NOTES TO CONDENSED 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”), ten limited partnerships investing in affordable housing investments in which the Bank is the sole limited partner, and GBC Venture Capital, Inc. Bancorp also owns 100% of the common stock of five statutory business trusts created for the purpose of issuing capital securities. The Bank was founded in 1962 and offers a wide range of financial services. As of March 31, 2021, the Bank operates 25 branches in Southern California, 13 branches in Northern California, 10 branches in New York State, four in Washington State, three in Illinois, two in Texas, one in Maryland, Massachusetts, Nevada, and New Jersey, one in Hong Kong, and a representative office in Taipei, Beijing, and Shanghai. Deposit accounts at the Hong Kong branch are not insured by the Federal Deposit Insurance Corporation (the “FDIC”).
2. Basis of Presentation and Summary of Significant Accounting Policies
The accompanying unaudited Condensed 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, 2021. 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, 2020.
The preparation of the Condensed 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 Condensed Consolidated Financial Statements. Actual results could differ from those estimates. The Company expects that the most significant estimates subject to change are the allowance for loan losses.
Summary of Significant Accounting Policies
Securities Available for Sale
With the exception of the updated accounting policies listed below, the accompanying unaudited interim consolidated financial statements have been prepared on a consistent basis with the accounting policies described in Consolidated Financial Statements and Supplementary Data - Note 1 - “Summary of Significant Accounting Policies” under Part II, Item 8 of our 2020 Form 10K.
Prior to January 1, 2021, debt securities available-for-sale were measured at fair value and declines in the fair value were reviewed to determine whether the impairment was other-than-temporary. If we did not expect to recover the entire amortized cost basis of the security, then an other-than-temporary impairment (“OTTI”) was considered to have occurred. The cost basis of the security was written down to its estimated fair value and the amount of the write-down was recognized through a charge to earnings. If the amount of the amortized cost basis expected to be recovered increased in a future period, the cost basis of the security was not increased but rather recognized prospectively through interest income.
Effective January 1, 2021, upon the adoption of ASU 2016-13, 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 ("ACL") 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.
Interest income includes amortization of premiums and discounts as an adjustment of yield on a level-yield basis. Premiums on callable debt securities are amortized to their earliest call date. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.
A debt security is placed on nonaccrual status at the time any principal or interest payments become delinquent by 90 days or greater. Interest accrued but not received for a security placed on non-accrual is reversed against interest income. No interest was reversed against interest income during the period.
Allowance for Credit Losses on Available for Sale Securities
For available-for-sale (“AFS”) debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value with the credit component of the unrealized loss of the impaired AFS debt security recognized as an allowance for credit losses, and a corresponding provision for credit losses on the consolidated statement of income and the non-credit component is recognized in other comprehensive income (loss), net of applicable taxes. 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 has not been recorded through an allowance for credit losses is recognized in other comprehensive income.
Changes in the allowance for credit losses are recorded as provision for credit loss expense. Losses are charged against the allowance when management believes the uncollectability of an available-for-sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met.
The amortized cost of the Company’s AFS debt securities excludes accrued interest, which is included in "accrued interest receivable" on the Condensed 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.
Trading securities are reported at fair value, with unrealized gains or losses included in income.
Loans Held for Investment.
Loans receivable that the Company has the intent and ability to hold for the foreseeable future or until maturity are stated at their outstanding principal, reduced by an allowance for loan losses and net of deferred loan fees or costs on originated loans and unamortized premiums or discounts on purchased loans. Nonrefundable fees and direct costs associated with the origination or purchase of loans are deferred and netted against outstanding loan balances. The deferred net loan fees and costs are recognized in interest income as an adjustment to yield over the loan term using the effective interest method or straight-line method. Discounts or premiums on purchased loans are accreted or amortized to interest income using the effective interest method or straight-line method over the remaining period to contractual maturity. Interest on loans is calculated using the simple-interest method on daily balances of the principal amounts outstanding based on an actual or 360-day basis.
Generally, loans are placed on nonaccrual status when they become 90 days past due. Loans are considered past due when contractually required principal or interest payments have not been made on the due dates. Loans are also placed on nonaccrual status when management believes, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that full collection of principal or interest becomes uncertain, regardless of the length of past due status. Once a loan is placed on nonaccrual status, interest accrual is discontinued, and all unpaid accrued interest is reversed against interest income. As a result, accrued interest receivable does not carry a credit loss reserve. Interest payments received on nonaccrual loans are reflected as a reduction of principal and not as interest income. A loan is returned to accrual status when the borrower has demonstrated a satisfactory payment trend subject to management’s assessment of the borrower’s ability to repay the loan.
Loans Held for Sale
Held for sale loans are carried at the lower of aggregate cost or fair value. Gains and losses are recorded in non-interest income based on the difference between sales proceeds, net of sales commissions, and carrying value. When a determination is made at the time of commitment to originate or purchase loans as held-for-investment, it is the Company’s intent to hold these loans to maturity or for the “foreseeable future,” subject to periodic review under the Company’s management evaluation processes, including asset/liability management. When the Company subsequently changes its intent to hold certain loans, the loans are transferred from the loans held-for-investment portfolio at amortized cost to the loans held-for-sale portfolio at lower of aggregate cost or fair value and the existing ACL on the loans transferred is reversed.
Allowance for Credit Losses on Loans Held for Investment.
Effective January 1, 2021, and upon the adoption of ASU 2016-13, the Company replaced the incurred loss accounting approach with the current expected credit loss (“CECL”) approach for financial instruments measured at amortized cost and other commitments to extend credit. CECL requires the immediate recognition of estimated credit losses expected to occur over the estimated remaining life of the asset. The forward-looking concept of CECL requires loss estimates to consider historical experience, current conditions and reasonable and supportable economic forecasts of future events and circumstances.
The ACL on loans held for investment is the combination of the allowance for loan losses and the reserve for unfunded loan commitments. The allowance for loan losses is reported as a reduction of the amortized cost basis of loans, while the reserve for unfunded loan commitments is included within "other liabilities" on the Condensed 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 Condensed Consolidated Balance Sheets. The "Provision for credit losses" on the Condensed 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 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. 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. When loans do not share similar risk characteristics, the Company would evaluate the loan for expected credit losses on an individual basis. 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 three different loan valuation methods: (1) the present value of the expected future cash flows of the individually evaluated loan discounted at the loan’s original effective interest rate, (2) the observable market price of the individually evaluated loan or (3) if the Company intends to foreclose on the collateral securing the loan, the fair value of the collateral of a collateral-dependent loan less costs of sale. For loans that are not collateral-dependent, the Company will use the present value of future cash flows or the market value of the loan.
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 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, commercial real estate prices and residential mortgage prices, to historical credit performance for each of the six loan portfolios from 2009 to 2019. Loss given default rates would be computed based on the net charge-offs recognized divided by the expected exposure at default of defaulted loans starting with the first quarter of 2009 to 2019. 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 ACL. Both the econometric regression models and the expected exposure of default will be updated annually.
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 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 either of the following applies: (i) management has a reasonable expectation at the reporting date that a troubled debt restructuring will be executed with an individual borrower or (ii) 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 (“HELOC’s”) and cash-secured loans, which were 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.
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 experience with residential mortgage loans made to non-US residents, and the higher risk characteristics of purchased syndicated loans. Current and forecasted economic trends and underlying market values for collateral dependent loans are considered to be included within the econometric models described above.
The 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 reasonable and supportable forecast and reversion periods; estimating expected utilization rates on unfunded loan commitments; and assessing relevant and appropriate qualitative factors. In addition, the CECL methodology is dependent on economic forecasts which are inherently imprecise and will change from period to period. Although the allowance for credit losses is considered 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 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.
Individually Evaluated Loans
Loans that do not share similar risk characteristics with other financial assets are individually evaluated for impairment and excluded from loan pools used within the collective evaluation of estimated credit losses. We defined the following criteria for what constitutes a “default”, which results in a loan no longer sharing similar risk characteristics with other loans, and therefore requires an individual evaluation for expected credit losses. The criteria for default may include any one of the following: on nonaccrual status, modified under a troubled debt restructuring, or payment delinquency of 90 days or more.
Impaired Loans
Prior to January 1, 2021, a loan or lease was considered impaired when it was probable that we would be unable to collect all amounts due according to the contractual terms of the loan or lease agreement. The measurement of impairment may be based on (1) the present value of the expected future cash flows of the impaired loan discounted at the loan’s original effective interest rate, (2) the observable market price of the impaired loan or (3) the fair value of the collateral of a collateral-dependent loan. The amount by which the recorded investment in the loan exceeds the measure of the impaired loan is recognized by recording a valuation allowance with a corresponding charge to the provision for loan losses. When loans are placed on an impaired status, previously accrued but unpaid interest is reversed against current income and subsequent payments received are generally first applied toward the outstanding principal balance of the loan.
Troubled Debt Restructured Loan (“TDR”)
A TDR is a formal modification of the terms of a loan when the lender, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower. The concessions may be granted in various forms, including reduction in the stated interest rate, reduction in the loan balance or accrued interest, or extension of the maturity date. Although these loan modifications are considered TDRs, TDR loans that have, pursuant to the Bank’s policy, performed under the restructured terms and have demonstrated sustained performance under the modified terms for six months are returned to accrual status. The sustained performance considered by management pursuant to its policy includes the periods prior to the modification if the prior performance met or exceeded the modified terms. This would include cash paid by the borrower prior to the restructure to set up interest reserves. Loans classified as TDRs are reported as individually evaluated loans.
The allowance for credit loss on a TDR is measured using the same method as all other loans held for investment, except when the value of a concession cannot be measured using a method other than the discounted cash flow method. When the value of a concession is measured using the discounted cash flow method, the allowance for credit loss is determined by discounting the expected future cash flows at the original interest rate of the loan.
The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) as extended by the Consolidated Appropriation Act, 2021 ("CAA") permits financial institutions to suspend requirements under GAAP for loan modifications to borrowers affected by COVID-19 and is intended to provide interpretive guidance as to conditions that would constitute a short-term modification that would not meet the definition of a TDR. Such conditions include the following (i) the loan modification is made between March 1, 2020 and the earlier of January 1, 2022 or 60 days after the end of the coronavirus emergency declaration and (ii) the applicable loan was not more than 30 days past due as of December 31, 2019.
12
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 Condensed 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 three-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 Condensed Consolidated Balance Sheets. Changes in the allowance for unfunded commitments are included in the provision for credit losses.
3. Recent Accounting Pronouncements
Accounting Standards Adopted in 2021
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This update requires an entity to use a broader range of R&S forecasts, in addition to historical experience and current conditions, to develop an expected credit loss estimate, referred to as the CECL model, for financial assets and net investments that are not accounted for at fair value through net income. Credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses to the amount by which fair value is below amortized cost.
The FASB issued additional ASUs containing clarifying guidance, transition relief provisions and minor updates to the original ASU. These include ASU 2018-19 (issued November 2018), ASU 2019-04 (issued April 2019), ASU 2019-05 (issued May 2019), ASU 2019-10 (issued November 2019), ASU 2019-11 (issued November 2019), ASU 2020-02 (issued February 2020) and ASU 2020-03 (issued March 2020). ASU 2016-13 and subsequent ASUs are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. This amendment is required to be adopted using a modified retrospective approach with a cumulative-effect adjustment to beginning retained earnings, as of the beginning of the first reporting period in which the guidance is effective.
Effective January 1, 2021, the Company adopted ASU 2016-13 and the related amendments to ASC Topic 326, Financial Instruments - Credit Losses, to replace the incurred loss accounting approach with a CECL approach for financial instruments measured at amortized cost and other commitments to extend credit. The new standard is generally intended to require earlier recognition of credit losses. While the standard changes the measurement of the allowance for credit losses, it does not change the credit risk of our lending portfolios or the ultimate losses in those portfolios.
Under the CECL approach, the standard requires immediate recognition of estimated credit losses expected to occur over the estimated remaining life of the asset. The forward-looking concept of CECL requires loss estimates to consider historical experience, current conditions and reasonable and supportable forecasts. The standard modifies the other-than-temporary impairment model for available-for-sale debt securities to require entities to record an allowance when recognizing credit losses for available-for-sale securities, rather than reducing the amortized cost of the securities by direct write-offs.
The Company adopted the new standard using the modified retrospective approach and recognized a cumulative effect adjustment to decrease retained earnings by $0.8 million, net of taxes, and increase the allowance for credit losses by $0.6 million and the reserve for unfunded loan commitments by $0.5 million without restating prior periods and applied the requirements of the new standard prospectively. There was no cumulative effect adjustment related to available-for-sale securities at adoption. The Company elected to account for accrued interest receivable separately from the amortized cost of loans and investment securities. Accrued interest receivable is included in "accrued interest receivables" on the Condensed Consolidated Balance Sheets. The Company elected the practical expedient to use the fair value of the collateral at the reporting date when determining the allowance for credit losses for a financial asset for which the repayment is expected to be provided substantially through the operation or sale of the collateral when the borrower is experiencing financial difficulty based on the entity’s assessment as of the reporting date (collateral dependent financial asset). Additionally, the Company implemented new business processes, new internal controls, and modified existing and/or implemented new internal models and tools to facilitate the ongoing application of the new standard. See Note 8. Loans for further details.
The following table sets forth the cumulative effect of the changes to the Company's unaudited Condensed Consolidated Balance Sheets at January 1, 2021, for the adoption of ASC 326:
|
|
Balance at
December 31, 2020
|
|
|
Adjustments Due to
Adoption of ASC 326
|
|
|
Balance at
January 1, 2021
|
|
|
|
(In thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses on loans
|
|
$
|
166,538
|
|
|
$
|
594
|
|
|
$
|
167,132
|
|
Deferred tax assets
|
|
|
85,610
|
|
|
|
335
|
|
|
|
85,945
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for unfunded commitments
|
|
|
5,880
|
|
|
|
539
|
|
|
|
6,419
|
|
Stockholders' equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings, net of tax
|
|
|
2,418,144
|
|
|
|
(798
|
)
|
|
|
2,417,346
|
|
In July 2017, the FASB issued ASU 2017-11, “Earnings per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815).” There are two parts to this update. Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments that result in the strike price being reduced on the basis of the pricing of future equity offerings. Part II of this update addresses the difficulty in navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests. The amendments in this update are effective for fiscal years beginning after December 15, 2020. Early adoption is permitted for all entities, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments in part I of this update should be applied in either of the following ways: (i) Retrospectively to outstanding financial instruments with a down round feature by means of a cumulative-effect adjustment to the statement of financial position as of the beginning of the first fiscal year and interim periods in which the pending content that links to this paragraph is effective; or (ii) Retrospectively to outstanding financial instruments with a down round feature for each prior reporting period presented in accordance with the guidance on accounting changes in paragraphs 250-10-45-5 through 45-10. The amendments to Part II of this update do not require any transition guidance because those amendments do not have an accounting effect. Adoption of ASU 2017-11 did not have a material impact on the Company’s Condensed Consolidated Financial Statements.
In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740); Simplifying the Accounting for Income Taxes.” This ASU removes specific exceptions to the general principles in Topic 740 in Generally Accepted Accounting Principles. It eliminates the need for an organization to analyze whether the following apply in a given period: exception to the incremental approach for intra-period tax allocation; exception to accounting for basis differences when there are ownership changes in foreign investments; and exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses. The ASU also improves financial statement preparers’ application of income tax-related guidance and simplifies GAAP for: Franchise taxes that are partially based on income; transactions with a government that result in a step up in the tax basis of goodwill; separate financial statements of legal entities that are not subject to tax; and enacted changes in tax laws in interim periods. This ASU is effective for public business entities, for fiscal years beginning after December 15, 2020 with early adoption permitted for public business entities for periods for which financial statements have not yet been issued. Adoption of ASU 2019-12 did not have a material impact on the Company’s Condensed Consolidated Financial Statements.
In January 2020, the FASB issued ASU No. 2020-01, “'Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint-Ventures (Topic 323), and Derivatives and Hedging (Topic 815). Clarifying the Interactions between Topic 321, Topic 323, and Topic 815.” This ASU is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early application is permitted, including early adoption in an interim period for public business entities for periods for which financial statements have not yet been issued. An entity should apply ASU No. 2020-01 prospectively at the beginning of the interim period that includes the adoption date. This ASU among other things clarifies that a company should consider observable transactions that require a company to either apply or discontinue the equity method of accounting under Topic 323, Investments—Equity Method and Joint Ventures, for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. The new ASU clarifies that, when determining the accounting for certain forward contracts and purchased options a company should not consider, whether upon settlement or exercise, if the underlying securities would be accounted for under the equity method or fair value option. Adoption of ASU 2020-01 did not have a material impact on the Company’s Condensed Consolidated Financial Statements.
Other Accounting Standards Pending Adoption
In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” ASU No. 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022. This ASU provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The ASU is intended to help stakeholders during the global market-wide reference rate transition period. Therefore, it will be in effect for a limited time through December 31, 2022. The Company is evaluating the impact of adopting ASU 2020-02 on the Company’s Consolidated Financial Statements.
In October 2020, the FASB issued ASU 2020-08, “Codification Improvements to Subtopic 310-20, Receivables, Nonrefundable Fees and Other Costs.” ASU 2020-08 clarifies the accounting for the amortization of purchase premiums for callable debt securities with multiple call dates. ASU 2020-8 became effective for the Company on January 1, 2021, and is not expected to have a significant impact on the Company's Consolidated Financial Statements.
In January 2021, the FASB issued ASU 2021-01, “Reference Rate Reform (Topic 848): Scope.” ASU 2021-01 clarifies that certain optional expedients and exceptions in ASC 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. ASU 2021-01 also amends the expedients and exceptions in ASC 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. ASU 2021-01 was effective upon issuance and generally can be applied through December 31, 2022. The Company is evaluating the impact of adopting ASU 2021-01 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, including for purposes of reporting cash flows, consist of cash on hand, amounts due from banks, and short-term investments with original maturity of three months or less.
The Company is required to maintain reserves with the Federal Reserve Bank. Reserve requirements are based on a percentage of deposit liabilities. The average reserve balances required were zero and $60 thousand for the three months ended March 31, 2021 and for the year ended December 31, 2020, respectively. As of March 31, 2021 and December 31, 2020, the Company had $30.8 million and $34.7 million, respectively, on deposit in a cash margin account that serves as collateral for interest rate swaps. These amounts included $10.0 million and $11.9 million, respectively, on deposit in a cash margin account that serves as collateral for the Bancorp’s interest rate swaps. As of March 31, 2021 and December 31, 2020, the Company held $4.2 million and $9.3 million, respectively, in a restricted escrow account with a major bank for its alternative energy investments.
16
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 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 March 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
(In thousands, except share and per share data)
|
|
Net income
|
|
$
|
73,384
|
|
|
$
|
46,852
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares:
|
|
|
|
|
|
|
|
|
Basic weighted-average number of common shares outstanding
|
|
|
79,530,777
|
|
|
|
79,588,076
|
|
Dilutive effect of weighted-average outstanding common share equivalents RSUs
|
|
|
301,528
|
|
|
|
241,949
|
|
Diluted weighted-average number of common shares outstanding
|
|
|
79,832,305
|
|
|
|
79,830,025
|
|
|
|
|
|
|
|
|
|
|
Average restricted stock units with anti-dilutive effect
|
|
|
71,108
|
|
|
|
47,399
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.92
|
|
|
$
|
0.59
|
|
Diluted
|
|
$
|
0.92
|
|
|
$
|
0.59
|
|
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 three years or cliff vest after one or three 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 zero and to a maximum of 150% of the target. The amount of performance-based RSUs that are eligible to vest is determined at the end of each performance period and is then added together to determine the total number of performance shares that are eligible to vest. Performance-based RSUs generally cliff vest three years from the date of grant.
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.
17
The following table presents RSU activity during the three months ended March 31, 2021:
|
|
Time-Based RSUs
|
|
|
Performance-Based RSUs
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
Grant Date
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Shares
|
|
|
Fair Value
|
|
Balance at December 31, 2020
|
|
|
292,670
|
|
|
$
|
33.37
|
|
|
|
302,802
|
|
|
$
|
32.55
|
|
Granted
|
|
|
13,509
|
|
|
|
39.77
|
|
|
|
—
|
|
|
|
—
|
|
Vested
|
|
|
(91,654
|
)
|
|
|
41.88
|
|
|
|
(8,537
|
)
|
|
|
43.37
|
|
Forfeited
|
|
|
(16,296
|
)
|
|
|
30.62
|
|
|
|
(5,008
|
)
|
|
|
40.60
|
|
Balance at March 31, 2021
|
|
|
198,229
|
|
|
$
|
30.10
|
|
|
|
289,257
|
|
|
$
|
32.09
|
|
The compensation expense recorded for RSUs was $1.2 million and $1.5 million for the three months ended March 31, 2021, and 2020, respectively. Unrecognized stock-based compensation expense related to RSUs was $7.2 million and $7.7 million as of March 31, 2021 and 2020, respectively. As of March 31, 2021, these costs are expected to be recognized over the next 1.7 years for time-based and performance-based RSUs.
As of March 31, 2021, 2,060,019 shares were available for future grants under the Company’s 2005 Incentive Plan, as amended and restated.
Tax deficiency from share-based payment arrangements increased income tax expense by $37 thousand and $0.3 million in the three months ended March 31, 2021, and 2020, respectively.
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 as of March 31, 2021, and December 31, 2020:
|
|
March 31, 2021
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
Securities Available-for-Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury securities
|
|
$
|
40,709
|
|
|
$
|
11
|
|
|
$
|
—
|
|
|
$
|
40,720
|
|
U.S. government agency entities
|
|
|
95,637
|
|
|
|
705
|
|
|
|
291
|
|
|
|
96,051
|
|
Mortgage-backed securities
|
|
|
658,371
|
|
|
|
15,292
|
|
|
|
5,239
|
|
|
|
668,424
|
|
Collateralized mortgage obligations
|
|
|
10,201
|
|
|
|
—
|
|
|
|
74
|
|
|
|
10,127
|
|
Corporate debt securities
|
|
|
93,545
|
|
|
|
526
|
|
|
|
549
|
|
|
|
93,522
|
|
Total
|
|
$
|
898,463
|
|
|
$
|
16,534
|
|
|
$
|
6,153
|
|
|
$
|
908,844
|
|
|
|
December 31, 2020
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
Securities Available-for-Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury securities
|
|
$
|
80,948
|
|
|
$
|
6
|
|
|
$
|
6
|
|
|
$
|
80,948
|
|
U.S. government agency entities
|
|
|
99,944
|
|
|
|
441
|
|
|
|
546
|
|
|
|
99,839
|
|
Mortgage-backed securities
|
|
|
709,709
|
|
|
|
17,965
|
|
|
|
606
|
|
|
|
727,068
|
|
Collateralized mortgage obligations
|
|
|
10,358
|
|
|
|
—
|
|
|
|
34
|
|
|
|
10,324
|
|
Corporate debt securities
|
|
|
118,271
|
|
|
|
367
|
|
|
|
267
|
|
|
|
118,371
|
|
Total
|
|
$
|
1,019,230
|
|
|
$
|
18,779
|
|
|
$
|
1,459
|
|
|
$
|
1,036,550
|
|
As of March 31, 2021, the amortized cost of AFS debt securities excluded accrued interest receivables of $2.3 million, which are included in "accrued interest receivable" on the Condensed Consolidated Balance Sheets (Unaudited). For the Company’s accounting policy related to AFS debt securities’ accrued interest receivable, see Note 2. Basis of Presentation and Summary of Significant Accounting Policies to the Condensed Consolidated Financial Statements (Unaudited) in this Form 10Q.
The amortized cost and fair value of securities available-for-sale as of March 31, 2021, 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.
|
|
March 31, 2021
|
|
|
|
Securities Available-For-Sale
|
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
85,713
|
|
|
$
|
85,764
|
|
Due after one year through five years
|
|
|
35,967
|
|
|
|
35,481
|
|
Due after five years through ten years
|
|
|
175,943
|
|
|
|
180,203
|
|
Due after ten years
|
|
|
600,840
|
|
|
|
607,396
|
|
Total
|
|
$
|
898,463
|
|
|
$
|
908,844
|
|
Equity Securities - The Company recognized a net loss of $2.8 million for the three months ended March 31, 2021, due to the decrease in fair value of equity investments with readily determinable fair values compared to a net loss of $6.1 million for the three months ended March 31, 2020. Equity securities were $21.0 million and $23.7 million as of March 31, 2021, and December 31, 2020, respectively.
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 March 31, 2021, and December 31, 2020:
|
|
March 31, 2021
|
|
|
|
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 Available-for-Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agency entities
|
|
$
|
12,930
|
|
|
$
|
11
|
|
|
$
|
23,662
|
|
|
$
|
280
|
|
|
$
|
36,592
|
|
|
$
|
291
|
|
Mortgage-backed securities
|
|
|
190,914
|
|
|
|
4,638
|
|
|
|
7,903
|
|
|
|
601
|
|
|
|
198,817
|
|
|
|
5,239
|
|
Collateralized mortgage obligations
|
|
|
9,946
|
|
|
|
65
|
|
|
|
181
|
|
|
|
9
|
|
|
|
10,127
|
|
|
|
74
|
|
Corporate debt securities
|
|
|
39,451
|
|
|
|
549
|
|
|
|
—
|
|
|
|
—
|
|
|
|
39,451
|
|
|
|
549
|
|
Total
|
|
$
|
253,241
|
|
|
$
|
5,263
|
|
|
$
|
31,746
|
|
|
$
|
890
|
|
|
$
|
284,987
|
|
|
$
|
6,153
|
|
|
|
December 31, 2020
|
|
|
|
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 Available-for-Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury securities
|
|
$
|
40,952
|
|
|
$
|
6
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
40,952
|
|
|
$
|
6
|
|
U.S. government agency entities
|
|
|
26,390
|
|
|
|
102
|
|
|
|
40,009
|
|
|
|
444
|
|
|
|
66,399
|
|
|
|
546
|
|
Mortgage-backed securities
|
|
|
1,694
|
|
|
|
23
|
|
|
|
8,093
|
|
|
|
583
|
|
|
|
9,787
|
|
|
|
606
|
|
Collateralized mortgage obligations
|
|
|
10,131
|
|
|
|
25
|
|
|
|
193
|
|
|
|
9
|
|
|
|
10,324
|
|
|
|
34
|
|
Corporate debt securities
|
|
|
58,405
|
|
|
|
267
|
|
|
|
—
|
|
|
|
—
|
|
|
|
58,405
|
|
|
|
267
|
|
Total
|
|
$
|
137,572
|
|
|
$
|
423
|
|
|
$
|
48,295
|
|
|
$
|
1,036
|
|
|
$
|
185,867
|
|
|
$
|
1,459
|
|
Allowance for Credit Losses
The securities that were in an unrealized loss position at March 31, 2021, 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 2. Basis of Presentation and Summary of Significant Accounting Policies - Allowance for Credit Losses on Available for Sale Securities to the Condensed Consolidated Financial Statements in this Form 10Q.
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 available-for-sale securities that have declined below their cost before their anticipated recovery. Accordingly, no allowance for credit losses was recorded as of March 31, 2021, against these securities, and there was no provision for credit losses recognized for the three months ended March 31, 2021. For the three months ended March 31, 2020, there was no credit loss recognized.
Securities available-for-sale having a carrying value of $21.0 million and $23.7 million as of March 31, 2021, and December 31, 2020, respectively, were pledged to secure public deposits, other borrowings and treasury tax and loan.
20
8. Loans
Most of the Company’s business activities are with customers 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 customers 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 Condensed Consolidated Balance Sheets as of March 31, 2021, and December 31, 2020, were as follows:
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
$
|
2,890,693
|
|
|
$
|
2,836,833
|
|
Residential mortgage loans
|
|
|
4,102,203
|
|
|
|
4,145,389
|
|
Commercial mortgage loans
|
|
|
7,549,522
|
|
|
|
7,555,027
|
|
Real estate construction loans
|
|
|
677,816
|
|
|
|
679,492
|
|
Equity lines
|
|
|
428,318
|
|
|
|
424,555
|
|
Installment and other loans
|
|
|
3,296
|
|
|
|
3,100
|
|
Gross loans
|
|
$
|
15,651,848
|
|
|
$
|
15,644,396
|
|
Allowance for loan losses
|
|
|
(147,264
|
)
|
|
|
(166,538
|
)
|
Unamortized deferred loan fees, net
|
|
|
(6,872
|
)
|
|
|
(2,494
|
)
|
Total loans, net
|
|
$
|
15,497,712
|
|
|
$
|
15,475,364
|
|
As of March 31, 2021, recorded investment in non-accrual loans was $94.4 million. As of December 31, 2020, recorded investment in impaired loans totaled $95.4 million and was comprised of non-accrual loans of $67.7 million and accruing TDRs of $27.7 million. For non-accrual loans, the amounts previously charged off represent 15.1% of the contractual balances for non-accrual loans as of March 31, 2021. For impaired loans, the amounts previously charged off represent 7.1% of the contractual balances for impaired loans as of December 31, 2020.
The following table presents the average recorded investment and interest income recognized on non-accrual loans for the period indicated:
|
|
Three Months Ended March 31,
|
|
|
|
2021
|
|
|
|
Average Recorded Investment
|
|
|
Interest Income Recognized
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
$
|
28,268
|
|
|
$
|
12
|
|
Real estate construction loans
|
|
|
4,229
|
|
|
|
97
|
|
Commercial mortgage loans
|
|
|
40,116
|
|
|
|
57
|
|
Residential mortgage loans and equity lines
|
|
|
8,427
|
|
|
|
8
|
|
Total non-accrual loans
|
|
$
|
81,040
|
|
|
$
|
174
|
|
In connection with the adoption of ASU 2016-13, the Company no longer provides information on impaired loans. The following table presents the average recorded investment and interest income recognized on individually evaluated loans for the period indicated:
|
|
Three Months Ended March 31,
|
|
|
|
2020
|
|
|
|
Average Recorded Investment
|
|
|
Interest Income Recognized
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
$
|
28,316
|
|
|
$
|
70
|
|
Real estate construction loans
|
|
|
4,506
|
|
|
|
98
|
|
Commercial mortgage loans
|
|
|
36,040
|
|
|
|
459
|
|
Residential mortgage loans and equity lines
|
|
|
11,371
|
|
|
|
71
|
|
Total impaired loans
|
|
$
|
80,233
|
|
|
$
|
698
|
|
The following table presents non-accrual loans and the related allowance as of March 31, 2021:
|
|
March 31, 2021
|
|
|
|
Unpaid Principal Balance
|
|
|
Recorded Investment
|
|
|
Allowance
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With no allocated allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
$
|
30,111
|
|
|
$
|
18,534
|
|
|
$
|
—
|
|
Real estate construction loans
|
|
|
5,776
|
|
|
|
4,189
|
|
|
|
—
|
|
Commercial mortgage loans
|
|
|
27,867
|
|
|
|
27,199
|
|
|
|
—
|
|
Residential mortgage loans and equity lines
|
|
|
9,205
|
|
|
|
8,545
|
|
|
|
—
|
|
Subtotal
|
|
$
|
72,959
|
|
|
$
|
58,467
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With allocated allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
$
|
19,864
|
|
|
$
|
19,817
|
|
|
$
|
5,559
|
|
Commercial mortgage loans
|
|
|
16,233
|
|
|
|
16,162
|
|
|
|
5,133
|
|
Subtotal
|
|
$
|
36,097
|
|
|
$
|
35,979
|
|
|
$
|
10,692
|
|
Total non-accrual loans
|
|
$
|
109,056
|
|
|
$
|
94,446
|
|
|
$
|
10,692
|
|
22
In connection with the adoption of ASU 2016-13, the Company no longer provides information on impaired loans. The following table presents impaired loans and the related allowance as of December 31, 2020:
|
|
December 31, 2020
|
|
|
|
Unpaid Principal Balance
|
|
|
Recorded Investment
|
|
|
Allowance
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
With no allocated allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
$
|
23,784
|
|
|
$
|
20,698
|
|
|
$
|
—
|
|
Real estate construction loans
|
|
|
5,776
|
|
|
|
4,286
|
|
|
|
—
|
|
Commercial mortgage loans
|
|
|
22,877
|
|
|
|
22,287
|
|
|
|
—
|
|
Residential mortgage loans and equity lines
|
|
|
6,379
|
|
|
|
6,307
|
|
|
|
—
|
|
Subtotal
|
|
$
|
58,816
|
|
|
$
|
53,578
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With allocated allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
$
|
13,703
|
|
|
$
|
6,372
|
|
|
$
|
1,030
|
|
Commercial mortgage loans
|
|
|
31,134
|
|
|
|
31,003
|
|
|
|
5,254
|
|
Residential mortgage loans and equity lines
|
|
|
5,005
|
|
|
|
4,452
|
|
|
|
145
|
|
Subtotal
|
|
$
|
49,842
|
|
|
$
|
41,827
|
|
|
$
|
6,429
|
|
Total impaired loans
|
|
$
|
108,658
|
|
|
$
|
95,405
|
|
|
$
|
6,429
|
|
The following tables present the aging of the loan portfolio by type as of March 31, 2021, and as of December 31, 2020:
|
|
March 31, 2021
|
|
|
|
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
$
|
13,845
|
|
|
$
|
1,645
|
|
|
$
|
1,880
|
|
|
$
|
38,351
|
|
|
$
|
55,721
|
|
|
$
|
2,834,972
|
|
|
$
|
2,890,693
|
|
Real estate construction loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,189
|
|
|
|
4,189
|
|
|
|
673,627
|
|
|
|
677,816
|
|
Commercial mortgage loans
|
|
|
6,659
|
|
|
|
274
|
|
|
|
258
|
|
|
|
43,361
|
|
|
|
50,552
|
|
|
|
7,498,970
|
|
|
|
7,549,522
|
|
Residential mortgage loans and equity lines
|
|
|
21,298
|
|
|
|
345
|
|
|
|
—
|
|
|
|
8,545
|
|
|
|
30,188
|
|
|
|
4,500,333
|
|
|
|
4,530,521
|
|
Installment and other loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,296
|
|
|
|
3,296
|
|
Total loans
|
|
$
|
41,802
|
|
|
$
|
2,264
|
|
|
$
|
2,138
|
|
|
$
|
94,446
|
|
|
$
|
140,650
|
|
|
$
|
15,511,198
|
|
|
$
|
15,651,848
|
|
|
|
December 31, 2020
|
|
|
|
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
$
|
52,601
|
|
|
$
|
3,182
|
|
|
$
|
2,947
|
|
|
$
|
23,087
|
|
|
$
|
81,817
|
|
|
$
|
2,755,016
|
|
|
$
|
2,836,833
|
|
Real estate construction loans
|
|
|
6,257
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,286
|
|
|
|
10,543
|
|
|
|
668,949
|
|
|
|
679,492
|
|
Commercial mortgage loans
|
|
|
45,186
|
|
|
|
18,069
|
|
|
|
2,035
|
|
|
|
33,715
|
|
|
|
99,005
|
|
|
|
7,456,022
|
|
|
|
7,555,027
|
|
Residential mortgage loans and equity lines
|
|
|
14,315
|
|
|
|
4,223
|
|
|
|
—
|
|
|
|
6,596
|
|
|
|
25,134
|
|
|
|
4,544,810
|
|
|
|
4,569,944
|
|
Installment and other loans
|
|
|
43
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
43
|
|
|
|
3,057
|
|
|
|
3,100
|
|
Total loans
|
|
$
|
118,402
|
|
|
$
|
25,474
|
|
|
$
|
4,982
|
|
|
$
|
67,684
|
|
|
$
|
216,542
|
|
|
$
|
15,427,854
|
|
|
$
|
15,644,396
|
|
The allowance for credit loss on a TDR is measured using the same method as all other loans held for investment, except when the value of a concession cannot be measured using a method other than the discounted cash flow method. When the value of a concession is measured using the discounted cash flow method, the allowance for credit loss is determined by discounting the expected future cash flows at the original interest rate of the loan.
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 discussed in the “Basis of Presentation and Summary of Significant Accounting Policies” above, for the quantitative baseline, and include non-accrual loans, TDRs, and other loans as deemed appropriate by management. In addition, the Company individually evaluates “reasonably expected” TDRs, which are identified by the Company as a commercial loan expected to be classified as a TDR. Individually evaluated loans also includes “reasonably expected” TDRs, identified by the Company as a consumer loan for which a borrower’s application of loan modification due to hardship has been received by the Company. Management judgment is utilized to make this determination.
Although the Company took steps to incorporate the impact of the COVID-19 pandemic on the economic conditions and other factors (such as the severity and length of the COVID-19 pandemic and its impacts) utilized to determine the expected loan losses, if the economic conditions or other factors worsen relative to the assumptions the Company utilized, the expected loan losses will increase accordingly in future periods.
A TDR is a formal modification of the terms of a loan when the lender, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower. The concessions may be granted in various forms, including a change in the stated interest rate, a reduction in the loan balance or accrued interest, or an extension of the maturity date. Although these loan modifications are considered TDRs, TDR loans that have, pursuant to the Bank’s policy, performed under the restructured terms and have demonstrated sustained performance under the modified terms for six months are returned to accrual status. The sustained performance considered by management pursuant to its policy includes the periods prior to the modification if the prior performance met or exceeded the modified terms. This would include cash paid by the borrower prior to the restructure to set up interest reserves. Loans classified as TDRs are reported as individually evaluated loans.
As of March 31, 2021, accruing TDRs were $27.9 million and non-accrual TDRs were $8.6 million compared to accruing TDRs of $27.7 million and non-accrual TDRs of $9.0 million as of December 31, 2020. The Company allocated specific reserves of $56 thousand to accruing TDRs and $1 thousand to non-accrual TDRs as of March 31, 2021, and $122 thousand to accruing TDRs and $24 thousand to non-accrual TDRs as of December 31, 2020. The following tables set forth TDRs that were modified during the three months ended March 31, 2021, and 2020, their specific reserves as of March 31, 2021 and 2020, and charge-offs for the three months ended March 31, 2021, and 2020:
|
|
Three Months Ended March 31, 2021
|
|
|
March 31, 2021
|
|
|
|
No. of Contracts
|
|
|
Pre-Modification Outstanding Recorded Investment
|
|
|
Post-Modification Outstanding Recorded Investment
|
|
|
Charge-offs
|
|
|
Specific Reserve
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
|
1
|
|
|
$
|
686
|
|
|
$
|
686
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total
|
|
|
1
|
|
|
$
|
686
|
|
|
$
|
686
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
Three Months Ended March 31, 2020
|
|
|
March 31, 2020
|
|
|
|
No. of Contracts
|
|
|
Pre-Modification Outstanding Recorded Investment
|
|
|
Post-Modification Outstanding Recorded Investment
|
|
|
Charge-offs
|
|
|
Specific Reserve
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
|
2
|
|
|
$
|
534
|
|
|
$
|
534
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total
|
|
|
2
|
|
|
$
|
534
|
|
|
$
|
534
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Modifications of the loan terms in the three months ended March 31, 2021, were in the form of extensions of maturity dates, which ranged generally from three to twelve months from the modification date.
We expect that the TDRs on accruing status as of March 31, 2021, which were all performing in accordance with their restructured terms, will continue to comply with the restructured terms because of the reduced principal or interest payments on these loans. The ongoing impact of the COVID pandemic, however, could increase the risk of such TDRs becoming non-accrual due to the borrowers’ inability to continue to comply with their restructured terms. A summary of TDRs by type of concession and by type of loan, as of March 31, 2021, and December 31, 2020, is set forth in the table below:
|
|
March 31, 2021
|
|
|
|
Payment
Deferral
|
|
|
Rate
Reduction
|
|
|
Rate Reduction
and Payment Deferral
|
|
|
Total
|
|
|
|
(In thousands)
|
|
Accruing TDRs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
$
|
4,544
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,544
|
|
Commercial mortgage loans
|
|
|
524
|
|
|
|
5,607
|
|
|
|
13,322
|
|
|
|
19,453
|
|
Residential mortgage loans
|
|
|
1,686
|
|
|
|
262
|
|
|
|
1,919
|
|
|
|
3,867
|
|
Total accruing TDRs
|
|
$
|
6,754
|
|
|
$
|
5,869
|
|
|
$
|
15,241
|
|
|
$
|
27,864
|
|
|
|
March 31, 2021
|
|
|
|
Payment
Deferral
|
|
|
Rate
Reduction
|
|
|
Rate Reduction
and Payment Deferral
|
|
|
Total
|
|
|
|
(In thousands)
|
|
Non-accrual TDRs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
$
|
8,150
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,150
|
|
Residential mortgage loans
|
|
|
511
|
|
|
|
—
|
|
|
|
—
|
|
|
|
511
|
|
Total non-accrual TDRs
|
|
$
|
8,661
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,661
|
|
|
|
December 31, 2020
|
|
|
|
Payment
Deferral
|
|
|
Rate
Reduction
|
|
|
Rate Reduction
and Payment Deferral
|
|
|
Total
|
|
|
|
(In thousands)
|
|
Accruing TDRs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
$
|
3,983
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,983
|
|
Commercial mortgage loans
|
|
|
515
|
|
|
|
5,635
|
|
|
|
13,425
|
|
|
|
19,575
|
|
Residential mortgage loans
|
|
|
1,724
|
|
|
|
275
|
|
|
|
2,164
|
|
|
|
4,163
|
|
Total accruing TDRs
|
|
$
|
6,222
|
|
|
$
|
5,910
|
|
|
$
|
15,589
|
|
|
$
|
27,721
|
|
|
|
December 31, 2020
|
|
|
|
Payment
Deferral
|
|
|
Rate
Reduction
|
|
|
Rate Reduction
and Payment Deferral
|
|
|
Total
|
|
|
|
(In thousands)
|
|
Non-accrual TDRs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
$
|
8,462
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,462
|
|
Residential mortgage loans
|
|
|
523
|
|
|
|
—
|
|
|
|
—
|
|
|
|
523
|
|
Total non-accrual TDRs
|
|
$
|
8,985
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,985
|
|
The activity within TDRs for the periods indicated is set forth below:
|
|
Three Months Ended March 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
(In thousands)
|
|
Accruing TDRs
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
27,721
|
|
|
$
|
35,336
|
|
New restructurings
|
|
|
686
|
|
|
|
534
|
|
Payments
|
|
|
(543
|
)
|
|
|
(1,506
|
)
|
Ending balance
|
|
$
|
27,864
|
|
|
$
|
34,364
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
(In thousands)
|
|
Non-accrual TDRs
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
8,985
|
|
|
$
|
18,048
|
|
Payments
|
|
|
(324
|
)
|
|
|
(159
|
)
|
Ending balance
|
|
$
|
8,661
|
|
|
$
|
17,889
|
|
The Company considers a loan to be in payment default once it is 60 to 90 days contractually past due under the modified terms. The Company did not have any loans that were modified as a TDR during the previous twelve months and which had subsequently defaulted as of March 31, 2021.
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 March 31, 2021, there were no commitments to lend additional funds to those borrowers whose loans had been restructured, were considered individually evaluated, or were on non-accrual status.
The CARES Act, signed into law on March 27, 2020, and as extended by the CAA, permits financial institutions to suspend requirements under GAAP for loan modifications to borrowers affected by COVID-19 that would otherwise be characterized as TDRs and suspend any determination related thereto if (i) the loan modification is made between March 1, 2020 and the earlier of January 1, 2022 or 60 days after the end of the coronavirus emergency declaration and (ii) the applicable loan was not more than 30 days past due as of December 31, 2019. In addition, federal bank regulatory authorities have issued guidance to encourage financial institutions to make loan modifications for borrowers affected by COVID-19 and have assured financial institutions that they will neither receive supervisory criticism for such prudent loan modifications, nor be required by examiners to automatically categorize COVID-19-related loan modifications as TDRs. The Company is applying this guidance to qualifying loan modifications.
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 lower than average, but still acceptable, credit risk.
|
|
●
|
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.
|
27
In connection with the adoption of ASU 2016-13, the Company no longer provides information on impaired loans. The following table presents loan portfolio by risk rating as of December 31, 2020:
|
|
December 31, 2020
|
|
|
|
Pass/Watch
|
|
|
Special Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Total
|
|
|
|
(In thousands)
|
|
Commercial loans
|
|
$
|
2,581,128
|
|
|
$
|
141,344
|
|
|
$
|
108,788
|
|
|
$
|
5,573
|
|
|
$
|
2,836,833
|
|
Real estate construction loans
|
|
|
593,196
|
|
|
|
82,010
|
|
|
|
4,286
|
|
|
|
—
|
|
|
|
679,492
|
|
Commercial mortgage loans
|
|
|
7,202,568
|
|
|
|
186,283
|
|
|
|
166,176
|
|
|
|
—
|
|
|
|
7,555,027
|
|
Residential mortgage loans and equity lines
|
|
|
4,547,052
|
|
|
|
11,647
|
|
|
|
11,245
|
|
|
|
—
|
|
|
|
4,569,944
|
|
Installment and other loans
|
|
|
3,100
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,100
|
|
Total gross loans
|
|
$
|
14,927,044
|
|
|
$
|
421,284
|
|
|
$
|
290,495
|
|
|
$
|
5,573
|
|
|
$
|
15,644,396
|
|
28
The following table summarizes the Company’s loan held for investment by loan portfolio segments, internal risk ratings and vintage year. The vintage year is the year of origination, renewal or major modification:
|
|
Loans Amortized Cost Basis by Origination Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
Prior
|
|
|
Revolving Loans
|
|
|
Revolving Converted to Term Loans
|
|
|
Total
|
|
|
|
(In thousands)
|
|
Commercial loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
255,423
|
|
|
$
|
527,049
|
|
|
$
|
316,832
|
|
|
$
|
245,195
|
|
|
$
|
125,699
|
|
|
$
|
94,080
|
|
|
$
|
1,088,480
|
|
|
$
|
8,055
|
|
|
$
|
2,660,813
|
|
Special Mention
|
|
|
—
|
|
|
|
100
|
|
|
|
16,458
|
|
|
|
7,535
|
|
|
|
3,265
|
|
|
|
31
|
|
|
|
43,466
|
|
|
|
246
|
|
|
|
71,101
|
|
Substandard
|
|
|
—
|
|
|
|
11,537
|
|
|
|
20,564
|
|
|
|
29,395
|
|
|
|
10,834
|
|
|
|
4,738
|
|
|
|
67,426
|
|
|
|
6,207
|
|
|
|
150,701
|
|
Doubtful
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,244
|
|
|
|
—
|
|
|
|
2,244
|
|
Total
|
|
|
255,423
|
|
|
|
538,686
|
|
|
|
353,854
|
|
|
|
282,125
|
|
|
|
139,798
|
|
|
|
98,849
|
|
|
|
1,201,616
|
|
|
|
14,508
|
|
|
|
2,884,859
|
|
YTD period charge-offs
|
|
|
—
|
|
|
|
23
|
|
|
|
50
|
|
|
|
366
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,699
|
|
|
|
—
|
|
|
|
9,138
|
|
YTD period recoveries
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(4
|
)
|
|
|
—
|
|
|
|
(156
|
)
|
|
|
(1,109
|
)
|
|
|
—
|
|
|
|
(1,269
|
)
|
Net
|
|
|
—
|
|
|
|
23
|
|
|
|
50
|
|
|
|
362
|
|
|
|
—
|
|
|
|
(156
|
)
|
|
|
7,590
|
|
|
|
—
|
|
|
|
7,869
|
|
Real estate construction loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
|
38,405
|
|
|
|
224,620
|
|
|
|
162,973
|
|
|
|
131,063
|
|
|
|
58,557
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
615,618
|
|
Special Mention
|
|
|
—
|
|
|
|
33,083
|
|
|
|
6,373
|
|
|
|
15,822
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
55,278
|
|
Substandard
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,189
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,189
|
|
Total
|
|
|
38,405
|
|
|
|
257,703
|
|
|
|
169,346
|
|
|
|
146,885
|
|
|
|
58,557
|
|
|
|
4,189
|
|
|
|
—
|
|
|
|
—
|
|
|
|
675,085
|
|
YTD period charge-offs
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
YTD period recoveries
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial mortgage loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
|
325,895
|
|
|
|
1,393,092
|
|
|
|
1,373,968
|
|
|
|
1,283,094
|
|
|
|
933,711
|
|
|
|
1,723,499
|
|
|
|
171,529
|
|
|
|
—
|
|
|
|
7,204,788
|
|
Special Mention
|
|
|
—
|
|
|
|
23,492
|
|
|
|
29,476
|
|
|
|
22,138
|
|
|
|
26,290
|
|
|
|
88,360
|
|
|
|
5,753
|
|
|
|
—
|
|
|
|
195,509
|
|
Substandard
|
|
|
—
|
|
|
|
628
|
|
|
|
6,832
|
|
|
|
47,145
|
|
|
|
3,608
|
|
|
|
89,479
|
|
|
|
377
|
|
|
|
—
|
|
|
|
148,069
|
|
Total
|
|
|
325,895
|
|
|
|
1,417,212
|
|
|
|
1,410,276
|
|
|
|
1,352,377
|
|
|
|
963,609
|
|
|
|
1,901,338
|
|
|
|
177,659
|
|
|
|
—
|
|
|
|
7,548,366
|
|
YTD period charge-offs
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
YTD period recoveries
|
|
|
—
|
|
|
|
—
|
|
|
|
(60
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(7
|
)
|
|
|
(28
|
)
|
|
|
—
|
|
|
|
(95
|
)
|
Net
|
|
|
—
|
|
|
|
—
|
|
|
|
(60
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(7
|
)
|
|
|
(28
|
)
|
|
|
—
|
|
|
|
(95
|
)
|
Residential mortgage loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
|
182,269
|
|
|
|
749,890
|
|
|
|
820,791
|
|
|
|
635,500
|
|
|
|
546,962
|
|
|
|
1,146,581
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,081,993
|
|
Special Mention
|
|
|
—
|
|
|
|
334
|
|
|
|
4,749
|
|
|
|
3,170
|
|
|
|
1,717
|
|
|
|
4,023
|
|
|
|
—
|
|
|
|
—
|
|
|
|
13,993
|
|
Substandard
|
|
|
—
|
|
|
|
18
|
|
|
|
809
|
|
|
|
2,300
|
|
|
|
564
|
|
|
|
4,140
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,831
|
|
Total
|
|
|
182,269
|
|
|
|
750,242
|
|
|
|
826,349
|
|
|
|
640,970
|
|
|
|
549,243
|
|
|
|
1,154,744
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,103,817
|
|
YTD period charge-offs
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
YTD period recoveries
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(7
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(7
|
)
|
Net
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(7
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(7
|
)
|
Equity lines
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10
|
|
|
|
392,712
|
|
|
|
34,804
|
|
|
|
427,526
|
|
Special Mention
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
925
|
|
|
|
—
|
|
|
|
925
|
|
Substandard
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
330
|
|
|
|
729
|
|
|
|
1,059
|
|
Total
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10
|
|
|
|
393,967
|
|
|
|
35,533
|
|
|
|
429,510
|
|
YTD period charge-offs
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
YTD period recoveries
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(3
|
)
|
|
|
(6
|
)
|
|
|
(9
|
)
|
Net
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(3
|
)
|
|
|
(6
|
)
|
|
|
(9
|
)
|
Installment and other loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
|
953
|
|
|
|
2,386
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,339
|
|
Total
|
|
|
953
|
|
|
|
2,386
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,339
|
|
YTD period charge-offs
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
YTD period recoveries
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total loans
|
|
$
|
802,945
|
|
|
$
|
2,966,229
|
|
|
$
|
2,759,825
|
|
|
$
|
2,422,357
|
|
|
$
|
1,711,207
|
|
|
$
|
3,159,130
|
|
|
$
|
1,773,242
|
|
|
$
|
50,041
|
|
|
$
|
15,644,976
|
|
Net charge-offs/(recoveries)
|
|
$
|
—
|
|
|
$
|
23
|
|
|
$
|
(10
|
)
|
|
$
|
362
|
|
|
$
|
—
|
|
|
$
|
(170
|
)
|
|
$
|
7,559
|
|
|
$
|
(6
|
)
|
|
$
|
7,758
|
|
Revolving loans that are converted to term loans presented in the table above are excluded from the term loans by vintage year columns.
The following table sets forth the balance in the allowance for loan losses by portfolio segment and based on impairment method as of December 31, 2020. This table is no longer presented after December 31, 2020, given the adoption of ASU 2016-13, which has a single impairment methodology.
|
|
December 31, 2020
|
|
|
|
|
|
|
|
Real Estate
|
|
|
Commercial
|
|
|
Residential
|
|
|
Installment
|
|
|
|
|
|
|
|
Commercial
|
|
|
Construction
|
|
|
Mortgage
|
|
|
Mortgage Loans
|
|
|
and
|
|
|
|
|
|
|
|
Loans
|
|
|
Loans
|
|
|
Loans
|
|
|
and Equity Lines
|
|
|
Other Loans
|
|
|
Total
|
|
|
|
(In thousands)
|
|
Loans individually evaluated for impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
|
|
$
|
1,030
|
|
|
$
|
—
|
|
|
$
|
5,254
|
|
|
$
|
145
|
|
|
$
|
—
|
|
|
$
|
6,429
|
|
Balance
|
|
$
|
27,070
|
|
|
$
|
4,286
|
|
|
$
|
53,289
|
|
|
$
|
10,760
|
|
|
$
|
—
|
|
|
$
|
95,405
|
|
Loans collectively evaluated for impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
|
|
$
|
67,712
|
|
|
$
|
30,854
|
|
|
$
|
43,951
|
|
|
$
|
17,592
|
|
|
$
|
—
|
|
|
$
|
160,109
|
|
Balance
|
|
$
|
2,809,763
|
|
|
$
|
675,206
|
|
|
$
|
7,501,738
|
|
|
$
|
4,559,184
|
|
|
$
|
3,100
|
|
|
$
|
15,548,991
|
|
Total allowance
|
|
$
|
68,742
|
|
|
$
|
30,854
|
|
|
$
|
49,205
|
|
|
$
|
17,737
|
|
|
$
|
—
|
|
|
$
|
166,538
|
|
Total balance
|
|
$
|
2,836,833
|
|
|
$
|
679,492
|
|
|
$
|
7,555,027
|
|
|
$
|
4,569,944
|
|
|
$
|
3,100
|
|
|
$
|
15,644,396
|
|
The following tables set forth activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2021, and March 31, 2020. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate
|
|
|
Commercial
|
|
|
Mortgage Loans
|
|
|
Installment
|
|
|
|
|
|
|
|
Commercial
|
|
|
Construction
|
|
|
Mortgage
|
|
|
and
|
|
|
and Other
|
|
|
|
|
|
|
|
Loans
|
|
|
Loans
|
|
|
Loans
|
|
|
Equity Lines
|
|
|
Loans
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021 Beginning Balance
|
|
$
|
68,742
|
|
|
$
|
30,854
|
|
|
$
|
49,205
|
|
|
$
|
17,737
|
|
|
$
|
—
|
|
|
$
|
166,538
|
|
Impact of ASU 2016-13 adoption
|
|
|
(28,748
|
)
|
|
|
(25,332
|
)
|
|
|
35,335
|
|
|
|
19,330
|
|
|
|
9
|
|
|
|
594
|
|
Allowance for loan losses, January 1, 2021
|
|
|
39,994
|
|
|
|
5,522
|
|
|
|
84,540
|
|
|
|
37,067
|
|
|
|
9
|
|
|
|
167,132
|
|
Provision/(reversal) for possible credit losses
|
|
|
12,627
|
|
|
|
446
|
|
|
|
(18,946
|
)
|
|
|
(6,231
|
)
|
|
|
(6
|
)
|
|
|
(12,110
|
)
|
Charge-offs
|
|
|
(9,138
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(9,138
|
)
|
Recoveries
|
|
|
1,269
|
|
|
|
—
|
|
|
|
95
|
|
|
|
16
|
|
|
|
—
|
|
|
|
1,380
|
|
Net (charge-offs)/recoveries
|
|
|
(7,869
|
)
|
|
|
—
|
|
|
|
95
|
|
|
|
16
|
|
|
|
—
|
|
|
|
(7,758
|
)
|
March 31, 2021 Ending Balance
|
|
$
|
44,752
|
|
|
$
|
5,968
|
|
|
$
|
65,689
|
|
|
$
|
30,852
|
|
|
$
|
3
|
|
|
$
|
147,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for unfunded credit commitments December 31, 2020
|
|
$
|
4,802
|
|
|
$
|
690
|
|
|
$
|
101
|
|
|
$
|
284
|
|
|
$
|
3
|
|
|
$
|
5,880
|
|
Impact of ASU 2016-13 adoption
|
|
|
(3,347
|
)
|
|
|
4,274
|
|
|
|
(101
|
)
|
|
|
(284
|
)
|
|
|
(3
|
)
|
|
|
539
|
|
Allowance for loan losses, January 1, 2021
|
|
|
1,455
|
|
|
|
4,964
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,419
|
|
Provision/(reversal) for possible credit losses
|
|
|
125
|
|
|
|
(1,574
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,449
|
)
|
Allowance for unfunded credit commitments March 31, 2021
|
|
$
|
1,580
|
|
|
$
|
3,390
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate
|
|
|
Commercial
|
|
|
Mortgage Loans
|
|
|
Installment
|
|
|
|
|
|
|
|
Commercial
|
|
|
Construction
|
|
|
Mortgage
|
|
|
and
|
|
|
and Other
|
|
|
|
|
|
|
|
Loans
|
|
|
Loans
|
|
|
Loans
|
|
|
Equity Lines
|
|
|
Loans
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 Beginning Balance
|
|
$
|
57,021
|
|
|
$
|
19,474
|
|
|
$
|
33,602
|
|
|
$
|
13,108
|
|
|
$
|
19
|
|
|
$
|
123,224
|
|
Provision/(reversal) for possible credit losses
|
|
|
10,891
|
|
|
|
3,748
|
|
|
|
6,129
|
|
|
|
4,251
|
|
|
|
(19
|
)
|
|
|
25,000
|
|
Charge-offs
|
|
|
(1,321
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,321
|
)
|
Recoveries
|
|
|
1,208
|
|
|
|
—
|
|
|
|
155
|
|
|
|
7
|
|
|
|
—
|
|
|
|
1,370
|
|
Net (charge-offs)/recoveries
|
|
|
(113
|
)
|
|
|
—
|
|
|
|
155
|
|
|
|
7
|
|
|
|
—
|
|
|
|
49
|
|
March 31, 2020 Ending Balance
|
|
$
|
67,799
|
|
|
$
|
23,222
|
|
|
$
|
39,886
|
|
|
$
|
17,366
|
|
|
$
|
—
|
|
|
$
|
148,273
|
|
Reserve for impaired loans
|
|
$
|
2,827
|
|
|
$
|
—
|
|
|
$
|
405
|
|
|
$
|
219
|
|
|
$
|
—
|
|
|
$
|
3,451
|
|
Reserve for non-impaired loans
|
|
$
|
64,972
|
|
|
$
|
23,222
|
|
|
$
|
39,481
|
|
|
$
|
17,147
|
|
|
$
|
—
|
|
|
$
|
144,822
|
|
Reserve for off-balance sheet credit commitments
|
|
$
|
1,296
|
|
|
$
|
1,233
|
|
|
$
|
177
|
|
|
$
|
304
|
|
|
$
|
3
|
|
|
$
|
3,013
|
|
The ongoing COVID-19 pandemic has caused significant disruption in the United States and international economies and financial markets. Although banks have generally been permitted to continue operating, the COVID-19 pandemic has caused disruptions to our business and could cause material disruptions to our business and operations in the future. The Company has continued its efforts to support its customers affected by the pandemic and to maintain asset quality and balance sheet strength, including the following:
|
•
|
The Company has provided loans through the SBA's Paycheck Protection Program, (or “PPP”). As of March 31, 2021, 2,770 PPP loans with a current balance of $334.4 million have been approved by the Small Business Administration and an additional $71.9 million have been forgiven. These loans do not carry an allowance for loan losses.
|
|
•
|
The Company has outstanding COVID-19 modifications on approximately seven commercial real estate loans totaling $56.1 million as of March 31, 2021, which represented 0.7% of the Bank’s commercial real estate loans and six commercial loans, totaling $38.0 million, which represented 1.3% of the total commercial loans.
|
|
•
|
As of March 31, 2021, there were 52 COVID-19 residential mortgage loan modifications outstanding, or $31.4 million, that represented 0.8% of the total residential mortgage portfolio, and two HELOC loans totaling $1.1 million, which represented 0.3% of total HELOC loans.
|
9. Commitments and Contingencies
From time to time, Bancorp and its subsidiaries are parties to litigation that arise in the ordinary course of business or otherwise are 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 customers. 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 Condensed 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 $95.7 million and $103.1 million as of March 31, 2021, and December 31, 2020, respectively.
10. Leases
The Company determines if a contract arrangement is a lease at inception and primarily enters into operating lease contracts for its branch locations, office space and certain equipment. As part of its property lease agreements, the Company may seek to include options to extend or terminate a lease when it is reasonably certain that the Company will exercise those options. The Right-of-Use (“ROU”) lease asset also includes any lease payments made and lease incentives. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company does not possess any leases that have variable lease payments or residual value guarantees as of March 31, 2021.
ASU 2016-02, “Leases (Topic 842),” as amended by ASU No. 2018-01, “Land Easement Practical Expedient for Transition to Topic 842”; ASU No. 2018-10, “Codification Improvements to Topic 842, Leases”; and ASU No. 2018-11, “Targeted Improvements,” establishes a right-of-use model (“ROU”) that requires a lessee to recognize an ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. The standard provides a number of optional practical expedients in transition. We have elected the "package of practical expedients," which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. We also elected all of the new standard’s available transition practical expedients, including the short-term lease recognition exemption that includes not recognizing ROU assets or lease liabilities for existing short-term leases, and the practical expedient to not separate lease and non-lease components for all of our leases. The Company uses its incremental borrowing rate to determine the present value of its lease liabilities.
The following table presents the operating lease amounts reported on the Condensed Consolidated Balance Sheets, and other supplemental information as of March 31, 2021 and December 31, 2020:
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
|
|
($ In millions)
|
|
|
|
|
|
|
|
|
|
|
Operating Leases:
|
|
|
|
|
|
|
|
|
ROU assets
|
|
$
|
32.9
|
|
|
$
|
30.9
|
|
Lease liabilities
|
|
$
|
35.8
|
|
|
$
|
33.5
|
|
|
|
|
|
|
|
|
|
|
Weighted-average remaining lease term (in years)
|
|
|
4.8
|
|
|
|
4.7
|
|
Weighted-average discount rate
|
|
|
2.63
|
%
|
|
|
2.77
|
%
|
Operating lease expense was $2.9 million and $2.9 million for the three months ended March 31, 2021 and March 31, 2020, respectively, and includes short-term leases that were immaterial. Operating cash flows from operating leases were $2.5 million and $2.2 million for the three months ended March 31, 2021 and 2020, respectively. During the first quarter the Company recognized an ROU asset impairment of $187 thousand related to an early termination of a lease agreement. This amount was included in other expenses in the Condensed Consolidated Statement of Operations and Comprehensive Income.
The following table presents a maturity analysis of the Company’s operating lease liabilities as of March 31, 2021, and December 31, 2020, respectively.
|
|
As of March 31, 2021
|
|
|
|
Operating Leases
|
|
|
|
(In thousands)
|
|
Remaining 2021
|
|
$
|
7,183
|
|
2022
|
|
|
9,165
|
|
2023
|
|
|
7,794
|
|
2024
|
|
|
5,427
|
|
2025
|
|
|
3,307
|
|
Thereafter
|
|
|
5,352
|
|
Total lease payments
|
|
|
38,228
|
|
Less amount of payment representing interest
|
|
|
(2,425
|
)
|
Total present value of lease payments
|
|
$
|
35,803
|
|
|
|
As of December 31, 2020
|
|
|
|
Operating Leases
|
|
|
|
(In thousands)
|
|
2021
|
|
$
|
9,384
|
|
2022
|
|
|
8,335
|
|
2023
|
|
|
6,890
|
|
2024
|
|
|
4,635
|
|
2025
|
|
|
2,520
|
|
Thereafter
|
|
|
4,153
|
|
Total lease payments
|
|
|
35,917
|
|
Less amount of payment representing interest
|
|
|
(2,433
|
)
|
Total present value of lease payments
|
|
$
|
33,484
|
|
33
11. Borrowed Funds
Borrowings from the Federal Home Loan Bank (“FHLB”) – There were no over-night borrowings from the FHLB as of March 31, 2021, and December 31, 2020. Advances from the FHLB were $75.0 million at a weighted average rate of 2.26% as of March 31, 2021, and $150.0 million at a weighted average rate of 2.15% as of December 31, 2020. As of March 31, 2021, FHLB advances of $5.0 million will mature in May 2021, $50.0 million in June 2021, and $20.0 million in May 2023.
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 the Capital Securities and investing in Junior Subordinated Notes. Subject to some limitations, payment of distributions out of the monies held by the trusts and payments on liquidation of the trusts, or the redemption of the Capital Securities, are guaranteed by the Company to the extent the trusts have funds on hand at such time. The obligations of the Company under the guarantees and the Junior Subordinated Notes are subordinate and junior in right of payment to all indebtedness of the Company and 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 March 31, 2021, Junior Subordinated Notes totaled $119.1 million with a weighted average interest rate of 2.36%, compared to $119.1 million with a weighted average rate of 2.40% at December 31, 2020. The Junior Subordinated Notes have a stated maturity term of 30 years.
12. Income Taxes
The effective tax rate for the first quarter of 2021 was 21.9% compared to 16.3% for the first quarter of 2020. The effective tax rate includes the impact of low-income housing and alternative energy investment tax credits. Income tax expense for the first quarter of 2021 was increased by $37 thousand related to a tax deficiency from the distribution of restricted stock units.
The Company’s tax returns are open for audit by the Internal Revenue Service back to 2017 and by the California Franchise Tax Board back to 2016.
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.
34
13. 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 as follows:
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.
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.
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.
The following tables present the Company’s hierarchy for its assets and liabilities measured at fair value on a recurring basis as of March 31, 2021, and December 31, 2020:
|
|
March 31, 2021
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
Total Fair Value
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Measurements
|
|
|
|
(In thousands)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
$
|
40,720
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
40,720
|
|
U.S. government agency entities
|
|
|
—
|
|
|
|
96,051
|
|
|
|
—
|
|
|
|
96,051
|
|
Mortgage-backed securities
|
|
|
—
|
|
|
|
668,424
|
|
|
|
—
|
|
|
|
668,424
|
|
Collateralized mortgage obligations
|
|
|
—
|
|
|
|
10,127
|
|
|
|
—
|
|
|
|
10,127
|
|
Corporate debt securities
|
|
|
—
|
|
|
|
93,522
|
|
|
|
—
|
|
|
|
93,522
|
|
Total securities available-for-sale
|
|
$
|
40,720
|
|
|
$
|
868,124
|
|
|
$
|
—
|
|
|
$
|
908,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds
|
|
$
|
6,301
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,301
|
|
Preferred stock of government sponsored entities
|
|
|
3,328
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,328
|
|
Other equity securities
|
|
|
11,364
|
|
|
|
—
|
|
|
|
—
|
|
|
|
11,364
|
|
Total equity securities
|
|
$
|
20,993
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
20,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
16
|
|
|
$
|
16
|
|
Interest rate swaps
|
|
|
—
|
|
|
|
3,615
|
|
|
|
—
|
|
|
|
3,615
|
|
Foreign exchange contracts
|
|
|
—
|
|
|
|
2,891
|
|
|
|
—
|
|
|
|
2,891
|
|
Total assets
|
|
$
|
61,713
|
|
|
$
|
874,630
|
|
|
$
|
16
|
|
|
$
|
936,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
—
|
|
|
$
|
12,116
|
|
|
$
|
—
|
|
|
$
|
12,116
|
|
Foreign exchange contracts
|
|
|
—
|
|
|
|
2,550
|
|
|
|
—
|
|
|
|
2,550
|
|
Total liabilities
|
|
$
|
—
|
|
|
$
|
14,666
|
|
|
$
|
—
|
|
|
$
|
14,666
|
|
|
|
December 31, 2020
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
Total Fair Value
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Measurements
|
|
|
|
(In thousands)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
$
|
80,948
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
80,948
|
|
U.S. government agency entities
|
|
|
—
|
|
|
|
99,838
|
|
|
|
—
|
|
|
|
99,838
|
|
Mortgage-backed securities
|
|
|
—
|
|
|
|
727,068
|
|
|
|
—
|
|
|
|
727,068
|
|
Collateralized mortgage obligations
|
|
|
—
|
|
|
|
10,324
|
|
|
|
—
|
|
|
|
10,324
|
|
Corporate debt securities
|
|
|
—
|
|
|
|
118,372
|
|
|
|
—
|
|
|
|
118,372
|
|
Total securities available-for-sale
|
|
$
|
80,948
|
|
|
$
|
955,602
|
|
|
$
|
—
|
|
|
$
|
1,036,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds
|
|
$
|
6,413
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,413
|
|
Preferred stock of government sponsored entities
|
|
|
5,485
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,485
|
|
Other equity securities
|
|
|
11,846
|
|
|
|
—
|
|
|
|
—
|
|
|
|
11,846
|
|
Total equity securities
|
|
$
|
23,744
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
23,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
21
|
|
|
$
|
21
|
|
Interest rate swaps
|
|
|
—
|
|
|
|
3,409
|
|
|
|
—
|
|
|
|
3,409
|
|
Foreign exchange contracts
|
|
|
—
|
|
|
|
4,658
|
|
|
|
—
|
|
|
|
4,658
|
|
Total assets
|
|
$
|
104,692
|
|
|
$
|
963,669
|
|
|
$
|
21
|
|
|
$
|
1,068,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
—
|
|
|
$
|
10,286
|
|
|
$
|
—
|
|
|
$
|
10,286
|
|
Foreign exchange contracts
|
|
|
—
|
|
|
|
2,200
|
|
|
|
—
|
|
|
|
2,200
|
|
Total liabilities
|
|
$
|
—
|
|
|
$
|
12,486
|
|
|
$
|
—
|
|
|
$
|
12,486
|
|
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 March 31, 2021, and December 31, 2020, 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.
For financial assets measured at fair value on a nonrecurring basis that were still reflected in the Condensed Consolidated Balance Sheets as of March 31, 2021, 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 March 31, 2021, and December 31, 2020, and the total losses for the periods indicated:
|
|
As of March 31, 2021
|
|
|
Total Losses
|
|
|
|
Fair Value Measurements Using
|
|
|
Total Fair Value
|
|
|
For the Three Months Ended
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Measurements
|
|
|
March 31, 2021
|
|
|
March 31, 2020
|
|
|
|
(In thousands)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held-for-investment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
14,258
|
|
|
$
|
14,258
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Commercial mortgage loans
|
|
|
—
|
|
|
|
—
|
|
|
|
11,029
|
|
|
|
11,029
|
|
|
|
—
|
|
|
|
—
|
|
Total loans held-for-investment
|
|
|
—
|
|
|
|
—
|
|
|
|
25,287
|
|
|
|
25,287
|
|
|
|
—
|
|
|
|
—
|
|
Other real estate owned (1)
|
|
|
—
|
|
|
|
905
|
|
|
|
4,236
|
|
|
|
5,141
|
|
|
|
—
|
|
|
|
336
|
|
Investments in venture capital and private company stock
|
|
|
—
|
|
|
|
—
|
|
|
|
1,094
|
|
|
|
1,094
|
|
|
|
71
|
|
|
|
33
|
|
Total assets
|
|
$
|
—
|
|
|
$
|
905
|
|
|
$
|
30,617
|
|
|
$
|
31,522
|
|
|
$
|
71
|
|
|
$
|
369
|
|
(1) Other real estate owned balance of $4.9 million in the Condensed Consolidated Balance Sheets is net of estimated disposal costs.
|
|
As of December 31, 2020
|
|
|
Total Losses
|
|
|
|
Fair Value Measurements Using
|
|
|
Total Fair Value
|
|
|
For the Twelve Months Ended
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Measurements
|
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
|
|
(In thousands)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans by type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,342
|
|
|
$
|
5,342
|
|
|
$
|
7,012
|
|
|
$
|
—
|
|
Commercial mortgage loans
|
|
|
—
|
|
|
|
—
|
|
|
|
25,749
|
|
|
|
25,749
|
|
|
|
—
|
|
|
|
—
|
|
Residential mortgage loans and equity lines
|
|
|
—
|
|
|
|
—
|
|
|
|
4,307
|
|
|
|
4,307
|
|
|
|
—
|
|
|
|
—
|
|
Total impaired loans
|
|
|
—
|
|
|
|
—
|
|
|
|
35,398
|
|
|
|
35,398
|
|
|
|
7,012
|
|
|
|
—
|
|
Other real estate owned (1)
|
|
|
—
|
|
|
|
905
|
|
|
|
4,236
|
|
|
|
5,141
|
|
|
|
717
|
|
|
|
681
|
|
Investments in venture capital and private company stock
|
|
|
—
|
|
|
|
—
|
|
|
|
1,381
|
|
|
|
1,381
|
|
|
|
107
|
|
|
|
167
|
|
Total assets
|
|
$
|
—
|
|
|
$
|
905
|
|
|
$
|
41,015
|
|
|
$
|
41,920
|
|
|
$
|
7,836
|
|
|
$
|
848
|
|
(1) Other real estate owned balance of $4.9 million in the condensed 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.
The significant unobservable inputs 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 3% to 6% of the collateral value of individually evaluated loans, quoted price, or loan sale price of loans held for sale, and appraised value of OREO.
The significant unobservable inputs in the Black-Scholes option pricing model for the fair value of warrants are their expected life ranging from one to six years, risk-free interest rate from 0.20% to 1.34%, and stock volatility from 16.76% to 21.30%.
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.
38
The following table sets forth the carrying and notional amounts and estimated fair value of financial instruments as of March 31, 2021, and December 31, 2020:
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
|
|
Carrying
|
|
|
|
|
|
|
Carrying
|
|
|
|
|
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Amount
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
141,885
|
|
|
$
|
141,885
|
|
|
$
|
138,616
|
|
|
$
|
138,616
|
|
Short-term investments
|
|
|
1,612,411
|
|
|
|
1,612,411
|
|
|
|
1,282,462
|
|
|
|
1,282,462
|
|
Securities available-for-sale
|
|
|
908,844
|
|
|
|
908,844
|
|
|
|
1,036,550
|
|
|
|
1,036,550
|
|
Loans, net
|
|
|
15,497,712
|
|
|
|
16,094,374
|
|
|
|
15,475,364
|
|
|
|
16,103,471
|
|
Equity securities
|
|
|
20,993
|
|
|
|
20,993
|
|
|
|
23,744
|
|
|
|
23,744
|
|
Investment in Federal Home Loan Bank stock
|
|
|
17,250
|
|
|
|
17,250
|
|
|
|
17,250
|
|
|
|
17,250
|
|
Warrants
|
|
|
16
|
|
|
|
16
|
|
|
|
21
|
|
|
|
21
|
|
|
|
Notional
|
|
|
|
|
|
|
Notional
|
|
|
|
|
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Amount
|
|
|
Fair Value
|
|
Foreign exchange contracts
|
|
$
|
154,340
|
|
|
$
|
2,891
|
|
|
$
|
151,244
|
|
|
$
|
4,658
|
|
Interest rate swaps
|
|
|
496,140
|
|
|
|
3,615
|
|
|
|
96,889
|
|
|
|
3,409
|
|
|
|
Carrying
|
|
|
|
|
|
|
Carrying
|
|
|
|
|
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Amount
|
|
|
Fair Value
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
16,353,633
|
|
|
$
|
16,364,101
|
|
|
$
|
16,109,401
|
|
|
$
|
16,125,808
|
|
Advances from Federal Home Loan Bank
|
|
|
75,000
|
|
|
|
77,691
|
|
|
|
150,000
|
|
|
|
155,133
|
|
Other borrowings
|
|
|
23,333
|
|
|
|
19,861
|
|
|
|
23,714
|
|
|
|
19,632
|
|
Long-term debt
|
|
|
119,136
|
|
|
|
64,892
|
|
|
|
119,136
|
|
|
|
65,487
|
|
|
|
Notional
|
|
|
|
|
|
|
Notional
|
|
|
|
|
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Amount
|
|
|
Fair Value
|
|
Foreign exchange contracts
|
|
$
|
96,119
|
|
|
$
|
2,550
|
|
|
$
|
132,813
|
|
|
$
|
2,200
|
|
Interest rate swaps
|
|
|
662,228
|
|
|
|
12,116
|
|
|
|
679,648
|
|
|
|
10,286
|
|
|
|
Notional
|
|
|
|
|
|
|
Notional
|
|
|
|
|
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Amount
|
|
|
Fair Value
|
|
Off-Balance Sheet Financial Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments to extend credit
|
|
$
|
3,095,013
|
|
|
$
|
(9,614
|
)
|
|
$
|
2,977,528
|
|
|
$
|
(8,432
|
)
|
Standby letters of credit
|
|
|
237,488
|
|
|
|
(1,720
|
)
|
|
|
234,200
|
|
|
|
(1,630
|
)
|
Other letters of credit
|
|
|
21,975
|
|
|
|
(19
|
)
|
|
|
16,821
|
|
|
|
(16
|
)
|
Bill of lading guarantees
|
|
|
—
|
|
|
|
—
|
|
|
|
238
|
|
|
|
—
|
|
39
The following tables set forth the level in the fair value hierarchy for the estimated fair values of financial instruments as of March 31, 2021, and December 31, 2020.
|
|
As of March 31, 2021
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Measurements
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
(In thousands)
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
141,885
|
|
|
$
|
141,885
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Short-term investments
|
|
|
1,612,411
|
|
|
|
1,612,411
|
|
|
|
—
|
|
|
|
—
|
|
Securities available-for-sale
|
|
|
908,844
|
|
|
|
40,720
|
|
|
|
868,124
|
|
|
|
—
|
|
Loans, net
|
|
|
16,094,374
|
|
|
|
—
|
|
|
|
—
|
|
|
|
16,094,374
|
|
Equity securities
|
|
|
20,993
|
|
|
|
20,993
|
|
|
|
—
|
|
|
|
—
|
|
Investment in Federal Home Loan Bank stock
|
|
|
17,250
|
|
|
|
—
|
|
|
|
17,250
|
|
|
|
—
|
|
Warrants
|
|
|
16
|
|
|
|
—
|
|
|
|
—
|
|
|
|
16
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
16,364,101
|
|
|
|
—
|
|
|
|
—
|
|
|
|
16,364,101
|
|
Advances from Federal Home Loan Bank
|
|
|
77,691
|
|
|
|
—
|
|
|
|
77,691
|
|
|
|
—
|
|
Other borrowings
|
|
|
19,861
|
|
|
|
—
|
|
|
|
—
|
|
|
|
19,861
|
|
Long-term debt
|
|
|
64,892
|
|
|
|
—
|
|
|
|
64,892
|
|
|
|
—
|
|
|
|
As of December 31, 2020
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Measurements
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
(In thousands)
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
138,616
|
|
|
$
|
138,616
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Short-term investments
|
|
|
1,282,462
|
|
|
|
1,282,462
|
|
|
|
—
|
|
|
|
—
|
|
Securities available-for-sale
|
|
|
1,036,550
|
|
|
|
80,948
|
|
|
|
955,602
|
|
|
|
—
|
|
Loans, net
|
|
|
16,103,471
|
|
|
|
—
|
|
|
|
—
|
|
|
|
16,103,471
|
|
Equity securities
|
|
|
23,744
|
|
|
|
23,744
|
|
|
|
—
|
|
|
|
—
|
|
Investment in Federal Home Loan Bank stock
|
|
|
17,250
|
|
|
|
—
|
|
|
|
17,250
|
|
|
|
—
|
|
Warrants
|
|
|
21
|
|
|
|
—
|
|
|
|
—
|
|
|
|
21
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
16,125,808
|
|
|
|
—
|
|
|
|
—
|
|
|
|
16,125,808
|
|
Advances from Federal Home Loan Bank
|
|
|
155,133
|
|
|
|
—
|
|
|
|
155,133
|
|
|
|
—
|
|
Other borrowings
|
|
|
19,632
|
|
|
|
—
|
|
|
|
—
|
|
|
|
19,632
|
|
Long-term debt
|
|
|
65,487
|
|
|
|
—
|
|
|
|
65,487
|
|
|
|
—
|
|
14. Goodwill and Goodwill Impairment
The Company’s policy is to assess goodwill for impairment at the reporting unit level on an annual basis or between annual assessments if a triggering event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Impairment is the condition that exists when the carrying amount of goodwill exceeds its implied fair value.
40
15. Financial Derivatives
It is our policy not to speculate on the future direction of interest rates. However, from time to time, we may enter into financial derivatives in order to seek mitigation of exposure to interest rate risks related to our interest-earning assets and interest-bearing liabilities. We believe that these transactions, when properly structured and managed, may provide a hedge against inherent interest rate risk in our assets or liabilities and against risk in specific transactions. In such instances, we may enter into interest rate swap contracts or other types of financial derivatives. Prior to considering any hedging activities, we seek to analyze the costs and benefits of the hedge in comparison to other viable alternative strategies. All hedges must be approved by the Bank’s Investment Committee.
The Company follows ASC Topic 815 that establishes accounting and reporting standards for financial derivatives, including certain financial derivatives embedded in other contracts, and hedging activities. It requires the recognition of all financial derivatives as assets or liabilities in the Company’s Condensed 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 Condensed Consolidated Financial Statements.
The Company offers various interest rate derivative contracts to its customers. When derivative transactions are executed with its customers, the derivative contracts are offset by paired trades with third-party financial institutions including with central counterparties (“CCP”). Certain derivative contracts entered with CCPs are settled-to-market daily to the extent the CCP’s rulebooks legally characterize the variation margin as settlement. Derivative contracts are intended to allow borrowers to lock in attractive intermediate and long-term fixed rate financing while not increasing the interest rate risk to the Company. These transactions are generally not linked to specific Company assets or liabilities on the Condensed Consolidated Balance Sheets or to forecasted transactions in a hedging relationship and, therefore, are economic hedges. The contracts are marked to market at each reporting period. The changes in fair values of the derivative contracts traded with third-party financial institutions are expected to be largely comparable to the changes in fair values of the derivative transactions executed with customers throughout the terms of these contracts, except for the credit valuation adjustment component. The Company records credit valuation adjustments on derivatives to properly reflect the variances of credit worthiness between the Company and the counterparties, considering the effects of enforceable master netting agreements and collateral arrangements.
In May 2014, the Bancorp entered into interest rate swap contracts in the notional amount of $119.1 million for a period of ten years. The objective of these interest rate swap contracts, which were designated as hedging instruments in cash flow hedges, was to hedge the quarterly interest payments on the Bancorp’s $119.1 million of Junior Subordinated Debentures that had been issued to five trusts, throughout the ten-year period beginning in June 2014 and ending in June 2024, from the risk of variability of these payments resulting from changes in the three-month LIBOR interest rate. As of March 31, 2021, and 2020, the ineffective portion of these interest rate swaps was not significant. The notional amount and net unrealized loss of the Company’s cash flow derivative financial instruments as of March 31, 2021, and December 31, 2020, were as follows:
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
Cash flow swap hedges:
|
|
(In thousands)
|
|
Notional
|
|
$
|
119,136
|
|
|
$
|
119,136
|
|
Weighted average fixed rate-pay
|
|
|
2.61
|
%
|
|
|
2.61
|
%
|
Weighted average variable rate-receive
|
|
|
0.19
|
%
|
|
|
0.44
|
%
|
|
|
|
|
|
|
|
|
|
Unrealized loss, net of taxes (1)
|
|
$
|
(5,627
|
)
|
|
$
|
(6,890
|
)
|
|
|
Three months ended
|
|
|
|
March 31, 2021
|
|
|
March 31, 2020
|
|
Periodic net settlement of swaps (2)
|
|
$
|
711
|
|
|
$
|
255
|
|
(1)-Included in other comprehensive income.
(2)-the amount of periodic net settlement of interest rate swaps was included in interest expense.
As of March 31, 2021, the Bank’s outstanding interest rate swap contracts had a notional amount of $819.8 million for various terms from three to ten years. The Bank entered into these interest rate swap contracts that are matched to fixed-rate commercial real estate loans in the Bank’s loan portfolio. These contracts have been designated as hedging instruments to hedge the risk of changes in the fair value of the underlying commercial real estate loans due to changes in interest rates. The swap contracts are structured so that the notional amounts reduce over time to match the contractual amortization of the underlying loan and allow prepayments with the same pre-payment penalty amounts as the related loan. As of March 31, 2021, and 2020, the ineffective portion of these interest rate swaps was not significant. The notional amount and net unrealized loss of the Company’s fair value derivative financial instruments as of March 31, 2021, and December 31, 2020, were as follows:
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
Fair value swap hedges:
|
|
(In thousands)
|
|
Notional
|
|
$
|
819,820
|
|
|
$
|
478,266
|
|
Weighted average fixed rate-pay
|
|
|
3.26
|
%
|
|
|
4.56
|
%
|
Weighted average variable rate spread
|
|
|
1.70
|
%
|
|
|
2.46
|
%
|
Weighted average variable rate-receive
|
|
|
1.82
|
%
|
|
|
3.11
|
%
|
|
|
|
|
|
|
|
|
|
Net unrealized loss (1)
|
|
$
|
(10,735
|
)
|
|
$
|
(15,082
|
)
|
|
|
Three months ended
|
|
|
|
March 31, 2021
|
|
|
March 31, 2020
|
|
Periodic net settlement of SWAPs (2)
|
|
$
|
(2,387
|
)
|
|
$
|
(643
|
)
|
(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.
The Company has designated as a partial-term hedging election $375.0 million notional as last-of-layer hedge on a pool of loans with a notational value of $779.3 million as of March 31, 2021. The loans are not expected to be affected by prepayment, defaults, or other factors affecting the timing and amount of cash flows under the last-of-layer method. The Company has entered into a pay-fixed and receive 1-Month LIBOR interest rate swap to convert the last-of-layer $375.0 million portion of a $779.3 million fixed rate loan tranche in order to reduce the Company’s exposure to higher interest rates for the last-of-layer tranche. As of March 31, 2021, the last-of-layer loan tranche had a fair value basis adjustment of $809 thousand. The interest rate swap converts this last-of-layer tranche into a floating rate instrument. The Company’s risk management objective with respect to this last-of-layer interest rate swap is to reduce interest rate exposure as to the last-of-layer tranche.
Interest rate swap contracts involve the risk of dealing with institutional derivative counterparties and their ability to meet contractual terms. Institutional counterparties must have a strong credit profile and be approved by 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. The 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. Cash posted as collateral by the Bancorp related to derivative contracts totaled $10.0 million as of March 31, 2021 and $11.9 million as of December 31, 2020.
The Company from time to time 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 Condensed 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 March 31, 2021, and December 31, 2020, were as follows:
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
Derivative financial instruments not designated as hedging instruments:
|
|
(In thousands)
|
|
Notional amounts:
|
|
|
|
|
|
|
|
|
Spot, forward, and swap contracts with positive fair value
|
|
$
|
154,340
|
|
|
$
|
151,244
|
|
Spot, forward, and swap contracts with negative fair value
|
|
$
|
96,119
|
|
|
$
|
132,813
|
|
Fair value:
|
|
|
|
|
|
|
|
|
Spot, forward, and swap contracts with positive fair value
|
|
$
|
2,891
|
|
|
$
|
4,658
|
|
Spot, forward, and swap contracts with negative fair value
|
|
$
|
(2,550
|
)
|
|
$
|
(2,200
|
)
|
43
16. Balance Sheet Offsetting
Certain financial instruments, including resell and repurchase agreements, securities lending arrangements and derivatives, may be eligible for offset in the Condensed 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 Condensed Consolidated Balance Sheets, as of March 31, 2021, and December 31, 2020, 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)
|
|
March 31, 2021
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$
|
3,615
|
|
|
$
|
—
|
|
|
$
|
3,615
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$
|
21,143
|
|
|
$
|
(9,027
|
)
|
|
$
|
12,116
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$
|
3,409
|
|
|
$
|
—
|
|
|
$
|
3,409
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$
|
28,258
|
|
|
$
|
(17,972
|
)
|
|
$
|
10,286
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10,286
|
|
44
17. Revenue from Contracts with Customers
The following is a summary of revenue from contracts with customers that are in-scope and not in-scope under ASC 606:
|
|
Three months Ended March 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
(In thousands)
|
|
Non-interest income, in-scope:
|
|
|
|
|
|
|
|
|
Fees and service charges on deposit accounts
|
|
$
|
2,112
|
|
|
$
|
2,054
|
|
Wealth management fees
|
|
|
3,557
|
|
|
|
3,137
|
|
Other service fees(1)
|
|
|
3,491
|
|
|
|
3,372
|
|
Total noninterest income
|
|
|
9,160
|
|
|
|
8,563
|
|
|
|
|
|
|
|
|
|
|
Noninterest income, not in-scope(2)
|
|
|
840
|
|
|
|
(2,777
|
)
|
Total noninterest income
|
|
$
|
10,000
|
|
|
$
|
5,786
|
|
|
(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 customers that are out of the scope of ASC 606.
|
The major revenue streams by fee type that are within the scope of ASC 606 presented in the above table is 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 customers 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 customers 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 customers 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 customer pays for that good or service is one year or less.
18. Stockholders’ Equity
Total equity was $2.46 billion as of March 31, 2021, an increase of $45.1 million, from $2.42 billion as of December 31, 2020, primarily due to net income of $73.4 million, and proceeds from dividend reinvestment of $868 thousand, and partially offset by common stock cash dividends of $24.6 million and a decrease in other comprehensive income of $3.6 million.
Activity in accumulated other comprehensive income, net of tax, and reclassification out of accumulated other comprehensive income for the three months ended March 31, 2021, and March 31, 2020, was as follows:
|
|
Three months ended March 31, 2021
|
|
|
Three months ended March 31, 2020
|
|
|
|
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 available-for-sale
|
|
|
|
|
|
|
|
|
|
$
|
12,200
|
|
|
|
|
|
|
|
|
|
|
$
|
5,714
|
|
Cash flow hedge derivatives
|
|
|
|
|
|
|
|
|
|
|
(6,890
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,412
|
)
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
5,310
|
|
|
|
|
|
|
|
|
|
|
$
|
2,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains/(losses) arising during the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available-for-sale
|
|
$
|
(6,085
|
)
|
|
$
|
(1,799
|
)
|
|
$
|
(4,286
|
)
|
|
$
|
16,833
|
|
|
$
|
4,976
|
|
|
$
|
11,857
|
|
Cash flow hedge derivatives
|
|
|
1,793
|
|
|
|
530
|
|
|
|
1,263
|
|
|
|
(6,073
|
)
|
|
|
(1,795
|
)
|
|
|
(4,278
|
)
|
Total
|
|
$
|
(4,292
|
)
|
|
$
|
(1,269
|
)
|
|
$
|
(3,023
|
)
|
|
$
|
10,760
|
|
|
$
|
3,181
|
|
|
$
|
7,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for net losses in net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available-for-sale
|
|
|
(853
|
)
|
|
|
(252
|
)
|
|
|
(601
|
)
|
|
|
(6
|
)
|
|
|
(2
|
)
|
|
|
(4
|
)
|
Cash flow hedge derivatives
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
|
(853
|
)
|
|
|
(252
|
)
|
|
|
(601
|
)
|
|
|
(6
|
)
|
|
|
(2
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income/(loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available-for-sale
|
|
$
|
(6,938
|
)
|
|
$
|
(2,051
|
)
|
|
$
|
(4,887
|
)
|
|
$
|
16,827
|
|
|
$
|
4,974
|
|
|
$
|
11,853
|
|
Cash flow hedge derivatives
|
|
|
1,793
|
|
|
|
530
|
|
|
|
1,263
|
|
|
|
(6,073
|
)
|
|
|
(1,795
|
)
|
|
|
(4,278
|
)
|
Total
|
|
$
|
(5,145
|
)
|
|
$
|
(1,521
|
)
|
|
$
|
(3,624
|
)
|
|
$
|
10,754
|
|
|
$
|
3,179
|
|
|
$
|
7,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, gain/(loss), net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available-for-sale
|
|
|
|
|
|
|
$
|
7,313
|
|
|
|
|
|
|
|
|
|
|
$
|
17,567
|
|
Cash flow hedge derivatives
|
|
|
|
|
|
|
|
(5,627
|
)
|
|
|
|
|
|
|
|
|
|
|
(7,690
|
)
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
1,686
|
|
|
|
|
|
|
|
|
|
|
$
|
9,877
|
|
19. Subsequent Events
On April 1, 2021, the Board of Directors approved a new stock repurchase program to buy back up to $75.0 million of the Company’s common stock.
The Company has evaluated the effect of events that have occurred subsequent to March 31, 2021, through the date of issuance of the Condensed 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 Condensed Consolidated Financial Statements or disclosure in the Notes to the Condensed Consolidated Financial Statements.