million at December 31, 2023. There were no land loans with interest reserves which have been extended as of September 30, 2024, and December 31, 2023.
At September 30, 2024, and December 31, 2023, the Bank had no loans on non-accrual status with available interest reserves. At September 30, 2024, and December 31, 2023, there were zero non-accrual non-residential construction loans, residential construction loans, or land loans that were originated with pre-established interest reserves. While we typically expect loans with interest reserves to be repaid in full according to the original contractual terms, some loans may require one or more extensions beyond the original maturity before full repayment. Typically, these extensions are required due to construction delays, delays in the sale or lease of the property, or some combination of these two factors.
Loan Concentration
Most of the Company’s business activities are with clients located in the high-density Asian-populated areas of Southern and Northern California; New York City, New York; Dallas and Houston, Texas; Seattle, Washington; Boston, Massachusetts; Chicago, Illinois; Edison, New Jersey; Rockville, Maryland; and Las Vegas, Nevada. The Company also has loan clients in Hong Kong. The Company has no specific industry concentration, and generally our loans are collateralized with real property or other pledged collateral of the borrowers. The Company generally expects loans to be paid off from the operating profits of the borrowers, refinancing by another lender, or through sale by the borrowers of the collateral.
The federal banking regulatory agencies issued final guidance on December 6, 2006, regarding risk management practices for financial institutions with high or increasing concentrations of commercial real estate (“CRE”) loans on their balance sheets. The regulatory guidance reiterates the need for sound internal risk management practices for those institutions that have experienced rapid growth in CRE lending, have notable exposure to specific types of CRE, or are approaching or exceeding the supervisory criteria used to evaluate the CRE concentration risk, but the guidance is not to be construed as a limit for CRE exposure. The supervisory criteria are: (1) total reported loans for construction, land development, and other land represent 100% of the institution’s total risk-based capital, and (2) both total CRE loans represent 300% or more of the institution’s total risk-based capital and the institution’s CRE loan portfolio has increased 50% or more within the last thirty-six months. The Bank’s loans for construction, land development, and other land represented 14% and 19% of the Bank’s total risk-based capital as of September 30, 2024, and December 31, 2023, respectively. Total CRE loans represented 289% of total risk-based capital as of September 30, 2024, and 292% as of December 31, 2023, which were within the Bank’s internal limit of 400%, of total capital.
CRE and Construction Loans ("CREC")
The Company’s total CREC loan portfolio is diversified by property type with an average CREC loan size of $1.9 million and $1.8 million as of September 30, 2024, and December 31, 2023, respectively. The following table summarizes the Company’s total CREC loans by property type as of September 30, 2024, and December 31, 2023:
| As of September 30, 2024 |
As of December 31, 2023 |
|||||||||||||||
| (In thousands) |
Amount |
% |
Amount |
% |
||||||||||||
| Property type: |
||||||||||||||||
| Retail |
$ | 2,382,982 | 23 | % | $ | 2,279,677 | 22 | % | ||||||||
| Multifamily |
2,733,849 | 27 | % | 2,602,430 | 26 | % | ||||||||||
| Office |
1,490,501 | 14 | % | 1,538,701 | 15 | % | ||||||||||
| Warehouse |
1,218,531 | 12 | % | 1,185,121 | 12 | % | ||||||||||
| Industrial and Multi-Use |
622,128 | 6 | % | 557,630 | 5 | % | ||||||||||
| Lodging |
298,032 | 3 | % | 317,111 | 3 | % | ||||||||||
| Construction & Land |
384,475 | 4 | % | 494,495 | 5 | % | ||||||||||
| Other |
1,151,831 | 11 | % | 1,177,063 | 12 | % | ||||||||||
| Total CREC loans |
$ | 10,282,329 | 100 | % | $ | 10,152,228 | 100 | % | ||||||||
The weighted-average loan-to-value (“LTV”) ratio of the total CREC loan portfolio was 49% and 50% as of September 30, 2024, and December 31, 2023, respectively. Approximately 85% and 83% of total CREC loans had an LTV ratio of 60% or lower as of September 30, 2024, and December 31, 2023, respectively.
The following tables provide a summary of the Company’s CREC, multifamily residential, and construction and land loans by geography as of September 30, 2024, and December 31, 2023. The distribution of the total CREC loan portfolio reflects the Company’s geographical footprint, which is primarily concentrated in California:
| As of September 30, 2024 |
||||||||||||||||||||||||||||||||
| (In thousands) |
CRE |
% |
Multifamily Residential |
% |
Construction and Land |
% |
Total |
% |
||||||||||||||||||||||||
| Geographic markets: |
||||||||||||||||||||||||||||||||
| Southern California |
$ | 2,447,809 | $ | 947,126 | $ | 231,338 | $ | 3,626,273 | ||||||||||||||||||||||||
| Northern California |
1,065,746 | 165,297 | 27,902 | 1,258,945 | ||||||||||||||||||||||||||||
| California |
3,513,555 | 49 | % | 1,112,423 | 41 | % | 259,240 | 67 | % | 4,885,218 | 48 | % | ||||||||||||||||||||
| New York |
2,157,025 | 30 | % | 1,210,064 | 44 | % | 91,595 | 24 | % | 3,458,684 | 34 | % | ||||||||||||||||||||
| Texas |
339,896 | 5 | % | 141,086 | 5 | % | — | 0 | % | 480,982 | 5 | % | ||||||||||||||||||||
| Illinois |
249,485 | 3 | % | 46,695 | 2 | % | 244 | 0 | % | 296,424 | 3 | % | ||||||||||||||||||||
| New Jersey |
131,552 | 2 | % | 16,643 | 1 | % | — | 0 | % | 148,195 | 1 | % | ||||||||||||||||||||
| Nevada |
152,740 | 2 | % | 28,929 | 1 | % | 25,066 | 7 | % | 206,735 | 2 | % | ||||||||||||||||||||
| Washington |
88,564 | 1 | % | 144,324 | 5 | % | — | 0 | % | 232,888 | 2 | % | ||||||||||||||||||||
| Other markets |
531,188 | 8 | % | 33,685 | 1 | % | 8,330 | 2 | % | 573,203 | 5 | % | ||||||||||||||||||||
| Total CREC loans |
$ | 7,164,005 | 100 | % | $ | 2,733,849 | 100 | % | $ | 384,475 | 100 | % | $ | 10,282,329 | 100 | % | ||||||||||||||||
| As of December 31, 2023 |
||||||||||||||||||||||||||||||||
| (In thousands) |
CRE |
% |
Multifamily Residential |
% |
Construction and Land |
% |
Total |
% |
||||||||||||||||||||||||
| Geographic markets: |
||||||||||||||||||||||||||||||||
| Southern California |
$ | 2,415,516 | $ | 931,886 | $ | 304,268 | $ | 3,651,670 | ||||||||||||||||||||||||
| Northern California |
1,060,242 | 169,060 | 30,014 | 1,259,316 | ||||||||||||||||||||||||||||
| California |
3,475,758 | 49 | % | 1,100,946 | 42 | % | 334,282 | 68 | % | 4,910,986 | 48 | % | ||||||||||||||||||||
| New York |
2,134,507 | 30 | % | 1,113,554 | 43 | % | 119,849 | 24 | % | 3,367,910 | 33 | % | ||||||||||||||||||||
| Texas |
352,005 | 5 | % | 108,120 | 4 | % | — | 0 | % | 460,125 | 5 | % | ||||||||||||||||||||
| Illinois |
235,440 | 3 | % | 45,822 | 2 | % | 250 | 0 | % | 281,512 | 3 | % | ||||||||||||||||||||
| New Jersey |
125,324 | 2 | % | 16,496 | 1 | % | 7,423 | 1 | % | 149,243 | 2 | % | ||||||||||||||||||||
| Nevada |
156,199 | 2 | % | 31,463 | 1 | % | 22,183 | 4 | % | 209,845 | 2 | % | ||||||||||||||||||||
| Washington |
89,016 | 1 | % | 146,909 | 6 | % | 2,603 | 1 | % | 238,528 | 2 | % | ||||||||||||||||||||
| Other markets |
487,053 | 8 | % | 39,120 | 1 | % | 7,906 | 2 | % | 534,079 | 5 | % | ||||||||||||||||||||
| Total CREC loans |
$ | 7,055,302 | 100 | % | $ | 2,602,430 | 100 | % | $ | 494,496 | 100 | % | $ | 10,152,228 | 100 | % | ||||||||||||||||
There were 48% of total CREC loans concentrated in California as of both September 30, 2024, and December 31, 2023. Changes in California’s economy and real estate values could have a significant impact on the collectability of these loans and the required level of allowance for loan losses.
Commercial Real Estate Loans
The Company focuses on providing financing to experienced real estate investors and developers who have moderate levels of leverage, many of whom are long-time customers of the Bank. CRE loans totaled $7.16 billion as of September 30, 2024, compared with $7.06 billion as of December 31, 2023, and accounted for 37% and 36% of total loans held-for-investment, not including loans held for sale, as of September 30, 2024, and December 31, 2023, respectively. Interest rates on CRE loans may be fixed or variable. As of September 30, 2024, 25% and 37% of our CRE portfolio were variable rate and hybrid loans in their fixed period, respectively. In comparison, as of December 31, 2023, 25% and 40% of our CRE portfolio were variable rate and hybrid loans in their fixed period, respectively. Loans are underwritten with conservative standards for cash flows, debt service coverage and LTV.
Owner-occupied properties comprised 23% of the CRE loans as of both September 30, 2024, and December 31, 2023, respectively. The remainder were non-owner-occupied properties, where 50% or more of the debt service for the loan is typically provided by rental income from an unaffiliated third party.
Commercial-Multifamily Residential Loans
The multifamily residential loan portfolio is largely comprised of loans secured by residential properties with five or more units. Multifamily residential loans totaled $2.73 billion as of September 30, 2024, compared with $2.60 billion as of December 31, 2023, and accounted for 14% and 13% of total loans held-for investment, not including loans held for sale, as of September 30, 2024, and December 31, 2023, respectively. The Company offers a variety of first lien mortgages, including fixed- and variable-rate loans. As of September 30, 2024, 21% and 39% of our multifamily residential loan portfolio were variable rate and hybrid loans in their fixed period, respectively. In comparison, as of December 31, 2023, 20% and 40% of our multifamily residential loan portfolio were variable rate and hybrid loans in their fixed period, respectively.
Commercial-Construction and Land Loans
Construction and land loans provide financing for diversified projects by real estate property type. Construction and land loans totaled $384.5 million as of September 30, 2024, compared with $494.5 million as of December 31, 2023, and accounted for 2% and 3% of total loans held-for-investment, not including loans held for sale, as of September 30, 2024, and December 31, 2023, respectively. Construction loan exposure was made up of $307.1 million in loans outstanding, plus $180.9 million in unfunded commitments as of September 30, 2024, compared with $422.6 million in loans outstanding, plus $280.5 million in unfunded commitments as of December 31, 2023. Land loans totaled $77.4 million as of September 30, 2024, compared with $71.8 million as of December 31, 2023.
Allowance for Credit Losses
The Bank maintains the allowance for credit losses at a level that the Bank’s management considers appropriate to cover the estimated and known risks in the loan portfolio and off-balance sheet unfunded credit commitments. Allowance for credit losses is comprised of the allowance for loan losses and for off-balance sheet unfunded credit commitments. With this risk management objective, the Bank’s management has an established monitoring system that is designed to identify individually evaluated and potential problem loans, and to permit periodic evaluation of impairment and the appropriate level of the allowance for credit losses in a timely manner.
In addition, the Company’s Board of Directors has established a written credit policy that includes a credit review and control system that it believes should be effective in ensuring that the Bank maintains an appropriate allowance for credit losses. The Board of Directors provides oversight for the allowance evaluation process, including quarterly evaluations, and determines whether the allowance is appropriate to absorb losses in the credit portfolio. The determination of the amount of the allowance for credit losses and the provision for credit losses are based on management’s current judgment about the credit quality of the loan portfolio and take into consideration known relevant internal and external factors that affect collectability when determining the appropriate level for the allowance for credit losses. The nature of the process by which the Bank determines the appropriate allowance for credit losses requires the exercise of considerable judgment. Additions or reductions to the allowance for credit losses are made by charges or credits to the provision for credit losses. While management utilizes its business judgment based on the information available, the ultimate appropriateness of the allowance is dependent upon a variety of factors, many of which are beyond the Bank’s control, including but not limited to the performance of the Bank’s loan portfolio, the economy and market conditions, changes in interest rates, and the view of the regulatory authorities toward loan classifications. Identified credit exposures that are determined to be uncollectible are charged against the allowance for credit losses. Recoveries of previously charged off amounts, if any, are credited to the allowance for credit losses. A weakening of the economy or other factors that adversely affect asset quality could result in an increase in the number of delinquencies, bankruptcies, or defaults, and a higher level of non-performing assets, net charge-offs, and provision for credit losses.
The allowance for loan losses was $163.7 million and the allowance for off-balance sheet unfunded credit commitments was $9.5 million at September 30, 2024, which represented the amount estimated by management to be appropriate to absorb expected credit losses inherent in the loan portfolio, including unfunded credit commitments. The allowance for credit losses, which is the sum of the allowances for loan losses and for off-balance sheet unfunded credit commitments, was $173.2 million at September 30, 2024, compared to $163.6 million at December 31, 2023. The allowance for credit losses represented 0.89% of period-end gross loans and 102.07% of non-performing loans at September 30, 2024. The comparable ratios were 0.84% of period-end gross loans and 221.58% of non-performing loans at December 31, 2023.
Critical Accounting Policies and Estimates
Our accounting policies are fundamental to understanding management’s discussion and analysis of results of operations and financial condition. We identify critical policies and estimates as those that require management to make particularly difficult, subjective, and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. We have identified the policy and estimates related to the allowance for credit losses on loans as a critical accounting policy.
Our critical accounting policies and estimates are described in Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the 2023 Form 10-K. For more information, please also see Note 2 to the Company’s unaudited Consolidated Financial Statements.
Expected Credit Losses Estimate for Loans
The allowance for credit losses is the combination of the allowance for loan losses and the reserve for unfunded loan commitments. The allowance for loan losses is reported as a reduction of the amortized cost basis of loans, while the reserve for unfunded loan commitments is included within "Other liabilities" on the Consolidated Balance Sheets. The amortized cost basis of loans does not include interest receivable, which is included in "Other assets" on the Consolidated Balance Sheets. The "Provision for credit losses" on the Consolidated Statement of Operations and Comprehensive Income is a combination of the provision for loan losses and the provision for unfunded loan commitments.
Under the CECL methodology, expected credit losses reflect losses over the remaining contractual life of an asset, considering the effect of prepayments and available information about the collectability of cash flows, including information about relevant historical experience, current conditions, and reasonable and supportable forecasts of future events and circumstances. Thus, the CECL methodology incorporates a broad range of information in developing credit loss estimates. For further information regarding the calculation of the allowance for credit losses on loans held for investment using the CECL methodology, see Note 8 to the unaudited Consolidated Financial Statements contained in "Item 1. Consolidated Financial Statements."
In calculating our allowance for credit losses in the third quarter of 2024, the change in Moody’s forecast of future GDP, unemployment rates, CRE and home price indexes did not result in a significant impact to the allowance for credit losses. The increase in the allowance for credit losses was primarily due to a provision for the delay in getting current appraisals for the new non-accrual loans added during the third quarter. Our methodology and framework along with the 8-quarter reasonable and supportable forecast period and the 4-quarter reversion period have remained consistent since the implementation of CECL. Certain management assumptions are reassessed every quarter based on current expectations for credit losses, while other assumptions are assessed and updated on at least an annual basis.
The use of different economic forecasts, whether based on different scenarios, the use of multiple or single scenarios, or updated economic forecasts and scenarios, can change the outcome of the calculations. In addition to the economic forecasts, there are numerous components and assumptions that are integral to the overall estimation of allowance for credit losses.
The determination of the allowance for credit losses is complex and dependent on numerous models, assumptions, and judgments made by management. Management's current expectation for credit losses as quantified in the allowance for credit losses, considers the impact of assumptions and is reflective of historical credit experience, economic forecasts viewed to be reasonable and supportable, current loan composition, and relative credit risks known as of the balance sheet date.
Under the Company’s CECL methodology, nine portfolio segments with similar risk characteristics are evaluated for expected loss. Six portfolios are modeled using econometric models and three smaller portfolios are evaluated using a simplified loss-rate method that calculates lifetime expected credit losses for the respective pools (simplified approach). The six portfolios subject to econometric modeling include residential mortgages; commercial and industrial loans (“C&I”); construction loans; commercial real estate (“CRE”) for multifamily loans; CRE for owner-occupied loans; and other CRE loans. We estimate the probability of default during the reasonable and supportable forecast period using separate econometric regression models developed to correlate macroeconomic variables, (GDP, unemployment, CRE prices and residential mortgage prices) to historical credit performance for each of the six loan portfolios from the fourth quarter of 2007 through the fourth quarter of 2022. Loss given default rates are computed based on the net charge-offs recognized and then applied to the expected exposure at default of defaulted loans starting with the fourth quarter of 2007 through the fourth quarter of 2022. The probability of default and the loss given default rates are applied to the expected amount at default at the loan level based on contractual scheduled payments and estimated prepayments. The amounts so calculated comprise the quantitative portion of the allowance for credit losses.
The Company’s CECL methodology utilizes an eight-quarter reasonable and supportable (“R&S”) forecast period, and a four-quarter reversion period. Management relies on multiple forecasts, blending them into a single loss estimate. Generally speaking, the blended scenario approach would include the Baseline, the Alternative Scenario 1 – Upside – 10th Percentile and the Alternative Scenario 3 – Downside – 90th Percentile forecasts. After the R&S period, the Company will revert straight-line for the four-quarter reversion period to the long-term loss rates for each of the six portfolios of loans. The contractual term excludes renewals and modifications but includes pre-approved extensions and prepayment assumptions where applicable.
Our allowance for credit losses is sensitive to a number of inputs, including macroeconomic forecast assumptions and credit rating migrations during the period. Our macroeconomic forecasts used in determining the September 30, 2024, allowance for credit losses consisted of three scenarios as provided by an outside forecaster. Because the December 2022 baseline scenario did not forecast a recession in the forecast period, we increased the weighting of the downside scenario to reflect our expectations that a recession in the forecast period was more likely than not. During the third quarter of 2023, in light of the continued strength of the economy, we reduced the weighting of the most severe scenario slightly. The baseline scenario reflects modest ongoing GDP growth and a steady decline in the unemployment rate starting from 4.20% in the fourth quarter of 2024 to 4.03% by the end of the R&S period. The upside scenario reflects higher GDP growth and lower unemployment rates with the stronger economy resulting in inflation and interest rates a bit higher than in the baseline scenario, though the Federal Reserve is projected to continue to cut the Fed funds rate in the fourth quarter of 2024. The downside scenario contemplates a recession and the weakening economy prompts the Fed to lower the fed funds rate below the baseline in the fourth quarter of 2024, resulting in negative GDP growth for three quarters peaking at 3.5% in the first quarter of 2025, rising unemployment that peaks at 8.3% in the fourth quarter of 2025, a decline in CRE prices of 12.4% and a decline in residential home prices of 12.7% during the forecast period. As of September 30, 2024, we placed the same weight on our downside and base scenario, with a small weighting on the upside scenario.
Keeping all other factors constant, we estimate that if we had applied 100% weighting to the downside scenario, the allowance for credit losses as of September 30, 2024, would have been approximately $58.8 million higher. This estimate is intended to reflect the sensitivity of the allowance for credit losses to changes in our scenario weights and is not intended to be indicative of future changes in the allowance for credit losses.
Management believes the allowance for credit losses is appropriate for the current expected credit losses in our loan portfolio and associated unfunded commitments, and the credit risk ratings and inherent loss rates currently assigned are reasonable and appropriate as of the reporting date. It is possible that others, given the same information, may at any point in time reach different conclusions that could result in a significant impact to the Company's financial statements.
The following table sets forth information relating to the allowance for loan losses, charge-offs, recoveries, and the reserve for off-balance sheet credit commitments for the periods indicated:
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| 2024 |
2023 |
2024 |
2023 |
|||||||||||||
| (In thousands) |
||||||||||||||||
| Allowance for loan losses |
||||||||||||||||
| Balance at beginning of period |
$ | 153,403 | $ | 155,109 | $ | 154,562 | $ | 146,485 | ||||||||
| Provision for expected credit losses on loans |
14,532 | 6,121 | 22,511 | 21,581 | ||||||||||||
| Charge-offs: |
||||||||||||||||
| Commercial loans |
(2,666 | ) | (6,254 | ) | (12,862 | ) | (12,517 | ) | ||||||||
| Real estate loans (1) |
(1,805 | ) | (1,221 | ) | (2,059 | ) | (5,341 | ) | ||||||||
| Installment and other loans |
(7 | ) | (8 | ) | (7 | ) | (15 | ) | ||||||||
| Total charge-offs |
(4,478 | ) | (7,483 | ) | (14,928 | ) | (17,873 | ) | ||||||||
| Recoveries: |
||||||||||||||||
| Commercial loans |
88 | 611 | 1,026 | 1,564 | ||||||||||||
| Real estate loans (1) |
187 | 261 | 561 | 2,862 | ||||||||||||
| Installment and other loans |
1 | — | 1 | — | ||||||||||||
| Total recoveries |
276 | 872 | 1,588 | 4,426 | ||||||||||||
| Balance at the end of period |
$ | 163,733 | $ | 154,619 | $ | 163,733 | $ | 154,619 | ||||||||
| Reserve for off-balance sheet credit commitments |
||||||||||||||||
| Balance at beginning of period |
$ | 9,574 | $ | 10,525 | $ | 9,053 | $ | 8,730 | ||||||||
| Provision for expected credit losses on unfunded credit commitments |
(32 | ) | 879 | 489 | $ | 2,674 | ||||||||||
| Balance at the end of period |
$ | 9,542 | $ | 11,404 | $ | 9,542 | $ | 11,404 | ||||||||
| Average loans outstanding during the period |
$ | 19,455,521 | $ | 18,959,444 | $ | 19,464,496 | $ | 18,572,222 | ||||||||
| Total gross loans outstanding, at period-end |
$ | 19,373,593 | $ | 19,023,822 | $ | 19,373,593 | $ | 19,023,822 | ||||||||
| Total non-performing loans, at period-end |
$ | 169,765 | $ | 79,254 | $ | 169,765 | $ | 79,254 | ||||||||
| Ratio of net charge-offs to average loans outstanding during the period(2) |
0.09 | % | 0.14 | % | 0.09 | % | 0.10 | % | ||||||||
| Provision for expected credit losses to average loans outstanding during the period(2) |
0.30 | % | 0.15 | % | 0.16 | % | 0.17 | % | ||||||||
| Allowance for credit losses to non-performing loans, at period-end |
102.07 | % | 209.48 | % | 102.07 | % | 209.48 | % | ||||||||
| Allowance for credit losses to gross loans, at period-end |
0.89 | % | 0.87 | % | 0.89 | % | 0.87 | % | ||||||||
| (1) Real estate loans include commercial real estate loans, residential mortgage loans, and equity lines. |
||||||||||||||||
| (2) Annualized. |
||||||||||||||||
The table set forth below reflects management’s allocation of the allowance for loan losses by loan category and the ratio of each loan category to the average gross loans as of the dates indicated:
| September 30, 2024 |
December 31, 2023 |
|||||||||||||||
| Percentage of |
Percentage of |
|||||||||||||||
| Loans in Each |
Loans in Each |
|||||||||||||||
| Category |
Category |
|||||||||||||||
| to Average |
to Average |
|||||||||||||||
| Amount |
Gross Loans |
Amount |
Gross Loans |
|||||||||||||
| (In thousands) |
||||||||||||||||
| Type of Loan: |
||||||||||||||||
| Commercial loans |
$ | 50,882 | 16.4 | % | $ | 53,791 | 17.1 | % | ||||||||
| Construction loans |
8,510 | 2.0 | 8,180 | 2.8 | ||||||||||||
| Commercial real estate loans |
85,343 | 50.4 | 74,428 | 49.1 | ||||||||||||
| Residential mortgage loans and equity lines |
18,917 | 31.2 | 18,140 | 31.0 | ||||||||||||
| Installment and other loans |
81 | 0.0 | 23 | 0.0 | ||||||||||||
| Total loans |
$ | 163,733 | 100 | % | $ | 154,562 | 100 | % | ||||||||
The allowance allocated to commercial loans decreased $2.9 million, or 5.4%, to $50.9 million at September 30, 2024, from $53.8 million at December 31, 2023. The decrease was mainly due to net charge-offs of $11.8 million.
The allowance allocated to construction loans increased $0.3 million, or 3.7% to $8.5 million at September 30, 2024, from $8.2 million at December 31, 2023.
The allowance allocated to commercial real estate loans increased $10.9 million, or 14.7%, to $85.3 million at September 30, 2024, from $74.4 million at December 31, 2023. The increase is due primarily to an increase in substandard and non-accrual commercial real estate loans.
The allowance allocated for residential mortgage loans and equity lines increased $0.8 million, or 4.4% to $18.9 million at September 30, 2024, compared to $18.1 million at December 31, 2023. The increase is due primarily to an increase in non-accrual residential mortgage loans.
Deposits
Total deposits were $19.94 billion as of September 30, 2024, an increase of $618.5 million, or 3.2% from $19.33 billion as of December 31, 2023.
The Company calculates its uninsured deposits based on the methodologies and assumptions used for regulatory reporting. Total uninsured deposits were $9.18 billion as of September 30, 2024, increased approximately $470.3 million, from $8.71 billion as of December 31, 2023. Excluding $780.2 million in collateralized deposits, the uninsured and uncollateralized deposits of $8.40 billion was 42.1% of total deposits as of September 30, 2024. Our unused borrowing capacity from the Federal Home Loan Bank as of September 30, 2024, was $7.29 billion and unpledged securities at September 30, 2024, was $1.49 billion. These sources of available liquidity, including cash and short-term investments, were more than 100% of uninsured and uncollateralized deposits as of September 30, 2024.
The following table sets forth the deposit mix as of the dates indicated:
| September 30, 2024 |
December 31, 2023 |
|||||||||||||||
| Amount |
Percentage |
Amount |
Percentage |
|||||||||||||
| (In thousands) |
||||||||||||||||
| Deposits |
||||||||||||||||
| Non-interest-bearing demand deposits |
$ | 3,253,823 | 16.3 | % | $ | 3,529,018 | 18.3 | % | ||||||||
| NOW deposits |
2,093,861 | 10.5 | 2,370,685 | 12.3 | ||||||||||||
| Money market deposits |
3,134,460 | 15.7 | 3,049,754 | 15.8 | ||||||||||||
| Savings deposits |
1,215,974 | 6.1 | 1,039,203 | 5.4 | ||||||||||||
| Time deposits |
10,245,823 | 51.4 | 9,336,787 | 48.2 | ||||||||||||
| Total deposits |
$ | 19,943,941 | 100.0 | % | $ | 19,325,447 | 100.0 | % | ||||||||
The following table sets forth the maturity distribution of time deposits at September 30, 2024:
| At September 30, 2024 |
||||||||||||
| Time Deposits -under $250,000 |
Time Deposits -$250,000 and over |
Total Time Deposits |
||||||||||
| (In thousands) |
||||||||||||
| Three months or less |
$ | 1,496,559 | $ | 2,335,071 | $ | 3,831,630 | ||||||
| Over three to six months |
1,963,660 | 2,274,316 | 4,237,976 | |||||||||
| Over six to twelve months |
860,525 | 1,292,153 | 2,152,678 | |||||||||
| Over twelve months |
15,740 | 7,799 | 23,539 | |||||||||
| Total |
$ | 4,336,484 | $ | 5,909,339 | $ | 10,245,823 | ||||||
| Percent of total deposits |
21.7 | % | 29.6 | % | 51.4 | % | ||||||
FDIC Special Assessment and Uninsured Deposits
In November 2023, the FDIC approved a final rule that would impose a special deposit insurance assessment on banks in order to recover losses that the FDIC's Deposit Insurance Fund ("DIF") has incurred in the receiverships of failed institutions. Under the final rule, the FDIC would impose the special assessment for eight quarterly assessment periods beginning with the first quarter of 2024 assessment period, subject to adjustment if the total amount collected is insufficient to cover the DIF's cost. Each quarterly special assessment would be equal to 3.36 basis points (0.0336%) of a bank's estimated uninsured deposits that exceeded $5 billion as of December 31, 2022. The Company recognized $11.3 million related to the special assessment in the fourth quarter of 2023. Based on updated information received from the FDIC about the estimated losses for the failed institutions, the Company recognized an additional $2.9 million of the special assessment in the first quarter ended March 31, 2024. Depending on future adjustments to the DIF's estimated loss, the FDIC has retained the ability to cease collection early, extend the special assessment collection period, or impose a one-time final shortfall assessment.
Off-Balance-Sheet Arrangements and Contractual Obligations
The following table summarizes the Company’s contractual obligations to make future payments as of September 30, 2024. Payments for deposits and borrowings do not include interest. Payments related to leases are based on actual payments specified in the underlying contracts:
| Payment Due by Period |
||||||||||||||||||||
| More than |
3 years or |
|||||||||||||||||||
| 1 year but |
more but |
|||||||||||||||||||
| 1 year |
less than |
less than |
5 years |
|||||||||||||||||
| or less |
3 years |
5 years |
or more |
Total |
||||||||||||||||
| (In thousands) |
||||||||||||||||||||
| Contractual obligations: |
||||||||||||||||||||
| Deposits with stated maturity dates |
$ | 10,222,284 | $ | 18,887 | $ | — | $ | 4,652 | $ | 10,245,823 | ||||||||||
| Advances from the Federal Home Loan Bank |
60,000 | — | — | — | 60,000 | |||||||||||||||
| Other borrowings |
— | — | — | 17,783 | 17,783 | |||||||||||||||
| Long-term debt |
— | — | — | 119,136 | 119,136 | |||||||||||||||
| Operating leases |
10,652 | 15,872 | 8,340 | 821 | 35,685 | |||||||||||||||
| Total contractual obligations and other commitments |
$ | 10,292,936 | $ | 34,759 | $ | 8,340 | $ | 142,392 | $ | 10,478,427 | ||||||||||
In the normal course of business, we enter into various transactions, which, in accordance with GAAP, are not included in our Consolidated Balance Sheets. We enter into these transactions to meet the financing needs of our clients. These transactions include commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the Consolidated Balance Sheets.
Loan Commitments - We enter into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Substantially all of our commitments to extend credit are contingent upon clients maintaining specific credit standards at the time of loan funding. We minimize our exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures. Management assesses the credit risk associated with certain commitments to extend credit in determining the level of the allowance for credit losses.
Standby Letters of Credit - Standby letters of credit are written conditional commitments issued by us to secure the obligations of a client to a third party. In the event the client does not perform in accordance with the terms of an agreement with the third party, we would be required to fund the commitment. The maximum potential amount of future payments we could be required to make is represented by the contractual amount of the commitment. If the commitment is funded, we would be entitled to seek reimbursement from the client. Our policies generally require that standby letter of credit arrangements contain security and debt covenants similar to those contained in loan agreements.
Capital Resources
Total equity was $2.83 billion as of September 30, 2024, an increase of $93.7 million, from $2.74 billion as of December 31, 2023, primarily due to net income of $205.8 million, other comprehensive income of $19.0 million, stock-based compensation of $4.1 million, proceeds from dividend reinvestment of $2.2 million, and stock issued to directors of $850 thousand, offset by, common stock cash dividends of $73.8 million, purchase of treasury stock of $60.6 million, and shares withheld related to net share settlement of RSUs of $3.7 million.
The following table summarizes changes in total equity for the nine months ended September 30, 2024:
| Nine Months Ended |
||||
| September 30, 2024 |
||||
| (In thousands) |
||||
| Net income |
$ | 205,778 | ||
| Proceeds from shares issued through the Dividend Reinvestment Plan |
2,217 | |||
| Shares withheld related to net share settlement of RSUs |
(3,722 | ) | ||
| Purchase of treasury stock |
(60,610 | ) | ||
| Stock-based compensation |
4,065 | |||
| Cash dividends paid to common stockholders |
(73,804 | ) | ||
| Restricted stock units vested |
1 | |||
| Stock issued to directors |
850 | |||
| Other comprehensive income |
18,963 | |||
| Net increase in total equity |
$ | 93,738 | ||
Capital Adequacy Review
Management seeks to retain our capital at a level sufficient to support future growth, protect depositors and stockholders, and comply with various regulatory requirements.
The following tables set forth actual and required capital ratios as of September 30, 2024, and December 31, 2023, for Bancorp and the Bank under the Basel III Capital Rules. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules. See the 2023 Form 10-K for a more detailed discussion of the Basel III Capital Rules.
| Actual |
Minimum Capital Required - Basel III | Required to be Considered Well Capitalized | ||||||||||||||||||||||
| Capital Amount |
Ratio |
Capital Amount |
Ratio |
Capital Amount |
Ratio |
|||||||||||||||||||
| (In thousands) |
||||||||||||||||||||||||
| September 30, 2024 |
||||||||||||||||||||||||
| Common Equity Tier 1 to Risk-Weighted Assets |
||||||||||||||||||||||||
| Cathay General Bancorp |
$ | 2,491,861 | 13.32 | $ | 1,309,305 | 7.00 | $ | 1,215,784 | 6.50 | |||||||||||||||
| Cathay Bank |
2,553,363 | 13.66 | 1,308,109 | 7.00 | 1,214,673 | 6.50 | ||||||||||||||||||
| Tier 1 Capital to Risk-Weighted Assets |
||||||||||||||||||||||||
| Cathay General Bancorp |
2,491,861 | 13.32 | 1,589,871 | 8.50 | 1,496,349 | 8.00 | ||||||||||||||||||
| Cathay Bank |
2,553,363 | 13.66 | 1,588,418 | 8.50 | 1,494,982 | 8.00 | ||||||||||||||||||
| Total Capital to Risk-Weighted Assets |
||||||||||||||||||||||||
| Cathay General Bancorp |
2,780,636 | 14.87 | 1,963,958 | 10.50 | 1,870,436 | 10.00 | ||||||||||||||||||
| Cathay Bank |
2,726,638 | 14.59 | 1,962,163 | 10.50 | 1,868,727 | 10.00 | ||||||||||||||||||
| Leverage Ratio |
||||||||||||||||||||||||
| Cathay General Bancorp |
2,491,861 | 10.82 | 921,152 | 4.00 | 1,151,440 | 5.00 | ||||||||||||||||||
| Cathay Bank |
2,553,363 | 11.10 | 920,380 | 4.00 | 1,150,475 | 5.00 | ||||||||||||||||||
| Actual |
Minimum Capital Required - Basel III | Required to be Considered Well Capitalized | ||||||||||||||||||||||
| Capital Amount |
Ratio |
Capital Amount |
Ratio |
Capital Amount |
Ratio |
|||||||||||||||||||
| (In thousands) |
||||||||||||||||||||||||
| December 31, 2023 |
||||||||||||||||||||||||
| Common Equity Tier 1 to Risk-Weighted Assets |
||||||||||||||||||||||||
| Cathay General Bancorp |
$ | 2,430,773 | 12.84 | $ | 1,325,277 | 7.00 | $ | 1,230,615 | 6.50 | |||||||||||||||
| Cathay Bank |
2,501,439 | 13.23 | 1,323,846 | 7.00 | 1,229,286 | 6.50 | ||||||||||||||||||
| Tier 1 Capital to Risk-Weighted Assets |
||||||||||||||||||||||||
| Cathay General Bancorp |
2,430,773 | 12.84 | 1,609,265 | 8.50 | 1,514,602 | 8.00 | ||||||||||||||||||
| Cathay Bank |
2,501,439 | 13.23 | 1,607,527 | 8.50 | 1,512,967 | 8.00 | ||||||||||||||||||
| Total Capital to Risk-Weighted Assets |
||||||||||||||||||||||||
| Cathay General Bancorp |
2,709,888 | 14.31 | 1,987,916 | 10.50 | 1,893,253 | 10.00 | ||||||||||||||||||
| Cathay Bank |
2,665,054 | 14.09 | 1,985,769 | 10.50 | 1,891,209 | 10.00 | ||||||||||||||||||
| Leverage Ratio |
||||||||||||||||||||||||
| Cathay General Bancorp |
2,430,773 | 10.55 | 921,473 | 4.00 | 1,151,841 | 5.00 | ||||||||||||||||||
| Cathay Bank |
2,501,439 | 10.87 | 920,670 | 4.00 | 1,150,838 | 5.00 | ||||||||||||||||||
As of September 30, 2024, capital levels at Bancorp and the Bank exceed all capital adequacy requirements under the fully phased-in Basel III Capital Rules. Based on the ratios presented above, capital levels as of September 30, 2024, at Bancorp and the Bank exceed the minimum levels necessary to be considered “well capitalized.”
Dividend Policy
Holders of common stock are entitled to dividends as and when declared by our Board of Directors out of funds legally available for the payment of dividends. Although we have historically paid cash dividends on our common stock, we are not required to do so. We increased the common stock dividend from $0.24 per share in the fourth quarter of 2017, to $0.31 per share in the fourth quarter of 2018, to $0.34 per share in the fourth quarter of 2021. The amount of future dividends, if any, will depend on our earnings, financial condition, capital requirements and other factors, and will be determined by our Board of Directors. The terms of our Junior Subordinated Notes also limit our ability to pay dividends. If we are not current in our payment of dividends on our Junior Subordinated Notes, we may not pay dividends on our common stock.
The Company declared a cash dividend of $0.34 per share on 71,559,973 shares outstanding on August 15, 2024, for distribution to holders of our common stock on August 29, 2024. The Company paid total cash dividends of $24.3 million in the third quarter of 2024 and $73.8 million for the nine months ended September 30, 2024.
Liquidity
Liquidity is our ability to maintain sufficient cash flow to meet maturing financial obligations and client credit needs, and to take advantage of investment opportunities as they are presented in the marketplace. Our principal sources of liquidity are growth in deposits, proceeds from the maturity or sale of securities and other financial instruments, repayments from securities and loans, Federal funds purchased, securities sold under agreements to repurchase, and advances from the FHLB. As of September 30, 2024, our average monthly liquidity ratio (defined as net cash plus short-term and marketable securities to net deposits and short-term liabilities) was 14.6% compared to 13.7% as of December 31, 2023.
The Bank is a shareholder of the FHLB, which enables the Bank to have access to lower-cost FHLB financing when necessary. At September 30, 2024, the Bank had an approved credit line with the FHLB of San Francisco totaling $8.13 billion. Total advances from the FHLB of San Francisco were $60.0 million and standby letters of credit issued by the FHLB on the Company’s behalf were $965.0 million as of September 30, 2024. These borrowings bear fixed rates and are secured by the Bank’s loans. See Note 10 to the Consolidated Financial Statements. At September 30, 2024, the Bank pledged $500.0 million of its commercial loans and $1.1 million of securities to the Federal Reserve Bank’s Discount Window under the Borrower-in-Custody program. The Bank had borrowing capacity of $438.2 million from the Federal Reserve Bank Discount Window at September 30, 2024.
Liquidity can also be provided through the sale of liquid assets, which may consist of federal funds sold, securities purchased under agreements to resell, and securities available-for-sale. At September 30, 2024, investment securities totaled $1.51 billion, with $18.4 million pledged as collateral for borrowings and other commitments. The remaining balance was available as additional liquidity or to be pledged as collateral for additional borrowings.
Approximately 99.8% of our time deposits mature within one year or less as of September 30, 2024. Management anticipates that these deposits will reprice lower as a result of the expected decreases in the target Fed funds rate expected in 2024. Management anticipates that there may be some outflow of these deposits upon maturity due to the keen competition in the Bank’s marketplace. However, based on our historical runoff experience, we expect the outflow will not be significant and can be replenished through our normal growth in deposits. As of September 30, 2024, management believes all the above-mentioned sources will provide adequate liquidity during the next twelve months for the Bank to meet its operating needs.
The business activities of Bancorp consist primarily of the operation of the Bank and limited activities in other investments. The Bank paid dividends to Bancorp totaling $156.0 million and $107.0 million during the third quarter of 2024 and 2023, respectively.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We use a net interest income simulation model to measure the extent of the differences in the behavior of the lending and funding rates to changing interest rates, to project future earnings or market values under alternative interest rate scenarios. Interest rate risk arises primarily through the Company’s traditional business activities of extending loans and accepting deposits. Many factors, including but not limited to economic, market and financial conditions, movements in interest rates, and consumer preferences, affect the spread between interest earned on assets and interest paid on liabilities. The net interest income simulation model is designed to measure the volatility of net interest income and net portfolio value, defined as net present value of assets and liabilities, under immediate rising or falling interest rate scenarios in 100 basis point increments.
Although the modeling can be helpful in managing interest rate risk, it does require significant assumptions for the projection of loan prepayment rates on mortgage related assets, loan volumes and pricing, and deposit and borrowing volume and pricing, that might prove inaccurate. Because these assumptions are inherently uncertain, the model cannot precisely estimate net interest income, or precisely predict the effect of higher or lower interest rates on net interest income. Actual results will differ from simulated results due to the timing, magnitude, and frequency of interest rate changes, the differences between actual experience and the assumed volume, changes in market conditions, and management strategies, among other factors. The Company monitors its interest rate sensitivity and seeks to reduce the risk of a significant decrease in net interest income caused by a change in interest rates.
We have established a tolerance level in our policy to define and limit net interest income volatility to a change of plus or minus 5% when the hypothetical rate change is plus or minus 200 basis points. When the net interest rate simulation projects that our tolerance level will be met, or exceeded, we seek corrective action after considering, among other things, market conditions, client reaction, and the estimated impact on profitability. The Company’s simulation model also projects the net economic value of our portfolio of assets and liabilities. We have established a tolerance level in our policy to limit the loss in the net economic value of our portfolio of assets and liabilities to zero when the hypothetical rate change is plus or minus 200 basis points.
The table below shows the estimated impact of changes in interest rates on net interest income and market value of equity as of September 30, 2024:
| Net Interest |
Market Value |
|||||||
| Income |
of Equity |
|||||||
| Change in Interest Rate (Basis Points) |
Volatility (1) |
Volatility (2) |
||||||
| +200 | 17.6 | -5.8 | ||||||
| +100 | 8.8 | -2.9 | ||||||
| -100 | -5.2 | 3.8 | ||||||
| -200 | -10.6 | 9.0 | ||||||
| (1) The percentage change in this column represents net interest income of the Company for 12 months in a stable interest rate environment versus the net interest income in the various rate scenarios. Much of the increase in net interest income is due to the lag in the repricing of certificates of deposits which mature throughout the twelve month period. | ||||||||
| (2) The percentage change in this column represents the net portfolio value of the Company in a stable interest rate environment versus the net portfolio value in the various rate scenarios. | ||||||||
Item 4. CONTROLS AND PROCEDURES.
The Company’s principal executive officer and principal financial officer have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this quarterly report. Based upon their evaluation, the principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
There has not been any change in our internal control over financial reporting that occurred during the third quarter of 2024 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
From time to time, Bancorp and its subsidiaries are parties to litigation that arises in the ordinary course of business or otherwise is incidental to various aspects of its operations. Based upon information available to the Company and its review of any such litigation with counsel, management presently believes that the liability relating to such litigation, if any, would not be expected to have a material adverse impact on the Company’s consolidated financial condition, results of operations or liquidity taken as a whole. The outcome of litigation and other legal and regulatory matters is inherently uncertain, however, and it is possible that one or more of the legal matters currently pending or threatened against the Company could have a material adverse effect on the Company’s consolidated financial condition, results of operations or liquidity taken as a whole.
The Company is not aware of any material change to the risk factors as previously disclosed in Part I, Item 1A, of the Company’s 2023 Form 10-K for the year ended December 31, 2023. In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors disclosed in Part I, Item 1A, of the Company’s 2023 Form 10-K for the year ended December 31, 2023, which could materially and adversely affect the Company’s business, financial condition, results of operations and stock price. The risk factors disclosed in the 2023 Form 10-K are not the only risks facing the Company. Additional risks and uncertainties, including those not presently known to the Company or that the Company presently believes not to be material, could also materially and adversely affect the Company’s business, financial condition, and results of operations and stock price.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
| Issuer Purchases of Equity Securities |
||||||||||||||||
| Period |
(a) Total Number of Shares (or Units) Purchased |
(b) Average Price Paid per Share (or Unit) |
(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs |
(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs |
||||||||||||
| (July 1, 2024 - July 31, 2024) |
0 | $ | 0.00 | 0 | $ | 0 | ||||||||||
| (August 1, 2024 - August 31, 2024) |
670,460 | $ | 41.75 | 670,460 | $ | 71,908,056 | ||||||||||
| (September 1, 2024 - September 30, 2024) |
162,000 | $ | 43.07 | 162,000 | $ | 64,930,708 | ||||||||||
| Total |
832,460 | $ | 42.00 | 832,460 | $ | 64,930,708 | ||||||||||
For a discussion of limitations on the payment of dividends, see “Dividend Policy” and “Liquidity” under Part I—Item 2— “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Item 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
Item 4. MINE SAFETY DISCLOSURES.
Not applicable.
| Exhibit 3.1 |
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| Exhibit 3.1.1 |
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| Exhibit 3.2 |
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| Exhibit 3.3 |
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| Exhibit 3.4 |
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| Exhibit 31.1+ |
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| Exhibit 31.2+ |
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| Exhibit 32.1++ |
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| Exhibit 32.2++ |
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| Exhibit 101.INS |
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document* |
| Exhibit 101.SCH |
Inline XBRL Taxonomy Extension Schema Document* |
| Exhibit 101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase Document* |
| Exhibit 101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase Document* |
| Exhibit 101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase Document* |
| Exhibit 101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase Document* |
| Exhibit 104 |
Cover Page Interactive Data File – the cover page XBRL tags are embedded within the Inline XBRL document* |
____________________
| + |
Filed herewith. |
| ++ |
Furnished herewith. |
| * | Filed electronically herewith. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Cathay General Bancorp | ||
| (Registrant) | ||
| Date: November 8, 2024 | ||
| /s/ Chang M. Liu |
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| Chang M. Liu |
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| President and Chief Executive Officer |
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| Date: November 8, 2024 | ||
| /s/ Heng W. Chen |
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| Heng W. Chen |
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| Executive Vice President and |
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| Chief Financial Officer |
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