CATHAY GENERAL BANCORP 10-K

caty20211231_10k.htm   Table of Contents     UNITED STATES SECURITIES AND EXCHANGE COMMISSION   Washington, D.C. 20549   Form 10-K   ☑           ANNUAL REPORT PURSUANT TO SECTION   13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934              For the fiscal year ended December 31, 2021   ☐          TRANSITION REPORT PURSUANT TO SECTION   13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934   Commission file number 001-31830   Cathay General Bancorp   (Exact name of Registrant as specified in its charter)   Delaware 95-4274680 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 777 North Broadway , Los Angeles , California (Address of principal executive offices) 90012 (Zip Code)   Registrant ’ s telephone number, including area code:   ( 213 )   625-4700   Securities registered pursuant to Section   12(b) of the Act:   Title of each class Trading Symbol(s) Name of each exchange on which registered Common Stock, $0.01 par value CATY NASDAQ Global Select Market   Securities registered pursuant to Section   12(g) of the Act:   None   Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  ☑ No ☐   Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No  ☑   Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ☑ No ☐       Table of Contents   Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).           Yes  ☑                  No ☐   Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):     Large accelerated filer ☑ Accelerated filer ☐   Non-accelerated filer ☐ Smaller reporting company ☐   Emerging growth company ☐     If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐   Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  ☑   Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑                               The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the price at which the common equity was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter (June 30, 2021) was $ 2,932,760,332 . This value is estimated solely for the purposes of this cover page. The market value of shares held by registrant’s directors, executive officers, and Employee Stock Ownership Plan have been excluded because they may be considered to be affiliates of the registrant.   As of February 15, 2022, the registrant had outstanding 75,286,834 shares of its common stock.   DOCUMENTS INCORPORATED BY REFERENCE   Portions of registrant’s definitive proxy statement relating to registrant’s 2022 Annual Meeting of Stockholders, which will be filed within 120 days of the fiscal year ended December 31, 2021, are incorporated by reference in this Form 10-K in response to Part III, Items 10 through 14 of this Form 10-K.   Auditor Name:  KPMG LLP Auditor Location:  Los Angeles, California Auditor Firm ID:  185     Table of Contents       CATHAY GENERAL BANCORP   2021 ANNUAL REPORT ON FORM 10-K   TABLE OF CONTENTS   PART I   2 Item 1. Business 2 Executive Officers of the Registrant 10 Item 1A. Risk Factors 28 Item 1B. Unresolved Staff Comments 53 Item 2. Properties 53 Item 3. Legal Proceedings 53 Item 4. Mine Safety Disclosures 53 PART II   54 Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 54 Item 6. [Reserved] 56 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 56 Item 7A. Quantitative and Qualitative Disclosures about Market Risk. 88 Item 8. Financial Statements and Supplementary Data 93 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 93 Item 9A. Controls and Procedures 93 Item 9B. Other Information 96 PART III   96 Item 10. Directors, Executive Officers and Corporate Governance 96 Item 11. Executive Compensation 96 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 96 Item 13. Certain Relationships and Related Transactions, and Director Independence  97 Item 14. Principal Accounting Fees and Services 97 PART IV   97 Item 15. Exhibits, Financial Statement Schedules 97 SIGNATURES 103     Table of Contents     Forward-Looking Statements   In this Annual Report on Form   10-K, the term “ Bancorp ” refers to Cathay General Bancorp and the term “ Bank ” refers to Cathay Bank. The terms “ Company, ” “ we, ” “ us, ” and “ our ” refer to Bancorp and its subsidiaries, including the Bank, collectively. The statements in this report include forward-looking statements within the meaning of the applicable provisions of the Private Securities Litigation Reform Act of 1995 regarding management ’ s beliefs, projections, and assumptions concerning future results and events. We intend such forward-looking statements to be covered by the safe harbor provision for forward-looking statements in these provisions. All statements other than statements of historical fact are “ forward-looking statements ” for purposes of federal and state securities laws, including statements about anticipated future operating and financial performance, financial position and liquidity, growth opportunities and growth rates, growth plans, acquisition and divestiture opportunities, business prospects, strategic alternatives, business strategies, financial expectations, regulatory and competitive outlook, investment and expenditure plans, financing needs and availability, and other similar forecasts and statements of expectation and statements of assumptions underlying any of the foregoing. Words such as “ aims, ” “ anticipates, ” “ believes, ” “ can, ” “ could, ” “ estimates, ” “ expects, ” “ hopes, ” “ intends, ” “ may, ” “ plans, ” “ projects, ” “ seeks, ” “ shall, ” “ should, ” “ will, ” “ predicts, ” “ potential, ” “ continue, ” “ possible, ” “ optimistic, ” and variations of these words and similar expressions are intended to identify these forward-looking statements.   Forward-looking statements by us are based on estimates, beliefs, projections, and assumptions of management and are not guarantees of future performance. Management's expectations and assumptions, and the continued validity of the forward-looking statements, are subject to change due to a broad range of factors affecting the U.S. and global economies, regulatory environment and the equity, debt, currency and other financial markets, as well as factors specific to Bancorp and its subsidiaries, including Cathay Bank. Factors that could cause changes in the expectations or assumptions on which forward-looking statements are based cannot be foreseen with certainty and include the factors described under the headings "Risk Factors Summary" and "Risk Factors" and elsewhere in this Form 10-K, including under "Management's Discussion and Analysis," and Bancorp ’ s other reports and filings filed with the Securities and Exchange Commission (the “ SEC ” ) from time to time. Actual results in any future period may also vary from the past results discussed in this report. Given these risks and uncertainties, readers are cautioned not to place undue reliance on any forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and, except as required by law, we undertake no obligation to update or review any forward-looking statement to reflect circumstances, developments or events occurring after the date on which the statement is made or to reflect the occurrence of unanticipated events.   1 Table of Contents   PART I     Item 1.           Business   Business of Bancorp   Overview   Cathay General Bancorp (the “Bancorp” on a parent-only basis, and the “Company,” “we,” “us” or “our” on a consolidated basis) is a corporation that was organized in 1990 under the laws of the State of Delaware. The Bancorp is the holding company of Cathay Bank, a California state-chartered commercial bank (“Cathay Bank” or the “Bank”), ten limited partnerships investing in affordable housing investments in which the Bank is the sole limited partner, and GBC Venture Capital, Inc. The Bancorp also own 100% of the common stock of five statutory business trusts created for the purpose of issuing capital securities.   Our principal place of business is located at 777 North Broadway, Los Angeles, California 90012, and our telephone number at that location is (213) 625-4700. Certain of our administrative offices are located at 9650 Flair Drive, El Monte, California 91731. Our common stock is traded on the NASDAQ Global Select Market, and our trading symbol is “CATY”.   The Bancorp is regulated as a bank holding company by the Board of Governors of the Federal Reserve System (“Federal Reserve”). Cathay Bank is regulated as a California commercial bank by the California Department of Financial Protection and Innovation (“DFPI”) and the Federal Deposit Insurance Corporation (“FDIC”).   At December 31, 2021, we had $20.9 billion in total consolidated assets, $16.2 billion in net loans, $18.1 billion in deposits, and $2.4 billion in shareholders’ equity.   Subsidiaries of Bancorp   In addition to Cathay Bank, the Bancorp has the following subsidiaries:   Cathay Capital Trust I, Cathay Statutory Trust I, Cathay Capital Trust II, Cathay Capital Trust III and Cathay Capital Trust IV. The Bancorp established Cathay Capital Trust I in June 2003, Cathay Statutory Trust I in September 2003, Cathay Capital Trust II in December 2003, Cathay Capital Trust III in March 2007, and Cathay Capital Trust IV in May 2007 (collectively, the “Trusts”) as wholly-owned subsidiaries. The Trusts are statutory business trusts. The Trusts issued capital securities representing undivided preferred beneficial interests in the assets of the Trusts. The Trusts exist for the purpose of issuing the capital securities and investing the proceeds thereof, together with proceeds from the purchase of the common securities of the Trusts by the Bancorp, in a certain series of securities issued by us, with similar terms to the relevant series of securities issued by each of the Trusts, which we refer to as “Junior Subordinated Notes.” The Bancorp guarantees, on a limited basis, payments of distributions on the capital securities of the Trusts and payments on redemption of the capital securities of the Trusts. The Bancorp is the owner of all the beneficial interests represented by the common securities of the Trusts. The purpose of issuing the capital securities was to provide the Company with a cost-effective means of obtaining capital. Because the Bancorp is not the primary beneficiary of the Trusts, the financial statements of the Trusts are not included in our Consolidated Financial Statements.   GBC Venture Capital, Inc. The business purpose of GBC Venture Capital, Inc. is to hold equity interests (such as options or warrants) received as part of business relationships and to make equity investments in companies and limited partnerships subject to applicable regulatory restrictions.   2 Table of Contents   Competition   The Bancorp’s primary business is to act as the holding company for the Bank. Accordingly, the Bancorp faces the same competitive pressures as those expected by the Bank. For a discussion of those risks, see “Business of the Bank — Competition” below under this Item 1.   Employees   Due to the limited nature of the Bancorp’s activities as a bank holding company, the Bancorp currently does not employ any persons other than the Bancorp’s management, which includes the Chief Executive Officer and President, Executive Chairman, the Chief Financial Officer, the Secretary and General Counsel, and the Assistant Secretary. See also “Business of the Bank — Employees ” below under this Item 1. In the future, the Bancorp may become an operating company or may engage in such other activities or acquire such other businesses as may be permitted by applicable law.   Business of the Bank   General   Cathay Bank was incorporated under the laws of the State of California on August 22, 1961, is licensed by the DFPI, and commenced operations as a California state-chartered bank on April 19, 1962. Cathay Bank is an insured bank under the Federal Deposit Insurance Act by the FDIC, but it is not a member of the Federal Reserve.   The Bank’s head office is located in the Chinatown area of Los Angeles, at 777 North Broadway, Los Angeles, California 90012. As of December 31, 2021, the Bank has branch offices in Southern California (24 branches), Northern California (13 branches), New York (10 branches), Washington (four branches), Illinois (two branches), Texas (two branches), Maryland (one branch), Massachusetts (one branch), Nevada (one branch), New Jersey (one branch), and Hong Kong (one branch) and a representative office in Beijing, Shanghai, and Taipei. Deposit accounts at the Hong Kong branch are not insured by the FDIC. Each branch has loan approval rights subject to the branch manager’s authorized lending limits. Current activities of the Beijing, Shanghai, and Taipei representative offices are limited to coordinating the transportation of documents to the Bank’s head office and performing liaison services.   Our primary market area is defined by the CRA delineation, which includes the contiguous areas surrounding each of the Bank’s branch offices. It is the Bank’s policy to reach out and actively offer services to low and moderate income groups in the delineated branch service areas. Many of the Bank’s employees speak both English and one or more Chinese dialects or Vietnamese, and are thus able to serve the Bank’s English, Chinese and Vietnamese speaking customers.   As a commercial bank, the Bank accepts checking, savings, and time deposits, and makes commercial, real estate, personal, home improvement, and other installment and term loans. From time to time, the Bank invests available funds in other interest-earning assets, such as U.S. Treasury securities, U.S. government agency securities, state and municipal securities, mortgage-backed securities, asset-backed securities, corporate bonds, and other security investments. The Bank also provides letters of credit, wire transfers, forward currency spot and forward contracts, traveler’s checks, safe deposit, night deposit, Social Security payment deposit, collection, bank-by-mail, drive-up and walk-up windows, automatic teller machines (“ATM”), Internet banking services, treasury management services, and other customary banking services.   The Bank primarily services individuals, professionals, and small to medium-sized businesses in the local markets in which its branches are located and provides commercial mortgage loans, commercial loans, U.S. Small Business Administration (“SBA”) loans, residential mortgage loans, real estate construction loans, home equity lines of credit, and installment loans to individuals for, household and other consumer expenditures.   3 Table of Contents   Through its Cathay Wealth Management business unit, the Bank provides its customers with a range of investment products and services, such as stocks, bonds, mutual funds, insurance, annuities, and advisory services.  As of December 31, 2021, all securities and insurance products provided by Cathay Wealth Management are offered by, and all financial consultants are registered with, Cetera Investment Services LLC, a registered securities broker/dealer and licensed insurance agency and member of the Financial Industry Regulatory Authority and Security Investor Protection Corporation. Cetera Investment Services LLC and Cathay Bank are independent entities. The securities and insurance products offered by Cetera Investment Services LLC are not insured by the FDIC.   Securities   The Bank’s securities portfolio is managed in accordance with a written investment policy which addresses strategies, types, and levels of allowable investments, and which is reviewed and approved by our Board of Directors on an annual basis.   Our investment portfolio is managed to meet our liquidity needs through proceeds from scheduled maturities and is also utilized for pledging requirements for deposits of state and local subdivisions, securities sold under repurchase agreements, and Federal Home Loan Bank (“FHLB”) advances. The portfolio is comprised of U.S. government securities, mortgage-backed securities, collateralized mortgage obligations, corporate debt instruments, and mutual funds.   Information concerning the carrying value, maturity distribution, and yield analysis of the Company’s securities portfolio as well as a summary of the amortized cost and estimated fair value of the Bank’s securities by contractual maturity is included in Part II — Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in Note 3 to the Consolidated Financial Statements.   Loans   The Bank’s Board of Directors and senior management establish, review, and modify the Bank’s lending policies. These policies include (as applicable) an evaluation of a potential borrower’s financial condition, ability to repay the loan, character, secondary repayment sources (such as guaranties), quality and availability of collateral, capital, leverage capacity and regulatory guidelines, market conditions for the borrower’s business or project, and prevailing economic trends and conditions. Loan originations are obtained through a variety of sources, including existing customers, walk-in customers, referrals from brokers or existing customers, and advertising. While loan applications are accepted at all branches, the Bank’s centralized document department supervises the application process including documentation of loans, review of appraisals, and credit reports.   Commercial Mortgage Loans. Commercial mortgage loans (also known as CRE loans) are typically secured by first deeds of trust on commercial properties. Our commercial mortgage portfolio includes primarily commercial retail properties, shopping centers, and owner-occupied industrial facilities, and, secondarily, office buildings, multiple-unit apartments, hotels, and multi-tenanted industrial properties.   The Bank also makes medium-term commercial mortgage loans which are generally secured by commercial or industrial buildings where the borrower uses the property for business purposes or derives income from tenants.   Commercial Loans. The Bank provides financial services to diverse commercial and professional businesses in its market areas. Commercial loans consist primarily of short-term loans (normally with a maturity of up to one year) to support general business purposes, or to provide working capital to businesses in the form of lines of credit to finance trade. The Bank continues to focus primarily on commercial lending to small-to-medium size businesses within the Bank’s geographic market areas. The Bank participates or syndicates loans, typically more than $25.0 million in principal amount, with other financial institutions to limit its credit exposure. Commercial loan pricing is generally at a rate tied to the prime rate, as quoted in The Wall Street Journal , or the Bank’s reference rate.   4 Table of Contents   SBA Loans. The Bank originates SBA loans under the national “preferred lender” status. Preferred lender status is granted to a lender that has made a certain number of SBA loans and which, in the opinion of the SBA, has staff qualified and experienced in small business loans. As a preferred lender, the Bank’s SBA Lending Group has the authority to issue, on behalf of the SBA, the SBA guaranty on loans under the 7(a) program which may result in shortening the time it takes to process a loan. The 7(a) program is the SBA’s primary loan program, and which can be used for financing of a variety of general business purposes such as acquisition of land, buildings, equipment and inventory and working capital needs of eligible businesses generally over a 5-25-year term. In addition, under this program, the SBA delegates loan underwriting, closing, and most servicing and liquidation authority and responsibility to selected lenders.   The Bank utilizes both the 504 program, which is focused on long-term financing of buildings and other long-term fixed assets, and the 7(a) program. The collateral position in the SBA loans is enhanced by the SBA guaranty in the case of 7(a) loans, and by lower loan-to-value ratios under the 504 program. The Bank has sold, and may in the future sell, the guaranteed portion of certain of its SBA 7(a) loans in the secondary market. SBA loan pricing is generally at a rate tied to the prime rate, as quoted in The Wall Street Journal .   Residential Mortgage Loans. The Bank originates single-family-residential mortgage loans. The single-family-residential mortgage loans are comprised of conforming, non‐conforming, and jumbo residential mortgage loans, and are secured by first or subordinate liens on single (one-to-four) family residential properties. The Bank’s products include a fixed-rate residential mortgage loan and an adjustable-rate residential mortgage loan. Mortgage loans are underwritten in accordance with the Bank’s and regulatory guidelines, on the basis of the borrower’s financial capabilities, an independent appraisal of the value of the property, historical loan quality, and other factors deemed relevant by the Bank’s underwriting personnel. The Bank generally retains all mortgage loans it originates in its portfolio. As such, the Bank was not impacted by the rule pertaining to risk retention implementing the risk retention requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), since the Bank does not securitize any of the loans it originates in its portfolio.   Real Estate Construction Loans. The Bank’s real estate construction loan activity focuses on providing short-term loans to individuals and developers, primarily for the construction of multi-unit projects. Residential real estate construction loans are typically secured by first deeds of trust and guarantees of the borrower. The economic viability of the projects, borrower’s credit worthiness, and borrower’s and contractor’s experience are primary considerations in the loan underwriting decision. The Bank utilizes approved independent licensed appraisers and monitors projects during the construction phase through construction inspections and a disbursement program tied to the percentage of completion of each project. The Bank also occasionally makes unimproved property loans to borrowers who intend to construct a single-family residence on their lots generally within twelve months. In addition, the Bank makes commercial real estate construction loans to high net worth clients with adequate liquidity for construction of office and warehouse properties. Such loans are typically secured by first deeds of trust and are guaranteed by the borrower.   Home Equity Lines of Credit. The Bank offers variable-rate home equity lines of credit that are secured by the borrower’s home. The pricing on the variable-rate home equity line of credit is generally at a rate tied to the prime rate, as quoted in The Wall Street Journal , or the Bank’s reference rate. Borrowers may use this line of credit for home improvement financing, debt consolidation and other personal uses.   Installment Loans . Installment loans tend to be fixed rate and longer-term (one-to-six year maturities). These loans are funded primarily for the purpose of financing the purchase of automobiles and other personal uses of the borrower.   Distribution and Maturity of Loans. Information concerning types, distribution, and maturity of loans is included in Part II — Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in Note 4 to the Consolidated Financial Statements.   5 Table of Contents   Financing of Tax-Advantaged Projects . We invest in and/or finance certain tax-advantaged projects promoting affordable housing and renewable energy sources. Our investments in these projects are designed to generate a return primarily through the realization of federal and state income tax credits, and other tax benefits, over specified time periods. For regulatory purposes, these investments are deemed loan-equivalent transactions and are made under the power of banks to make loans.   Asset Quality   The Bank’s lending and credit policies require management to regularly review the Bank’s loan portfolio so that the Bank can monitor the quality of its assets. If during the ordinary course of business, management becomes aware that a borrower may not be able to meet the contractual payment obligations under a loan, then such policies require that the loan be supervised more closely with consideration given to, among other things, placing the loan on non-accrual status, requiring additional allowance for loan losses, and (if appropriate) charging-off a part or all of the loan.   Under the Bank’s current policies, a loan will generally be placed on a non-accrual status if interest or principal is past due 90 days or more, or in cases where management deems the full collection of principal and interest unlikely. When a loan is placed on non-accrual status, previously accrued but unpaid interest is reversed and charged against current income, and subsequent payments received are generally first applied towards the outstanding principal balance of the loan. Depending on the circumstances, management may elect to continue the accrual of interest on certain past due loans if partial payment is received or the loan is well-collateralized, and in the process of collection. The loan is generally returned to accrual status when the borrower has brought the past due principal and interest payments current and, in the opinion of management, the borrower has demonstrated the ability to make future payments of principal and interest as scheduled. A non-accrual loan may also be returned to accrual status if all principal and interest contractually due are reasonably assured of repayment within a reasonable period and there has been a sustained period of payment performance, generally six months.   Information concerning non-performing loans, restructured loans, allowance for credit losses, loans charged-off, loan recoveries, and other real estate owned is included in Part II — Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in Note 4 to the Consolidated Financial Statements.   Deposits   The Bank offers a variety of deposit products in order to meet its customers’ needs. As of December 31, 2021, the Bank offered passbook accounts, checking accounts, money market deposit accounts, certificates of deposit, individual retirement accounts, and public funds deposits. These products are priced generally to promote growth of deposits in a safe and sound manner.   The Bank’s deposits are generally obtained from residents within its geographic market area. The Bank utilizes traditional marketing methods to attract new customers and deposits, by offering a wide variety of products and services and utilizing various forms of advertising media. From time to time, the Bank may offer special deposit promotions. Information concerning types of deposit accounts, average deposits and rates, and maturity of time deposits is included in Part II — Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in Note 7 to the Consolidated Financial Statements.   6 Table of Contents   Borrowings   Borrowings from time to time include securities sold under agreements to repurchase, the purchase of federal funds, funds obtained as advances from the FHLB, borrowing from other financial institutions, and the issuance of Junior Subordinated Notes. Information concerning the types, amounts, and maturity of borrowings is included in in Part II — Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in Note 8 and Note 9 to the Consolidated Financial Statements.   Return on Equity and Assets   Information concerning the return on average assets, return on average stockholders’ equity, the average equity to assets ratio and the dividend payout ratio is included in Part II — Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”   Interest Rates and Differentials   Information concerning the interest-earning asset mix, average interest-earning assets, average interest-bearing liabilities, and the yields on interest-earning assets and interest-bearing liabilities is included in Part II — Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”   Analysis of Changes in Net Interest Income   An analysis of changes in net interest income due to changes in rate and volume is included in Part II — Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”   Commitments and Letters of Credit   Information concerning the Bank’s outstanding loan commitments and letters of credit is included in Note 12 to the Consolidated Financial Statements.   Subsidiaries of Cathay Bank   Cathay Holdings LLC (“CHLLC”) was incorporated in December 2007. The purpose of this subsidiary is to hold other real estate owned in the state of Texas that was transferred from the Bank. As of December 31, 2021, CHLLC owned properties with a carrying value of $301 thousand.   Competition   We face substantial competition for deposits, loans and other banking services, as well as for acquisition, opportunities, from the numerous banks and financial institutions that operate in our market areas. We also compete for loans and deposits, as well as other banking services, such as payment services, with savings and loan associations, savings banks, brokerage houses, insurance companies, mortgage companies, credit unions, credit card companies and other financial and non-financial institutions and entities.   In California, one larger Chinese-American bank competes for loans and deposits with the Bank and at least two super-regional banks compete with the Bank for deposits. In addition, there are many other banks that target the Chinese-American communities in both Southern and Northern California. Banks from the Pacific Rim countries, such as Taiwan, Hong Kong, and China, also continue to open branches in the Los Angeles area, thus increasing competition in the Bank’s primary markets. See discussion below in Part I — Item 1A — “Risk Factors.”   7 Table of Contents   To compete with other financial institutions in our primary service areas, the Bank relies principally upon personal contacts by our officers, directors, employees, and stockholders, our long established relationships with the Chinese-American communities, the Bank’s responsiveness to customer needs, local promotional activities, availability and pricing of loan and deposit products, extended hours on weekdays, Saturday banking in certain locations, Internet banking, an Internet website ( www.cathaybank.com ), and other specialized services. The content of our website is not incorporated into and is not part of this Annual Report on Form 10-K.   If a proposed loan exceeds the Bank’s internal lending limits, the Bank has, in the past, and may in the future, arrange the loan on a participation or syndication basis with correspondent banks. The Bank also assists customers requiring other services not offered by the Bank to obtain these services from its correspondent banks.   Human Capital Resources   Our employees are vital to our success. Our goal is to ensure that we have the right talent, in the right place, at the right time. To achieve this level of value creation, we believe we must strive to find, develop and keep a world-class workforce. We invest in our employees by providing quality training and learning opportunities, promoting inclusion and diversity, and upholding a high standard of ethics and respect for human rights.   As of December 31, 2021, Cathay Bank employed approximately 1,156 regular full-time equivalent employees, of whom 1,116 were located in the United States and 40 were located in China, Hong Kong and Taiwan. Of the total number of employees, 638 are banking officers. None of the employees are represented by a union.   Diversity and Inclusion   Inclusion and diversity are the cultural hallmarks of Cathay Bank. We benefit from the diversity of our staff offering a multiplicity of viewpoints, backgrounds and experiences, in service of our clients and the commercial and financial industries in which we work.   Our staff comprise of a diverse mixture of different genders, races, ethnic backgrounds, religions, sexual orientations, cultures and primary languages. Our commitment to diversity enables us to draw from a remarkable wealth of talent to recruit and retain the best employees to provide innovative solutions for our customers' banking needs. The Bank is continuing its efforts to expand gender diversity on the Bank’s Board, and senior management.   In 2021, 83% of our employees are of Asian descent, 11% are non-Asian minorities, and 6% are Caucasian. At the manager-level, 77% are of Asian descent, 12% are of non-Asian minorities, and 11% are Caucasian. 57% of our management-level positions are held by woman, and 66% of our employees are women. Our 12-member Board of Directors consists of 11 members of minority descent and a quarter of the Board seats are held by women.   Our commitment to diversity and inclusion extends to our community. We invest in affordable housing and renewable energy projects; in addition, we offer community checking and various affordable home ownership and loan programs serving the underbanked, and routinely engage in collaboration with local nonprofit organizations working together to build and cultivate lives in low-income communities. We also promote diversity and inclusion among our supplier base, through the Cathay Bank Vendor Diversity Program. The program promotes the use of suppliers owned by minority, women, and small businesses, to help contribute to long-term economic sustainability in our communities.   8 Table of Contents   Grow, Engage and Elevate   The Bank believes that its future success is highly dependent upon its continued ability to attract qualified employees. As part of our efforts to attract and motivate employees, we offer competitive rewards, compensation and benefits, including healthcare and 401(k) benefits, parental and family leave, holiday and paid time off, and tuition assistance.   Recruiting the best and brightest is just the beginning. Cathay Bank’s goal is to provide every employee with a robust platform that allows each individual to truly grow, engage and elevate to their full potential. We believe every individual is integral to our success, we strive to provide an engaging environment coupled with training and development opportunities throughout one’s career.   Employee Learning and Development   Committed to the belief that every employee is integral to the Bank’s success, we offer employees numerous opportunities for both personal and professional development. From the Emerging Leadership programs to interoffice transfer opportunities to a database of online training courses, Cathay Bank provides employees with the tools they need to succeed.   Cathay Bank’s skill-building programs are aligned around a common set of objectives and framework focused on compliance, technical, professional and management development. For example, our Emerging Leadership I program for newly promoted supervisors and managers and our Emerging Leadership II – Senior Cohort Program for the senior management, both are designed to help employees to gain a clear and in-depth assessment of the current state of their work and be more effective in their current and future roles. There is an expectation that every employee has a development goal as a part of individual performance objectives.   Employee Health and Pandemic Response   Cathay Bank manages organizational and personal health to gain insight into employees’ experiences, levels of workplace satisfaction, and feelings of engagement with the Bank. We have organized the Cathay Well-Being program since 2014, encouraging employees to participate in healthy habit challenges and Bank wide exercise plans in order to qualify for additional discounts on medical premiums. As of December 31, 2021, we have 73% of our employees participating in the Well-Being program.   Cathay Bank’s top priority during the ongoing COVID-19 pandemic remains protecting the health and safety of our employees and their families, customers and community. The Bank continues to maintain workplace flexibility such as working remotely where possible to reduce the number of people who are in the office each day. We have also introduced the Cathay Bank Pandemic Landing Page on the Bank’s intranet to allow employees easy access all the latest COVID-19 news and resources within and outside of Cathay Bank. Cathay Bank is keeping its bank branches open consistent with local laws and regulations and continuing to provide essential banking services to customers. In the interest of public health, all bank branches are utilizing the minimum number of people to safely execute tasks and following enhanced safety and health protocols—including screenings, social distancing, and use of personal protective equipment.   9 Table of Contents   Executive Officers of the Registrant   The table below sets forth the names, ages, and positions at the Bancorp and the Bank of all executive officers of the Company as of February 15, 2022.   Name Age   Present Position and Principal Occupation During the Past Five Years         Dunson K. Cheng           77   Executive Chairman of the Boards of Directors of the Bancorp and the Bank since October 2016; Director of the Bancorp since 1990; Director of the Bank since 1982; Chairman of the Boards of Directors of the Bancorp and the Bank from 1994 to September 2016; President of the Bank from 1985 to March 2015; President and Chief Executive Officer of the Bancorp from 1990 to September 2016.         Chang M. Liu 55   President and Chief Executive Officer, and Director of the Bancorp since October 2020; Chief Executive Officer of the Bank since October 2020; Director of the Bank since October 2019; President of the Bank from October 2019 to September 2020; Executive Vice President and Chief Operating Officer of the Bank from February 2019 to September 2019; Executive Vice President and Chief Lending Officer of the Bank from 2016 to 2019; Senior Vice President and Deputy Chief Lending Officer of the Bank from 2015 to 2016; Senior Vice President and Assistant Chief Lending Officer of the Bank from 2014 to 2015; Chief Lending Officer at Banc of California (formerly known as Pacific Trust Bank) from 2011 to 2014         Heng W. Chen 69   Executive Vice President, Chief Financial Officer, and Treasurer of the Bancorp since 2003; Executive Vice President of the Bank since 2003; Chief Financial Officer of the Bank since 2004.         Kim R. Bingham 65   Chief Risk Officer of the Bank since 2014; Executive Vice President of the Bank since 2004; Chief Credit Officer of the Bank from 2004 to 2013.         Mark H. Lee 59   Executive Vice President and Chief Credit Officer of the Bank since December 2017; Executive Vice President and Special Advisor to the Office of the President of the Bank from April 2017 to December 2017; Senior Executive Vice President and Head of Corporate Banking of Bank of Hope (formerly known as BBCN Bank) from 2016 to 2017; Senior Executive Vice President and Chief Credit Officer of BBCN Bank (formerly known as Nara Bank) from 2009 to 2016; and Senior Vice President and Deputy Chief Credit Officer of East West Bank from 2007 to 2009.   10 Table of Contents   Available Information   We invite you to visit our website at www.cathaygeneralbancorp.com, to access free of charge the Bancorp's Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports, all of which are made available as soon as reasonably practicable after we electronically file such material with or furnish it to the SEC. The content of our website is not incorporated into and is not part of this Annual Report on Form 10-K. In addition, you can write to us to obtain a free copy of any of those reports at Cathay General Bancorp, 9650 Flair Drive, El Monte, California 91731, Attn: Investor Relations. The SEC also maintains a website that contains the reports, proxy and information statements and other information we file with or furnish to them. The address of the site is http://www.sec.gov.   Regulation and Supervision   General   The Bancorp and its bank and non-bank subsidiaries are subject to extensive regulation under federal and state statutes and regulations that, among other things, may affect our cost of doing business and financial performance, limit permissible activities and expansion or impact the competitive balance between us and other financial services providers. These statutes and regulations are intended primarily for the protection of depositors and the FDIC’s Deposit Insurance Fund, and secondarily for the stability of the U.S. banking system and are not intended for the benefit of stockholders of financial institutions.   The following discussion of certain statutes and regulations to which the Bancorp and the Bank are subject is a summary and does not purport to be complete nor does it address all applicable statutes and regulations. This discussion is qualified in its entirety by reference to the full statutes and regulations.   Bank Holding Company and Bank Regulation   The Bancorp is a bank holding company within the meaning of the Bank Holding Company Act and is registered as such with the Federal Reserve. The Bancorp is also a bank holding company within the meaning of Section 3700 of the California Financial Code. Therefore, the Bancorp and any of its subsidiaries are subject to examination by, and may be required to file reports with, the DFPI. DFPI approvals are also required for bank holding companies to acquire control of banks. As a California commercial bank, the deposits of which are insured by the FDIC, the Bank is subject to regulation, supervision, and regular examination by the DFPI and by the FDIC, as the Bank’s primary federal regulator, and must additionally comply with certain applicable regulations of the Federal Reserve.   The wide range of requirements and restrictions contained in federal and state banking laws include:     ● Requirements that bank holding companies and banks file periodic reports.     ● Requirements that bank holding companies and banks meet or exceed minimum capital requirements (see “Capital Adequacy Requirements” below).     ● Requirements that bank holding companies serve as a source of financial and managerial strength for their banking subsidiaries. In addition, the regulatory agencies have “prompt corrective action” authority to limit activities and require a limited guaranty of a required bank capital restoration plan by a bank holding company if the capital of a bank subsidiary falls below capital levels required by the regulators. (See “Source of Strength” and “Prompt Corrective Action Provisions” below.)     ● Limitations on dividends payable to Bancorp stockholders. The Bancorp’s ability to pay dividends is subject to legal and regulatory restrictions. A substantial portion of the Bancorp’s funds to pay dividends or to pay principal and interest on our debt obligations is derived from dividends paid by the Bank. (See “Dividends” below)   11 Table of Contents     ● Limitations on dividends payable by bank subsidiaries. These dividends are subject to various legal and regulatory restrictions. The federal banking agencies have indicated that paying dividends that deplete a depositary institution’s capital base to an inadequate level would be an unsafe and unsound banking practice. Moreover, the federal agencies have issued policy statements that provide that bank holding companies and insured banks should generally only pay dividends out of current operating earnings. (See “Dividends” below)     ● Safety and soundness requirements. Banks must be operated in a safe and sound manner and meet standards applicable to internal controls, information systems, internal audit, loan documentation, credit underwriting, interest rate exposure, asset growth, and compensation, as well as other operational and management standards. These safety and soundness requirements give bank regulatory agencies significant latitude in exercising their supervisory authority and the authority to initiate informal or formal enforcement actions.     ● Requirements for notice, application and approval, or non-objection of acquisitions and certain other activities conducted directly or in subsidiaries of the Bancorp or the Bank.     ● Compliance with the Community Reinvestment Act. The CRA requires that banks help meet the credit needs in their communities, including the availability of credit to low and moderate income individuals. If the Bank fails to adequately serve its communities, restrictions may be imposed, including denials of applications for branches, for adding subsidiaries or affiliate companies, for engaging in new activities or for the merger with or purchase of other financial institutions. In its last reported examination by the FDIC in June 2019, the Bank received a CRA rating of “Satisfactory.”     ● Compliance with the Bank Secrecy Act, the USA Patriot Act, and other anti-money laundering laws (“AML”), and the regulations of the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”). (See “Anti-Money Laundering and OFAC Regulations” below.)     ● Limitations on the amount of loans to one borrower and its affiliates and to executive officers and directors.     ● Limitations on transactions with affiliates.     ● Restrictions on the nature and amount of any investments in, and the ability to underwrite, certain securities.     ● Requirements for opening of intra- and interstate branches.     ● Compliance with truth in lending and other consumer protection and disclosure laws to ensure equal access to credit and to protect consumers in credit transactions. (See “Operations, Consumer and Privacy Compliance Laws” below.)     ● Compliance with provisions of the Gramm-Leach-Bliley Act of 1999 (“GLB Act”) and other federal and state laws dealing with privacy for nonpublic personal information of customers. The federal bank regulators have adopted rules limiting the ability of banks and other financial institutions to disclose non-public information about consumers to unaffiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to an unaffiliated third party. These regulations affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors.   12 Table of Contents   Specific federal and state laws and regulations which are applicable to banks regulate, among other things, the scope of their business, their investments, their reserves against deposits, the timing of the availability of deposited funds, their activities relating to dividends, the nature and amount of and collateral for certain loans, servicing and foreclosing on loans, borrowings, capital requirements, certain check-clearing activities, branching, and mergers and acquisitions. California banks are also subject to statutes and regulations including Federal Reserve Regulation O and Federal Reserve Act Sections 23A and 23B and Regulation W, which restrict or limit loans or extensions of credit to “insiders,” including officers, directors, and principal shareholders, and affiliates, and purchases of assets from affiliates, including parent bank holding companies, except pursuant to certain exceptions and only on terms and conditions at least as favorable to those prevailing for comparable transactions with unaffiliated parties. The Dodd-Frank Act expanded definitions and restrictions on transactions with affiliates and insiders under Sections 23A and 23B, and also lending limits for derivative transactions, repurchase agreements and securities lending, and borrowing transactions.   The Bank operates branches and/or loan production offices in California, New York, Washington, Illinois, Texas, Maryland, Massachusetts, Nevada, and New Jersey. While the DFPI remains the Bank’s primary state regulator, the Bank’s operations in these jurisdictions are subject to examination and supervision by local bank regulators, and transactions with customers in those jurisdictions are subject to local laws, including consumer protection laws. The Bank also operates a branch in Hong Kong and a representative office in Beijing, Shanghai, and Taipei. The operations of these foreign offices and branches (and limits on the scope of their activities) are subject to local law and regulatory authorities in addition to regulation and supervision by the DFPI and the Federal Reserve.   The Dodd-Frank Act and the Growth Act   The Dodd-Frank Act financial reform legislation, adopted in July 2010, significantly revised and expanded the rulemaking, supervisory and enforcement authority of the federal bank regulatory agencies by implementing the following changes, among others:     ● capital standards that, among other things, increase capital requirements and eliminate the treatment of trust preferred securities as Tier 1 regulatory capital for bank holding companies with assets of $15.0 billion or more (our assets exceed the $15.0 billion threshold and, as a result, our outstanding junior subordinated notes no longer qualify as Tier 1 capital for regulatory reporting purposes);     ● restrictions on banking entities from engaging in proprietary trading, as well as having investments in, sponsoring, and maintaining relationships with hedge funds and private equity funds (commonly referred to as the “Volcker Rule”);     ● the establishment of the Consumer Financial Protection Bureau (“CFPB”) responsible for consumer protection in the financial services industry and to examine financial institutions with $10.0 billion or more in assets, such as the Company, for compliance with regulations promulgated by the CFPB;     ● additional risk management and other enhanced prudential standards for larger bank holding companies;     ● limitations on interchange fees charged for debit card transactions;     ● the revisions in the deposit insurance assessment base for FDIC insurance and the permanent increase in coverage to $250 thousand;     ● the permissibility of paying interest on business checking accounts;     ● the removal of barriers to interstate branching;     ● required disclosure and shareholder advisory votes on executive compensation; and     ● the establishment of new minimum mortgage underwriting standards for residential mortgages.   13 Table of Contents   On May 24, 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Growth Act”) was signed into law. Among other relief, the Growth Act:     ● raises the asset threshold for annual company-run stress tests required under the Dodd-Frank Act from $10.0 billion to $100.0 billion;     ● raises the enhanced prudential supervision threshold for bank holding companies from $50.0 billion to $250.0 billion in total consolidated assets and the asset threshold for risk committee requirements for publicly traded bank holding companies from $10.0 billion to $50.0 billion; and     ● implements other changes that may help reduce regulatory burden for the Company and other mid-sized financial institutions, such as (i) prohibiting federal banking regulators from imposing higher capital standards on High Volatility Commercial Real Estate exposures unless they are for acquisition, development or construction; (ii) requiring amendments to the Liquidity Coverage Ratio Rule to treat all qualifying investment-grade, liquid and readily-marketable municipal securities as level 2B liquid assets, making them potentially more attractive alternative investments; (iv) directing the CFPB to provide guidance on certain disclosure requirements for mortgage assumption transactions and construction-to-permanent home loans; and (iv) not requiring appraisals for certain transactions in rural areas valued at less than $400 thousand.   On October 15, 2019, the FDIC adopted a final rule that revised the FDIC’s requirements for stress testing by FDIC supervised institutions, such as the Bank, to conform with the Growth Act by raising the minimum threshold for applicability from $10.0 billion to $250.0 billion. The final rule became effective on November 25, 2019. Notwithstanding these amendments to the stress testing requirements, the federal banking agencies indicated through interagency guidance that the capital planning and risk management practices of institutions with total assets less than $100.0 billion would continue to be reviewed through the regular supervisory process.   Notwithstanding the regulatory relief provided for mid-size financial institutions such as the Company that has resulted from the Growth Act, many provisions of the Dodd-Frank Act and its implementing regulations remain in place and will continue to result in additional operating and compliance costs that could have a material adverse effect on our business, financial condition, and results of operation. In addition to the Growth Act, various pending bills in Congress may offer some regulatory relief for mid-sized banking organizations of our size. We are uncertain about the scope, nature and timing of any regulatory relief, and its effect on us.   Capital Adequacy Requirements   Bank holding companies and banks are subject to various regulatory capital requirements administered by state and federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations (see “Prompt Corrective Action Provisions” below), involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weighting, and other factors. The risk-based capital guidelines for bank holding companies and banks require capital ratios that vary based on the perceived degree of risk associated with a banking organization’s operations for both transactions reported on the balance sheet as assets, such as loans, and those recorded as off-balance sheet items, such as commitments, letters of credit and recourse arrangements. The risk-based capital ratio is determined by classifying assets and certain off-balance sheet financial instruments into weighted categories, with higher levels of capital being required for those categories perceived as representing greater risks and dividing its qualifying capital by its total risk-adjusted assets and off-balance sheet items. Bank holding companies and banks engaged in significant trading activity may also be subject to the market risk capital guidelines and be required to incorporate additional market and interest rate risk components into their risk-based capital standards.   The federal bank regulatory agencies adopted final regulations in July 2013, which revised their risk-based and leverage capital requirements for banking organizations to meet requirements of the Dodd-Frank Act and to implement Basel III international agreements reached by the Basel Committee on Banking Supervision.   14 Table of Contents   The following are among the requirements under the Basel III Capital Rules that became effective on January 1, 2015:     ● An increase in the minimum Tier 1 capital ratio from 4.00% to 6.00% of risk-weighted assets.     ● A required 4.50% of risk-weighted assets ratio is established for “common equity Tier 1” as a subset of Tier 1 capital limited to common equity.     ● A minimum non-risk-based leverage ratio is set at 4.00% eliminating a 3.00% exception for higher rated banks.     ● Changes in the permitted composition of Tier 1 capital to exclude trust preferred securities (other than certain grandfathered trust preferred securities issued), mortgage servicing rights and certain deferred tax assets and include unrealized gains and losses on available for sale debt and equity securities.     ● An additional capital conservation buffer of 2.5% of risk weighted assets over each of the required capital ratios must be met to avoid limitations in the ability of the Bank to pay dividends, repurchase shares or pay discretionary bonuses.     ● The risk-weights of certain assets for purposes of calculating the risk-based capital ratios are changed for high volatility commercial real estate acquisition, development and construction loans, certain past due non-residential mortgage loans and certain mortgage-backed and other securities exposures.     ● An additional “countercyclical capital buffer” is required for larger and more complex institutions.   Under the Basel III Capital Rules, after taking into account the capital conservation buffer, the Bancorp and the Bank must maintain the following minimum ratios: (i) a Tier 1 leverage ratio of 4.0%, (ii) a common equity Tier 1 risk-based capital ratio of 4.5%, plus the capital conservation buffer, effectively resulting in a minimum common equity Tier 1 risk-based capital ratio of 7.0%, (iii) a Tier 1 risk-based capital ratio of 6.0%, plus the capital conservation buffer, effectively resulting in a minimum common equity Tier 1 risk-based capital ratio of 8.5%, and (iv) a total risk-based capital ratio of 8.0%, plus the capital conservation buffer, effectively resulting in a minimum total risk-based capital ratio of 10.5%. To be considered “well capitalized,” a bank holding company or bank must have the following minimum ratios: (i) a Tier 1 leverage ratio of 5.0%, (ii) a common equity Tier 1 risk-based capital ratio of 6.5%, (iii) a Tier 1 risk-based capital ratio of 8.0%, and (iv) a total risk-based capital ratio of 10.0%.   Failure to meet statutorily mandated capital guidelines or more restrictive ratios separately established for a financial institution could subject a bank or bank holding company to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on accepting or renewing brokered deposits, limitations on the rates of interest that the institution may pay on its deposits and other restrictions on its business. Significant additional restrictions can be imposed on FDIC-insured depository institutions that fail to meet applicable capital requirements under the regulatory agencies’ prompt corrective action authority.   At December 31, 2021, (i) the Bancorp’s and the Bank’s common equity Tier 1 capital ratios were 12.80% and 13.32%, respectively; (ii) their total risk-based capital ratios were 14.41% and 14.21% respectively; (iii) their Tier 1 risk-based capital ratios were, 12.80% and 13.32% respectively; and (iv) their leverage capital ratios were, respectively, 10.40% and 10.82% respectively all of which exceeded the minimum percentage requirements to be deemed “well-capitalized” for regulatory purposes.   Bank regulators may also continue their past policies of expecting banks to maintain additional capital beyond the requirements of the Basel III Capital Rules. The federal banking agencies may also require banks and bank holding companies subject to enforcement actions to maintain capital ratios in excess of the minimum ratios otherwise required to be deemed “well-capitalized. The implementation of the Basel III Capital Rules or more stringent requirements to maintain higher levels of capital or to maintain higher levels of liquid assets could adversely impact the Bancorp’s net income and return on equity, restrict the ability of the Bank and/or the Bancorp to pay dividends or executive bonuses and require the raising of additional capital.   15 Table of Contents     In December 2017, the Basel Committee published “Basel IV” standards to finalize the Basel III regulatory reforms. According to the Basel Committee, Basel IV is intended to, among other things, reduce variability in risk weighted assets by implementing a standardized approach for operation risk and credit risk to replace model-based approaches for certain categories of risk weighted assets, and by reducing the scope of model-based parameters and implementing exposure-level parameter floors where model-based approaches remain available. Under the Basel framework, these standards will generally be effective on January 1, 2023, with an aggregate output floor phasing in through January 1, 2028. The impact of Basel IV on us will depend on the manner in which it is implemented by the federal bank regulators.   Prompt Corrective Action Provisions   The Federal Deposit Insurance Act (the “FDI Act”) requires the federal bank regulatory agencies to take “prompt corrective action” with respect to a depository institution if that institution does not meet certain capital adequacy standards, including requiring the prompt submission of an acceptable capital restoration plan. Depending on the bank’s capital ratios, the agencies’ regulations define five categories in which an insured depository institution will be placed: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. At each successive lower capital category, an insured bank is subject to more restrictions, including restrictions on the bank's activities, operational practices or the ability to pay dividends. Based upon its capital levels, a bank that is classified as well-capitalized, adequately capitalized, or undercapitalized may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition, or an unsafe or unsound practice, warrants such treatment. A bank’s capital category is determined solely for the purpose of applying the prompt corrective action regulations and the capital category may not constitute an accurate representation of the bank’s overall financial condition or prospects for other purposes.   The FDI Act generally prohibits a depository institution from making any capital distributions (including payment of a dividend) or paying any management fee to its parent holding company, if the depository institution would thereafter be “undercapitalized.” “Undercapitalized” institutions are subject to growth limitations and are required to submit capital restoration plans. If a depository institution fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.” “Significantly undercapitalized” depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become “adequately capitalized,” requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. “Critically undercapitalized” institutions are subject to the appointment of a receiver or conservator. The capital classification of a bank holding company and a bank affects the frequency of regulatory examinations, the bank holding company’s and the bank’s ability to engage in certain activities and the deposit insurance premium paid by the bank.   As of December 31, 2021, the Bancorp and the Bank met all requirements to be considered well-capitalized under the Basel III Capital Rules.   16 Table of Contents   Volcker Rule   In December 2013, the federal bank regulatory agencies adopted final rules that implement a part of the Dodd-Frank Act commonly referred to as the “Volcker Rule.” In the fall of 2019, the federal banking regulatory agencies adopted revised rules to simplify and tailor the Volcker Rules. The revised rules became effective on January 1, 2020, with a compliance date of January 1, 2021. The revised rules continue to restrict banking entities subject to the Volcker Rule, including the Bancorp and the Bank and its subsidiaries, from engaging in activities that are considered proprietary trading and from sponsoring or investing in certain entities, including hedge or private equity funds that are considered “covered funds,” subject to certain exceptions. The revised rules provide regulatory relief by tailoring application of the Volcker Rule based on the level of trading assets and liabilities, simplifying certain standards and requirements, and reducing compliance burden. Effective October 1, 2020, the amendments to the Volcker Rule modified the provisions for certain existing covered fund exclusions, including loan securitizations and public welfare and small business funds, and added certain additional covered fund exclusions, including credit funds and venture capital funds. The Federal Reserve granted an extension until July 21, 2022, of the conformance period for the Bancorp to divest ownership in certain legacy investment funds that are prohibited under the rule. In June 2020, the federal agencies adopted new regulations that exempted venture capital funds from the definition of “covered funds” under the Volcker Rule, so the Bancorp’s remaining venture capital funds can be held indefinitely.   We believe that the Volcker Rule will not require any material changes in our operations or business or security holdings.   CFPB Actions   The Dodd-Frank Act provided for the creation of the CFPB as an independent entity within the Federal Reserve with broad rulemaking, supervisory, and enforcement authority over consumer financial products and services, including deposit products, residential mortgages, home-equity loans and credit cards. The CFPB’s functions include investigating consumer complaints, conducting market research, rulemaking, supervising and examining bank consumer transactions, and enforcing rules related to consumer financial products and services. CFPB regulations and guidance apply to all financial institutions and banks with $10.0 billion or more in assets, which are also subject to examination by the CFPB. As the Bank has more than $10.0 billion in assets, it is examined for compliance with CFPB regulation by the CFPB in addition to examinations of the Bank by the FDIC and the DFPI.   The CFPB has enforcement authority over unfair, deceptive or abusive act and practices (“UDAAP”). UDAAP is considered one of the most far reaching new enforcement tools at the disposal of the CFPB and covers all consumer and small business financial products or services such as deposit and lending products or services such as overdraft programs and third-party payroll card vendors. It is a wide-ranging regulatory net that potentially picks up the gaps not included in other consumer laws, rules and regulations. Violations of UDAAP can be found in many areas and can include advertising and marketing materials, the order of processing and paying items in a checking account or the design of client overdraft programs. The scope of coverage includes not only direct interactions with clients and prospects but also actions by third-party service providers. The Dodd-Frank Act does not prevent states from adopting stricter consumer protection standards. State regulation of financial products and potential enforcement actions could also adversely affect our business, financial condition or results of operations.   Additionally, in 2014, the CFPB adopted revisions to Regulation Z, which implement the Truth in Lending Act, pursuant to the Dodd-Frank Act, and apply to all consumer mortgages (except home equity lines of credit, timeshare plans, reverse mortgages, or temporary loans). The revisions mandate specific underwriting criteria for home loans in order for creditors to make a reasonable, good faith determination of a consumer's ability to repay and establish certain protections from liability under this requirement for “qualified mortgages” meeting certain standards. In particular, it will prevent banks from making “no doc” and “low doc” home loans, as the rules require that banks determine a consumer’s ability to pay based in part on verified and documented information. We do originate certain “low doc” loans that meet specific underwriting criteria.  Given the small volume of such loans, we do not believe that this regulation will have a significant impact on our operations.   17 Table of Contents   Risk Committee Framework   Pursuant to Federal Reserve Board regulations promulgated under authority of the Dodd-Frank Act, as originally adopted, as a publicly traded bank holding company with $10.0 billion in assets, we were required and have established and maintained a risk committee responsible for enterprise-wide risk management practices, comprised of an independent chairman and at least one risk management expert. We expect to maintain our risk committee, although we are no longer required to have a risk committee under the Growth Act unless and until we reach $50.0 billion in assets. The risk committee approves and periodically reviews the risk-management policies of the Bancorp’s global operations and oversees the operations of its risk-management framework. The bank holding company’s risk-management framework must be commensurate with its structure, risk profile, complexity, activities and size. At a minimum, the framework must include policies and procedures establishing risk-management governance and providing for adequate risk-control infrastructure for the bank holding company’s operations. In addition, the framework must include processes and systems to monitor compliance with the foregoing policies and procedures, including processes and systems designed to identify and report risk-management risks and deficiencies; ensure effective implementation of actions to address emerging risks and risk-management deficiencies; designate managerial and staff responsibility for risk management; ensure the independence of the risk-management function; and integrate risk-management and associated controls with management goals and the management compensation structure.   Interchange Fees   Under the Durbin Amendment to the Dodd-Frank Act, the Federal Reserve adopted rules establishing standards for assessing whether the interchange fees that may be charged with respect to certain electronic debit transactions are “reasonable and proportional” to the costs incurred by issuers for processing such transactions.   Interchange fees, or “swipe” fees, are charges that merchants pay to us and other card-issuing banks for processing electronic payment transactions. Under the final rules, the maximum permissible interchange fee is equal to no more than 21 cents plus 5 basis points of the transaction value for many types of debit interchange transactions. The Federal Reserve also adopted a rule to allow a debit card issuer to recover 1 cent per transaction for fraud prevention purposes if the issuer complies with certain fraud-related requirements required by the Federal Reserve. The Federal Reserve also has rules governing routing and exclusivity that require issuers to offer two unaffiliated networks for routing transactions on each debit or prepaid product.   Anti-Money Laundering and OFAC Regulations   A major focus of governmental policy on financial institutions in recent years has been aimed at combating money laundering and terrorist financing through AML and OFAC regulations. AML laws and regulations, including the Bank Secrecy Act and the U.S.A. Patriot Act, require us to assist U.S. government agencies in detecting and preventing money laundering and other illegal acts by maintaining policies, procedures and controls designed to detect and report money laundering, terrorist financing, and other suspicious activity. The AML program must include, at a minimum, a designated compliance officer, written policies, procedures and internal controls, training of appropriate personnel and independent testing of the program, and a customer identification program.   OFAC administers and enforces economic and trade sanctions against targeted foreign countries and regimes, under authority of various laws, including designated foreign countries, nationals and others. OFAC publishes lists of specially designated targets and countries. We and our bank are responsible for, among other things, blocking accounts of, and transactions with, such targets and countries, prohibiting unlicensed trade and financial transactions with them and reporting blocked transactions after their occurrence.   18 Table of Contents   Regulatory authorities routinely examine financial institutions for compliance with these obligations, and any failure by us to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences, including causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not required. Regulatory authorities have imposed cease and desist orders and civil money penalties against institutions found to be violating these obligations.   Additional Restrictions on Bancorp and Bank Activities   Subject to prior notice or Federal Reserve approval, bank holding companies may generally engage in, or acquire shares of companies engaged in, activities determined by the Federal Reserve to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Bank holding companies which elect and retain “financial holding company” status pursuant to the GLB Act may engage in these nonbanking activities and broader securities, insurance, merchant banking and other activities that are determined to be “financial in nature” or are incidental or complementary to activities that are financial in nature without prior Federal Reserve approval. Pursuant to the GLB Act and the Dodd-Frank Act, in order to elect and retain financial holding company status, a bank holding company and all depository institution subsidiaries of a bank holding company must be well capitalized and well managed, and, except in limited circumstances, depository subsidiaries must be in satisfactory compliance with the CRA. Failure to sustain compliance with these requirements or correct any non-compliance within a fixed time period could lead to divestiture of subsidiary banks or require all activities to conform to those permissible for a bank holding company. The Bancorp has not elected financial holding company status and does not believe it has engaged in any activities determined by the Federal Reserve to be financial in nature or incidental or complementary to activities that are financial in nature, which would, in the absence of financial holding company status, require notice or Federal Reserve approval.   Pursuant to the FDI Act and the California Financial Code, California state chartered commercial banks may generally engage in any activity permissible for national banks. Therefore, the Bank may form subsidiaries to engage in the many so-called “closely related to banking” or “nonbanking” activities commonly conducted by national banks in operating subsidiaries or subsidiaries of bank holding companies. Further, pursuant to the GLB Act, California banks may conduct certain “financial” activities in a subsidiary to the same extent as a national bank, provided the bank is and remains “well-capitalized,” “well-managed” and in satisfactory compliance with the CRA. The Bank currently has no financial subsidiaries.   Source of Strength   Federal Reserve policy and federal law require bank holding companies to act as a source of financial and managerial strength to their subsidiary banks. Under this requirement, Bancorp is expected to commit resources to support the Bank, including at times when Bancorp may not be in a financial position to provide such resources, and it may not be in Bancorp’s, or Bancorp’s stockholders’ or creditors’, best interests to do so. In addition, any capital loans Bancorp makes to the Bank are subordinate in right of payment to depositors and to certain other indebtedness of the Bank. In the event of Bancorp’s bankruptcy, any commitment by Bancorp to a federal bank regulatory agency to maintain the capital of the Bank will be assumed by the bankruptcy trustee and entitled to priority of payment.   19 Table of Contents   Enforcement Authority   The federal and California regulatory structure gives the bank regulatory agencies extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. The regulatory agencies have adopted guidelines to assist in identifying and addressing potential safety and soundness concerns before an institution’s capital becomes impaired. The guidelines establish operational and managerial standards generally relating to: (i) internal controls, information systems, and internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest-rate exposure; (v) asset growth and asset quality; (vi) loan concentration; and (vii) compensation, fees, and benefits. Further, the regulatory agencies have adopted safety and soundness guidelines for asset quality and for evaluating and monitoring earnings to ensure that earnings are sufficient for the maintenance of adequate capital and reserves.   The federal and California regulatory structure subjects the Bancorp and the Bank to regular examination by their respective regulatory agencies, which results in examination reports and ratings that, although not publicly available, can affect the conduct and growth of our businesses. These examinations consider not only compliance with applicable laws and regulations, but also capital levels, asset quality and risk, management ability and performance, earnings, liquidity, and various other factors. If, as a result of an examination, the DFPI or the FDIC should determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of the Bank’s operations are unsatisfactory or that the Bank or its management is violating or has violated any law or regulation, the DFPI and the FDIC have residual authority to:     ● Require affirmative action to correct any conditions resulting from any violation or practice;     ● Direct an increase in capital and the maintenance of higher specific minimum capital ratios, which may preclude the Bank from being deemed “well-capitalized” and restrict its ability to accept certain brokered deposits, among other things;     ● Restrict the Bank’s growth geographically, by products and services, or by mergers and acquisitions;     ● Issue, or require the Bank to enter into, informal or formal enforcement actions, including required Board resolutions, memoranda of understanding, written agreements and consent or cease and desist orders or prompt corrective action orders to take corrective action and cease unsafe and unsound practices;     ● Require prior approval of senior executive officer or director changes, remove officers and directors, and assess civil monetary penalties; and     ● Terminate FDIC insurance, revoke the Bank’s charter, take possession of, close and liquidate the Bank, or appoint the FDIC as receiver.   The Federal Reserve has similar enforcement authority over bank holding companies and commonly takes parallel action in conjunction with actions taken by a subsidiary bank’s regulators.   In the exercise of their supervisory and examination authority, the regulatory agencies have recently emphasized corporate governance, stress testing, enterprise risk management and other board responsibilities; anti-money laundering compliance and enhanced high-risk customer due diligence; vendor management; cyber security and fair lending and other consumer compliance obligations.   20 Table of Contents   Deposit Insurance   The FDIC is an independent federal agency that insures deposits, up to prescribed statutory limits, of federally insured banks and savings institutions and safeguards the safety and soundness of the banking and savings industries. The FDIC insures our customer deposits through the Deposit Insurance Fund (the “DIF”) up to prescribed limits of $250 thousand for each depositor pursuant to the Dodd-Frank Act. The amount of FDIC assessments paid by each DIF member institution is based on its relative risk of default as measured by regulatory capital ratios and other supervisory factors. As an institution with $10.0 billion or more in assets, the FDIC uses a performance score and a loss-severity score to calculate an initial assessment rate for the Bank. In calculating these scores, the FDIC uses the Bank’s capital level and regulatory supervisory ratings and certain financial measures to assess the Bank’s ability to withstand asset-related stress and funding-related stress. The FDIC also has the ability to make discretionary adjustments to the total score based upon significant risk factors that are not adequately captured in the calculations. In addition to ordinary assessments described above, the FDIC has the ability to impose special assessments in certain instances.   All FDIC-insured institutions are also required to pay assessments to the FDIC to fund interest payments on bonds issued by the Financing Corporation (“FICO"), an agency of the federal government established to recapitalize the predecessor to the DIF. These assessments will continue until the FICO bonds mature in 2017 through 2019.   Pursuant to the Dodd-Frank Act, the FDIC has established 2.0% as the designated reserve ratio (DRR), that is, the ratio of the DIF to insured deposits. The FDIC adopted a plan under which it met the statutory minimum DRR of 1.35% (formerly 1.15%) before September 30, 2020, the deadline imposed by the Dodd-Frank Act. According to the FDIC, the DRR reached 1.36% of total deposits as of September 30, 2018.   We are generally unable to control the amount of assessments that we are required to pay for FDIC insurance. If there are additional bank or financial institution failures or if the FDIC otherwise determines, we may be required to pay even higher FDIC assessments than the recently increased levels. These increases in FDIC insurance assessments may have a material and adverse effect on our earnings and could have a material adverse effect on the value of, or market for, our common stock.   Under the FDI Act, the FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.   Dividends   Holders of the Bancorp’s common stock are entitled to receive dividends as and when declared by the board of directors out of funds legally available therefore under the laws of the State of Delaware. Delaware corporations such as the Bancorp may make distributions to their stockholders out of their surplus, or in case there is no surplus, out of their net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. However, dividends may not be paid out of a corporation’s net profits if, after the payment of the dividend, the corporation’s capital would be less than the capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets.   It is the Federal Reserve’s policy that bank holding companies should generally pay dividends on common stock only out of income available over the past year, and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition. It is also the Federal Reserve’s policy that bank holding companies should not maintain dividend levels that undermine their ability to be a source of strength to their banking subsidiaries. The Federal Reserve also discourages dividend policy payment ratios that are at maximum allowable levels unless both asset quality and capital are very strong.   21 Table of Contents   The terms of our Junior Subordinated Notes also limit our ability to pay dividends on our common stock. If we are not current on our payment of interest on our Junior Subordinated Notes, we may not pay dividends on our common stock. The amount of future dividends by the Bancorp will depend on our earnings, financial condition, capital requirements and other factors, and will be determined by our board of directors in accordance with the capital management and dividend policy.   The Bank is a legal entity that is separate and distinct from its holding company. The Bancorp is dependent on the performance of the Bank for funds which may be received as dividends from the Bank for use in the operation of the Bancorp and the ability of the Bancorp to pay dividends to stockholders. Future cash dividends by the Bank will also depend upon management’s assessment of future capital requirements, contractual restrictions, and other factors. The Basel III Capital Rules restrict dividends by the Bank if the capital conservation buffer is not achieved.   The power of the board of directors of the Bank to declare cash dividends to the Bancorp is subject to California law, which restricts the amount available for cash dividends to the lesser of a bank’s retained earnings or net income for its last three fiscal years (less any distributions to stockholders made during such period). Where the above test is not met, cash dividends may still be paid, with the prior approval of the DFPI, in an amount not exceeding the greatest of (i) retained earnings of the Bank; (ii) the net income of the Bank for its last fiscal year; or (iii) the net income of the Bank for its current fiscal year. Future cash dividends by the Bank will also depend upon management’s assessment of future capital requirements, contractual restrictions, and other factors.   Operations, Consumer and Privacy Compliance Laws   The Bank must comply with numerous federal and state anti-money laundering and consumer protection statutes and implementing regulations, including the USA Patriot Act, the Bank Secrecy Act, the Foreign Account Tax Compliance Act, the CRA, the Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions Act, the Equal Credit Opportunity Act, the Truth in Lending Act, the Fair Housing Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, the National Flood Insurance Act, the California Homeowner Bill of Rights and various federal and state privacy protection laws. The Bank and the Company are also subject to federal and state laws prohibiting unfair or fraudulent business practices, untrue or misleading advertising, and unfair competition. Some of these laws are further discussed below:   The Equal Credit Opportunity Act (“ECOA”) generally prohibits discrimination in any credit transaction, whether for consumer or business purposes, on the basis of race, color, religion, national origin, sex, marital status, age, receipt of income from public assistance programs, or good faith exercise of any rights under the Consumer Credit Protection Act.   The Truth in Lending Act (“TILA”) is designed to ensure that credit terms are disclosed in a meaningful way so that consumers may compare credit terms more readily and knowledgeably. As a result of the TILA, all creditors must use the same credit terminology to express rates and payments, including the annual percentage rate, the finance charge, the amount financed, the total of payments and the payment schedule, among other things.   The Fair Housing Act (“FH Act”) regulates many practices, including making it unlawful for any lender to discriminate in its housing-related lending activities against any person because of race, color, religion, national origin, sex, handicap or familial status. A number of lending practices have been found by the courts to be, or may be considered, illegal under the FH Act, including some that are not specifically mentioned in the FH Act itself.   The Home Mortgage Disclosure Act (“HMDA”) grew out of public concern over credit shortages in certain urban neighborhoods and provides public information that will help show whether financial institutions are serving the housing credit needs of the neighborhoods and communities in which they are located. The HMDA also includes a “fair lending” aspect that requires the collection and disclosure of data about applicant and borrower characteristics as a way of identifying possible discriminatory lending patterns and enforcing anti-discrimination statutes.   22 Table of Contents   Finally, the Real Estate Settlement Procedures Act (“RESPA”) requires lenders to provide borrowers with disclosures regarding the nature and cost of real estate settlements. Also, RESPA prohibits certain abusive practices, such as kickbacks, and places limitations on the amount of escrow accounts. Penalties under the above laws may include fines, reimbursements and other civil money penalties.   Due to heightened regulatory concern related to compliance with the CRA, TILA, FH Act, ECOA, HMDA and RESPA generally, the Bank may incur additional compliance costs or be required to expend additional funds for investments in its local community.   The Federal Reserve and other bank regulatory agencies also have adopted guidelines for safeguarding confidential, personal customer information. These guidelines require financial institutions to create, implement and maintain a comprehensive written information security program designed to ensure the security and confidentiality of customer information, protect against any anticipated threats or hazards to the security or integrity of such information and protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer. Financial institutions are also required to implement policies and procedures regarding the disclosure of nonpublic personal information about consumers to non-affiliated third parties. In general, financial institutions must provide explanations to consumers on policies and procedures regarding the disclosure of such nonpublic personal information and, except as otherwise required by law, prohibits disclosing such information. The Bank has adopted a customer information security and privacy program to comply with such requirements.   Operations, consumer and privacy compliance laws and regulations also mandate certain disclosure and reporting requirements and regulate the manner in which financial institutions must deal with customers when taking deposits, making loans, collecting loans, and providing other services. Failure to comply with these laws and regulations can subject the Bank to lawsuits and penalties, including enforcement actions, injunctions, fines or criminal penalties, punitive damages to consumers, and the loss of certain contractual rights.   In addition, privacy and data protection are areas of increasing state legislative focus, and several states have recently enacted consumer privacy laws that impose compliance obligations with respect to personal information. For example, the California Consumer Privacy Act of 2018 (the “CCPA”), which became effective on January 1, 2020, applies to for-profit businesses that conduct business in California and meet certain revenue or data collection thresholds. The CCPA gives consumers the right to request disclosure of information collected about them, and whether that information has been sold or shared with others, the right to request deletion of personal information (subject to certain exceptions), the right to opt out of the sale of the consumer’s personal information, and the right not to be discriminated against for exercising these rights. The CCPA contains several exemptions, including for information that is collected, processed, sold or disclosed pursuant to the GLB Act. In November 2020, California voters approved the California Privacy Rights Act (“CPRA”), a ballot measure that amends and supplements the CCPA by creating the California Privacy Protection Agency, a watchdog privacy agency to be appointed shortly after the CPRA’s enactment. The CPRA also modifies the CCPA by expanding both the scope of businesses covered by the law and certain rights relating to personal information and its use, collection, and disclosure by covered businesses.   In May 2018, the European Union ("EU") adopted a comprehensive general data privacy regulation ("GDPR") that, among other things, implements greater review of data processing activities and higher fines and sanctions for non-compliance with data protection legislation. The GDPR also extends the territory of EU privacy rules to non-EU organizations that offer goods or services to or monitor EU citizen behaviors and sets forth compliance obligations and penalties for non-compliance. We believe the applicability of the GDPR to us is minimal since we do not offer good or services to EU residents or monitor their behaviors. Other foreign, federal, state or local governments, including in states and countries which we do business, may try to implement similar or other privacy legislation, which, among other effects, could result in different privacy standards for different geographical regions, restrict our ability to do business and increase our costs of doing business.   23 Table of Contents   Cybersecurity   Federal regulators have issued multiple statements regarding cybersecurity and that financial institutions need to design multiple layers of security controls to establish lines of defense and to ensure that their risk management processes also address the risk posed by compromised customer credentials, including security measures to reliably authenticate customers accessing internet-based services of the financial institution. In addition, a financial institution’s management is expected to maintain sufficient business continuity planning processes to ensure the rapid recovery, resumption and maintenance of the institution’s operations in the event of a cyber-attack. A financial institution is also expected to develop appropriate processes to enable recovery of data and business operations and address rebuilding network capabilities and restoring data if the institution or its critical service providers fall victim to a cyber-attack. If we fail to observe the regulatory guidance, we could be subject to various regulatory sanctions, including financial penalties.   State regulators have also been increasingly active in implementing privacy and cybersecurity standards and regulations. Recently, several states, notably including California where our banking business is concentrated, have adopted laws and/or regulations requiring certain financial institutions to implement cybersecurity programs and providing detailed requirements with respect to these programs, including data encryption requirements. Many such states (including California) have also recently implemented or modified their data breach notification and data privacy requirements. We expect this trend of state-level activity in those areas to continue, and we continue to monitor relevant legislative and regulatory developments in California where most of our customers are located.   In the ordinary course of business, we rely on electronic communications and information systems to conduct our operations and to store sensitive data. We employ a layered, defensive approach that leverages people, processes and technology to manage and maintain cybersecurity controls. We employ a variety of preventative and detective tools to monitor, block, and provide alerts regarding suspicious activity, as well as to report on any suspected advanced persistent threats. Notwithstanding the strength of our defensive measures, the threat from cyber-attacks is severe, attacks are sophisticated and increasing in volume, and attackers respond rapidly to changes in defensive measures. While to date we have not detected a significant compromise, significant data loss or any material financial losses related to cybersecurity attacks, our systems and those of our customers and third-party service providers are under constant threat and it is possible that we could experience a significant event in the future. Risks and exposures related to cybersecurity attacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of Internet banking, mobile banking and other technology-based products and services by us and our customers. See Item 1A. Risk Factors for a further discussion of risks related to cybersecurity.   Environmental Regulations   In the course of the Bank’s business, the Bank may foreclose and take title to real estate and could be subject to environmental liabilities with respect to these properties. The Bank may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination or may be required to investigate or clear up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. See Item 1A. Risk Factors for a further discussion of risks related to environmental regulations and liabilities.   24 Table of Contents   Federal Home Loan Bank System   The Bank is a member of the FHLB of San Francisco. Among other benefits, each FHLB serves as a reserve or central bank for its members within its assigned region. Each FHLB is financed primarily from the sale of consolidated obligations of the FHLB system. Each FHLB makes available loans or advances to its members in compliance with the policies and procedures established by the board of directors of the individual FHLB. Each member of the FHLB of San Francisco is required to own stock in an amount equal to the greater of (i) a membership stock requirement with an initial cap of $15.0 million (100% of “membership asset value” as defined), or (ii) an activity based stock requirement (based on a percentage of outstanding advances). There can be no assurance that the FHLB will pay dividends at the same rate it has paid in the past, or that it will pay any dividends in the future.   Impact of Monetary Policies   The earnings and growth of the Bank are largely dependent on its ability to maintain a favorable differential or spread between the yield on its interest-earning assets and the rates paid on its deposits and other interest-bearing liabilities. As a result, the Bank’s performance is influenced by general economic conditions, both domestic and foreign, the monetary and fiscal policies of the federal government, and the policies of the regulatory agencies. The Federal Reserve implements national monetary policies (with objectives such as seeking to curb inflation and combat recession) by its open-market operations in U.S. government securities, by adjusting the required level of reserves for financial institutions subject to its reserve requirements, and by varying the discount rate applicable to borrowings by banks from the Federal Reserve Banks. The actions of the Federal Reserve in these areas influence the growth of bank loans, investments and deposits, and also affect interest rates charged on loans and deposits. The nature and impact of any future changes in monetary policies cannot be predicted.   Securities and Corporate Governance   The Bancorp is subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, both as administered by the SEC. As a company listed on the NASDAQ Global Select Market, the Company is subject to NASDAQ listing standards for listed companies. The Bancorp is also subject to the Sarbanes-Oxley Act of 2002, provisions of the Dodd-Frank Act, and other federal and state laws and regulations which address, among other matters, required executive certification of financial presentations, corporate governance requirements for board and its audit and compensation committees and their members, and disclosure of controls and procedures and internal control over financial reporting, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. NASDAQ has also adopted corporate governance rules, which are intended to allow stockholders and investors to more easily and efficiently monitor the performance of companies and their directors. Under the Sarbanes-Oxley Act, management and the Bancorp’s independent registered public accounting firm are required to assess the effectiveness of the Bancorp’s internal control over financial reporting as of December 31, 2021. These assessments are included in Part II — Item 9A — “Controls and Procedures.”   Federal Banking Agency Compensation Guidelines   Guidelines adopted by the federal banking agencies pursuant to the FDI Act prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal stockholder. Federal banking agencies have also issued comprehensive guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking.   25 Table of Contents   In addition, the Dodd-Frank Act requires the federal bank regulatory agencies and the SEC to establish joint regulations or guidelines prohibiting certain incentive-based payment arrangements. These regulators must establish regulations or guidelines requiring enhanced disclosure to regulators of incentive-based compensation arrangements. The agencies proposed such regulations in April 2011, but the regulations have not been finalized. In April 2016, the agencies published a notice of proposed rulemaking further revising the incentive-based compensation standards originally proposed in 2011. Similar to the 2011 proposed rule, the 2016 proposed rule would prohibit financial institutions with at least $1.0 billion in consolidated assets from establishing or maintaining incentive-based compensation arrangements that encourage inappropriate risk by providing any executive officer, employee, director or principal shareholder who is a covered person with excessive compensation, fees or benefits or that could lead to material financial loss to the covered institution. It cannot be predicted whether, or in what form, any such proposed compensation rules may be enacted.   The scope, content and application of the U.S. banking regulators’ policies on incentive compensation continue to evolve. Depending upon the outcome of the rule making process, the application of any final compensation-related regulations to us could require us to revise our compensation strategy, increase our administrative costs and adversely affect our ability to recruit and retain qualified employees.   The Federal Reserve will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as us, that are not “large, complex banking organizations.” These reviews will be tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the organization’s supervisory ratings, which can affect the organization’s ability to make acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk management control or governance processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.   Audit Requirements   The Bank is required to have an annual independent audit, alone or as a part of the Bancorp’s audit, and to prepare all financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The Bank and the Bancorp are also each required to have an audit committee comprised entirely of independent directors. As required by NASDAQ, the Bancorp has certified that its audit committee has adopted formal written charters and meets the requisite number of directors, independence, and other qualification standards. As such, among other requirements, the Bancorp must maintain an audit committee that includes members with banking or related financial management expertise, has access to its own outside counsel, and does not include members who are large customers of the Bank. In addition, because the Bank has more than $3.0 billion in total assets, it is subject to the FDIC requirements for audit committees of large institutions.   Regulation of Non-Bank Subsidiaries   Non-bank subsidiaries are subject to additional or separate regulation and supervision by other state, federal and self-regulatory bodies. Additionally, any foreign-based subsidiaries would also be subject to foreign laws and regulations.   26 Table of Contents   Tax Cuts and Jobs Act of 2017   On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“Tax Reform Act”) was signed into law. The Tax Reform Act included a number of provisions that impact us, including the following:     ● Tax Rate. The Tax Reform Act replaces the corporate tax rates applicable under prior law, which imposed a maximum tax rate of 35%, with a reduced 21% tax rate for 2018. Although the reduced tax rate generally should be favorable to us by resulting in lower tax expense in future periods, it decreased the value of our existing deferred tax assets as of December 31, 2017.     ● FDIC Insurance Premiums. The Tax Reform Act prohibits taxpayers with consolidated assets over $50.0 billion from deducting any FDIC insurance premiums and prohibits taxpayers with consolidated assets between $10.0 and $50.0 billion from deducting the portion of their FDIC premiums equal to the ratio, expressed as a percentage, that (i) the taxpayer’s total consolidated assets over $10.0 billion, as of the close of the taxable year, bears to (ii) $40.0 billion.     ● Employee Compensation. A “publicly held company” is not permitted to deduct compensation in excess of $1.0 million per year paid to certain employees. The Tax Reform Act eliminates certain exceptions to the $1.0 million limit applicable under prior law related to performance-based compensation, such as equity grants and cash bonuses that are paid only on the attainment of performance goals. As a result, our ability to deduct certain compensation paid to our most highly compensated employees is limited.     ● Business Asset Expensing. The Tax Reform Act allows taxpayers to expense immediately the entire cost (instead of only 50%, as under prior law) of certain depreciable tangible property and real property improvements acquired and placed in service after September 27, 2017 and before January 1, 2023 (with an additional year for certain property). This 100% “bonus” depreciation is phased out proportionately for property placed in service on or after January 1, 2023, and before January 1, 2027 (with an additional year for certain property).     ● Limitations on Deductions. The Tax Reform Act limits deductions for state and local taxes, including property taxes, to $10 thousand per household, and limits mortgage interest deduction to mortgages of $750 thousand or less. Such limitations may reduce housing demand and prices, particularly in California and other high-tax, high-cost metro areas, which may reduce the demand for our residential mortgage loans and adversely affect our business and financial condition.   CARES Act and the Consolidated Appropriations Act, 2021   In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act and the Consolidated Appropriations Act, 2021 (the “CAA”) was signed into law on March 27, 2020, and December 27, 2020, respectively. Among other things, the CARES Act and the CAA include the following provisions impacting financial institutions like the Company:     ● As permitted by the CARES Act, and as extended by the CAA, we have chosen to adopt the Current Expected Credit Losses ("CECL") methodology for estimated credit losses as of January 1, 2021.      ● As permitted by the CARES Act, and as extended by the CAA, we have elected to suspend requirements under GAAP for loan modifications related to the COVID-19 pandemic (for loans that were not more than 30 days past due as of December 31, 2019) that would otherwise be categorized as a troubled debt restructuring (“TDR”), including impairment for accounting purposes, until the earlier of 60 days after the termination date of the national emergency or January 1, 2022.     ● The Bank participates as a lender under the SBA’s Paycheck Protection Program (the “PPP”) authorized by the CARES Act and extended by the CAA. The PPP provides for SBA-guaranteed business loans that may be eligible for loan forgiveness if borrowers, among other requirements, maintain their staff and payroll and if loans amounts are used to cover payroll, mortgage interest, rents and utilities payments.      27 Table of Contents     ● A borrower of a federally-backed mortgage loan (VA, FHA, USDA, Freddie Mac and Fannie Mae) experiencing financial hardship due to the COVID-19 pandemic may request forbearance from paying the borrower’s mortgage for up to 180 days, subject to extension for an additional 180-day period upon the request of the borrower. The CARES Act and many states, including California, also have moratoriums on certain foreclosure actions.   Pending Legislation and Future Initiatives   Certain pending legislation, and future initiatives that may be proposed or introduced before Congress, the California Legislature, and other governmental bodies, if enacted, may further alter the structure, regulation, and competitive relationship among financial institutions and may subject us to increased supervision and disclosure and reporting requirements. In addition, the various bank regulatory agencies often adopt new rules and regulations and policies to implement and enforce existing legislation. It cannot be predicted whether, or in what form, any such legislation or regulatory changes in policy may be enacted or the extent to which the business of the Bank would be affected thereby. The outcome of examinations, any litigation, or any investigations initiated by state or federal authorities also may result in necessary changes in our operations and increased compliance costs.   Item 1A. Risk Factors   Ownership of our common stock involves certain risks. The risks and uncertainties described below are not the only ones we face. Understanding these risks is important to understanding any statement in this Annual Report on Form 10K. You should carefully read and consider the risks and uncertainties described below together with all of the other information included or incorporated by reference in this Annual Report on Form 10K, including under the heading “Management’s Discussion and Analysis”. Further, to the extent that any of the information in this report, or in other reports we file with the SEC, constitutes forward-looking statements, the risk factors below are cautionary statements identifying important factors that could cause actual results to differ materially from those expressed in any forward-looking statements made by us or on our behalf. See "Forward-Looking Statements". The risks described below are not the only ones facing our business. Additional risks that management is not aware of or focused on or that management currently deems immaterial may also impair our business operations. This Annual Report on Form 10K is qualified in its entirety by these risk factors.   If any of the following risks actually occur, our business, financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of our common stock could significantly decline, and you could lose some or all of your investment.   Risk Factors Summary   The following is a summary of the material risks that we believe could adversely affect our business, operations and financial results. These risks are discussed more fully below and include, but are not limited to:   Market and Economic Risks     ● The COVID-19 pandemic has caused a significant global economic disruption, which has, and is expected to continue to, adversely affect our business and results of operations.     ● Unfavorable or uncertain economic and market conditions, including in California and the other markets in which we operate, can adversely affect our industry and business.     ● Our loan portfolio is largely secured by real estate, and a downturn in the real estate market may adversely affect our results of operations.       ● Adverse conditions in Asia and elsewhere could adversely affect our business.       ● The soundness of other financial institutions could adversely affect us.   28 Table of Contents   Credit, Interest Rate and Liquidity Risks     ● We may be required to make additional provisions for loan losses and charge off additional loans in the future, which could adversely affect our results of operations.     ● The allowance for credit losses is an estimate of probable credit losses. Actual credit losses in excess of the estimate could adversely affect our results of operations and capital.       ● Our business is subject to interest rate risk, and fluctuations in interest rates could reduce our net interest income and adversely affect our business.       ● Inflation and deflation may adversely affect our financial performance.     ● Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.     ● If the Company ’ s goodwill were determined to be impaired, it would result in a charge against earnings and thus a reduction in stockholders ’  equity.     Operational Risks     ● We may incur significant losses as a result of ineffective risk management processes and strategies.     ● Concentration of risk increases the potential for significant losses.     ● COVID-19 could have negative effects on our commercial real estate ( “ CRE ’ ) and other loans, including loans to hotels/motels, restaurants and the retail industry, which are dependent for repayment on the successful operation and management of the CRE, the strength of the CRE industry broadly and other factors outside of the borrower ’ s control.     ● Our commercial loan, CRE loan and construction loan portfolios expose us to risks that may be greater than the risks related to our other loans.     ● Our investments and/or financings in certain tax-advantaged projects may not generate returns as anticipated and may have an adverse impact on our financial results.     ● Our use of appraisals in deciding whether to make a loan on or secured by real property does not ensure the value of the real property collateral.       ● Our use of third-party vendors and our other ongoing third party business relationships are subject to increasing regulatory requirements and attention.     ● Our deposit insurance premiums could increase in the future, which could have a material adverse impact on future earnings and financial condition.     ● As we expand our business outside of California markets, including through acquisitions, we may encounter additional risks that could adversely affect our business and earnings.       ● We face substantial competition from our competitors.       ● We are dependent on key personnel and the loss of one or more of those key personnel may materially and adversely affect our prospects.       ● Natural disasters, geopolitical events, public health crises and other catastrophic events beyond our control could adversely affect us.     ● Governmental and societal responses to climate change could adversely affect our business and performance, including indirectly through impacts on our customers.   Information, Information Technology and Privacy Risks     ● We depend on the accuracy and completeness of information about customers.   29 Table of Contents     ● Our information systems may experience failures, interruptions, or breaches in security, which could have a material and adverse effect on our business, financial condition, results of operations and the value of our common stock.       ● Our need to continue to adapt our information technology systems to allow us to provide new and expanded service could present operational issues, require significant capital spending, and disrupt our business.       ● Managing reputational risk is important to attracting and maintaining customers, investors, and employees.       ● Regulations relating to privacy, information security and data protection could increase our costs, affect or limit how we collect and use personal information and adversely affect our business opportunities.   Regulatory, Compliance and Legal Risks     ● The banking industry is highly regulated, and the regulatory framework, together with any future legislative or regulatory changes, could limit or restrict our activities, hamper our ability to increase our assets and earnings, and materially and adversely affect our profitability.     ● We are subject to stringent risk-based capital and leverage requirements, including those adopted by the Federal Reserve ( ” the Basel III Capital Rules ” ).       ● We may become subject to supervisory action by bank supervisory authorities that could have a material adverse effect on our business, financial condition, and the value of our common stock.     ● We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations.     ● We are subject to the Community Reinvestment Act (the “ CRA), fair lending and other laws and regulations, and our failure to comply with these laws and regulations could lead to material penalties.     ● Reforms to and uncertainty regarding LIBOR may adversely affect our business.     ● Governmental monetary policies and intervention to stabilize the U.S. financial system may affect our business and are beyond our control.     ● Adverse results in legal proceedings could adversely affect our business and financial condition.     ● Liabilities from environmental regulations could adversely affect our business and financial condition.     ● Changes in accounting standards or tax laws and regulations could adversely affect our financial results.   Risks Related to Ownership of Our Common Stock     ● The price of our common stock may fluctuate significantly, and this may make it difficult for a holder to sell shares of common stock at times or at prices such holder finds attractive.       ● An investment in our common stock is not an insured deposit.     ● Statutory and regulatory restrictions on dividends and other distributions from the Bank may adversely impact us by limiting the amount of distributions the Bancorp may receive. Statutory and contractual restrictions (including our outstanding debt securities) and our regulators may also restrict the Bancorp ’ s ability to pay dividends.       ● The issuance of preferred stock could adversely affect holders of common stock.     ● Our outstanding debt securities restrict our ability to pay dividends on our common stock.     ● Certain provisions of our charter and bylaws could make acquiring our Company more difficult.       ● Our outstanding debt securities restrict our ability to pay dividends on our common stock.     ● We may need to raise additional capital, which may dilute the interests of holders of our common stock or otherwise have an adverse effect on their investment.   30 Table of Contents   Market and Economic Risks   The COVID-19 pandemic has caused a significant global economic disruption, which has, and is expected to continue to, adversely affect our business and results of operations.   Global health and economic concerns relating to the COVID-19 pandemic and government actions taken to reduce the spread of the virus have had a material adverse impact on the macroeconomic environment, and the pandemic has significantly increased economic uncertainty. The pandemic has resulted in federal, state and local authorities, including those who govern the markets in which we operate, implementing numerous measures to try to contain the virus. Such measures have included travel bans and restrictions, curfews, quarantines, shelter in place or total lock-down orders and business limitations and shutdowns. Such measures have significantly contributed to rising unemployment and negatively impacted consumer and business spending. The United States government has taken steps to attempt to mitigate some of the more severe anticipated economic effects of the virus, including the passage of the CARES Act and the CAA, and vaccination programs are on-going. There can be no assurance, however, that such steps will be effective or achieve their desired results in the near future.   The pandemic has adversely impacted and is likely to continue to adversely impact our workforce and operations and the operations of our customers and business partners. In particular, we may experience financial losses due to a number of operational factors impacting us or our customers or business partners, including but not limited to the following:     ● Our business is dependent upon the willingness and ability of our customers to conduct banking and other financial transactions. The spread of COVID-19 could disrupt the business, activities, and operations of our customers, cause a decline in demand for our products and services, including loans and deposits which may result in a significant decrease in business and would negatively impact our liquidity position, and our growth strategy.     ● Our financial results could also be impacted due to an inability of our customers to meet their loan commitments due to job losses or other losses associated with impacts of the disease, and could also result in increased risk of delinquencies, defaults, foreclosures, declining collateral values and the ability of our borrowers to repay their loans resulting in losses to our Bank.     ● Based on a review of the appropriateness of the allowance for loan losses at December 31, 2021, we recorded a reversal for credit losses of $16.0 million in the year ended December 31, 2021, primarily a result of the economic improvements of the global economy as economies recover from the COVID-19 pandemic. While we took steps to incorporate the impact of the COVID-19 pandemic on the economic forecast and other factors utilized to determine our allowance for loan losses, if the economic forecast or other factors worsen relative to the assumptions we utilized, our allowance for loan losses will increase accordingly in future periods.     ● Market interest rates have declined significantly. We expect that these reductions in interest rates, especially if prolonged, could adversely affect our net interest income, margins and our profitability. Our assets and liabilities may be significantly impacted by changes in interest rates.     ● The COVID-19 pandemic restrictions have created significant volatility and disruption in the financial markets, and these conditions may require us to recognize an elevated level of other than temporary impairments on investment securities in our portfolio as issues of these securities are negatively impacted by the economic slowdown. Declines in fair value of investment securities in our portfolio could also reduce the unrealized gains reported as part of our consolidated comprehensive income (loss).     ● We are required to comply with minimum capital and leverage requirements. Our capital strategy is primarily to maintain capital levels through the COVID-19 pandemic, and our Board of Directors could determine, as appropriate, to reduce or forego dividends in order to maintain and/or strengthen our capital and liquidity position.   31 Table of Contents     ● Current and future governmental action may temporarily require us to conduct business related to foreclosures, repossessions, payments, deferrals and other customer-related transactions differently.     ● The pandemic creates heightened risks of cyber and payment fraud, as cyber criminals try to take advantage of the disruption and increased online activity brought about by the pandemic.   Although we have established a pandemic response plan and procedures, our workforce has been, is, and may continue to be impacted by COVID-19. We are taking precautions to protect the safety and well-being of our employees and customers, but no assurance can be given that our actions will be adequate or appropriate, nor can we predict the level of disruption which will occur to our employees’ ability to provide customer support and service. The spread could also negatively impact availability of key personnel and employee productivity, as well as the business and operations of third-party service providers who perform critical services for us, which could adversely impact our ability to deliver products and services to our customers.   These and other factors may exist for an extended period of time and may continue to adversely affect our business, financial condition and operations even after the COVID-19 pandemic has subsided. The extent to which the pandemic impacts our business, financial condition and operations will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, the pandemic’s duration and severity, the actions to contain it or treat its impact (including the speed and effectiveness of vaccination programs), and how quickly and to what extent normal economic and operating conditions can resume. Even after the pandemic has subsided, we may continue to experience materially adverse impacts to our business as a result of its economic impact, including the availability of credit, adverse impacts on our liquidity and any recession that has occurred or may occur in the future. Additionally, future outbreaks of COVID-19, or other viruses, may occur.   There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of the pandemic is highly uncertain and subject to change. We do not yet know the full extent of the impacts on our business, our operations or the global economy as a whole. Therefore, the risk factors discussed in this Annual Report on Form 10-K could be heightened, changed or be added to in the future.   Unfavorable or uncertain economic and market conditions can adversely affect our industry and business.   Our financial performance generally, as well as the ability of borrowers to make loan payments, the value of the collateral securing those loans, and the demand for loans and our other products and services, are highly dependent upon the business and economic conditions in the markets in which we operate and in the United States as a whole. Unfavorable or uncertain economic and market conditions, including conditions triggered by the COVID-19 pandemic, could lead to credit quality concerns related to repayment ability and collateral protection as well as reduced demand for our products and services. The uncertainties triggered by the COVID-19 pandemic has slowed economic growth and business spending, increased financial market volatility, and opinions vary on when the U.S. economy will recover from the COVID-19 pandemic and the rate of economic growth following recovery. Uncertainties also have arisen as a result of increased tariffs and other changes to U.S. trade policies and reactions to such changes by China and other U.S. trading partners as further discussed below. In addition, economic growth in international markets also appears to be slowing, particularly in China and Europe, which also may impact the economy and financial markets here in the United States. While we have no banking operations in Europe, the impact of Great Britain’s exit from the Europe Union on British and European businesses, financial markets, and related businesses in the United States could also adversely affect financial markets generally. Our business also could be adversely affected directly by the default of another institution or if the financial services industry experiences significant market-wide liquidity and credit problems.   32 Table of Contents   Factors related to inflation, recession, unemployment, volatile interest rates, changes in tariffs and trade policies, international conflicts, real estate values, energy prices, state and local municipal budget deficits, consumer confidence level, government spending and any government shutdowns, the U.S. national debt, natural disasters, geopolitical events, public health crises (such as the COVID-19 pandemic) and other factors outside of our control also may assert economic pressures on consumers and businesses and adversely affect our business, financial condition, results of operations and stock price.   We may face the following risks, among others, in connection with these events:     ● Unfavorable market conditions triggered by any of these events (including, but not limited to, the COVID-19 pandemic) result in a deterioration in the credit quality of our borrowers and the demand for our products and services, an increase in the number of loan delinquencies, defaults and charge-offs, additional provisions for loan losses, adverse asset values and an overall material adverse effect on the quality of our loan portfolio.     ● Economic pressure on consumers and uncertainty regarding continuing economic improvement resulting from any of these events (including, but not limited to, the COVID-19 pandemic) may result in changes in consumer and business spending, borrowing and saving habits. Such conditions could have a material adverse effect on the credit quality of our loans or our business, financial condition or results of operations.     ● The banking industry remains heavily regulated, and changes by Congress or federal regulatory agencies to the banking and financial institutions regulatory regime and heightened legal standards and regulatory requirements may continue to be adopted in the future. Compliance with such regulation may increase our costs and limit our ability to pursue business opportunities.     ● The process we use to estimate losses inherent in our credit exposure requires difficult, subjective, and complex judgments, including qualitative factors that pertain to economic conditions and how these economic conditions might impair the ability of our borrowers to repay their loans. The level of uncertainty concerning economic conditions may adversely affect the accuracy of our estimates which may, in turn, impact the reliability of the process.     ● The value of the portfolio of investment securities that we hold may be adversely affected by increasing interest rates and defaults by debtors.     ● There have been changes and discussions with respect to U.S. trade policies, legislation, treaties and tariffs, including trade policies and tariffs affecting other countries, including China, the European Union, Canada and Mexico and retaliatory tariffs by such countries. Tariffs and retaliatory tariffs have been imposed, and additional tariffs and retaliation tariffs have been proposed. Such tariffs, retaliatory tariffs or other trade restrictions on products and materials that our customers import or export, could cause the prices of our customers’ products to increase which could reduce demand for such products, or reduce our customer margins, and adversely impact their revenues, financial results and ability to service debt; which, in turn, could adversely affect our financial condition and results of operations. In addition, to the extent changes in the political environment have a negative impact on us or on the markets in which we operate our business, results of operations and financial condition could be materially and adversely impacted in the future. It remains unclear what the U.S. Administration or foreign governments will or will not do with respect to tariffs already imposed, additional tariffs that may be imposed, or international trade agreements and policies. A trade war or other governmental action related to tariffs or international trade agreements or policies has the potential to negatively impact ours and/or our customers' costs, demand for our customers' products, and/or the U.S. economy or certain sectors thereof and, thus, adversely impact our business, financial condition and results of operations.   33 Table of Contents   Economic conditions in California and the other markets in which we operate may adversely affect our business.   Our banking operations are concentrated primarily in California, and secondarily in New York, Washington, Illinois, Texas, Maryland, Massachusetts, Nevada, New Jersey, and Hong Kong. The economic conditions in these local markets may be different from, and in some instances worse than, the economic conditions in the United States as a whole. Adverse economic conditions in these regions in particular could impair borrowers’ ability to service their loans, decrease the level and duration of deposits by customers, decrease demand for our loans and other services and erode the value of loan collateral. These conditions include the effects of the general decline in real estate sales and prices in many markets across the United States; declines in economic growth, business activity or investor or business confidence; limitations on the availability or increases in the cost of credit and capital; increases in inflation or interest rates; high unemployment; natural disasters, pandemics and health crises (such as the COVID-19 pandemic), geopolitical events; state or local government insolvency or budget disputes; changes in taxes, tariffs, trade policies and other government regulations and polices; or a combination of these or other factors. These conditions could increase the amount of our non-performing assets and have an adverse effect on our efforts to collect our non-performing loans or otherwise liquidate our non-performing assets (including other real estate owned) on terms favorable to us, if at all, and could also cause a decline in demand for our products and services, or a lack of growth or a decrease in deposits, any of which may cause us to incur losses, adversely affect our capital, and hurt our business.    Our loan portfolio is largely secured by real estate, and a downturn in the real estate market may adversely affect our results of operations.     The real estate collateral securing our borrowers’ obligations is principally located in California, and to a lesser extent, in New York, Washington, Illinois, Texas, Maryland, Massachusetts, Nevada, and New Jersey. The value of such collateral depends upon conditions in the relevant real estate markets. These include general or local economic conditions and neighborhood characteristics, unemployment rates, real estate tax rates, the cost of operating the properties, governmental regulations and fiscal policies, acts of nature including earthquakes, floods, and hurricanes (which may result in uninsured losses), and other factors beyond our control. The direction of real estate sales and prices in many markets across the United States is not currently predictable and reductions in the value of our real estate collateral could cause us to have to foreclose on the real estate. If we are not able to realize a satisfactory amount upon foreclosure sales, we may have to own the properties, subjecting us to exposure to the risks and expenses associated with ownership. Any continued declines in real estate sales and prices coupled with any weakness in the economy and continued high unemployment will result in higher than expected loan delinquencies or problem assets, additional loan charge-offs and provisions for loan losses, a decline in demand for our products and services, or a lack of growth or a decrease in deposits, which may cause us to incur losses, adversely affect our capital, and hurt our business.    Adverse conditions in Asia and elsewhere could adversely affect our business.     A substantial number of our customers have economic and cultural ties to Asia and, as a result, we are likely to feel the effects of adverse economic and political conditions in Asia, including the effects of rising inflation or slowing growth and volatility in the real estate and stock markets in China and other regions. Additionally, we maintain a branch in Hong Kong. U.S. and global economic and trade policies, military tensions, and unfavorable global economic conditions may adversely impact the Asian economies. In addition, pandemics and other public health crises, including the occurrence of a contagious disease or illness or concerns over the possibility of such crises could create economic, market and financial disruptions in the region.   34 Table of Contents   A significant deterioration of economic conditions in Asia could expose us to, among other things, economic and transfer risk, and we could experience an outflow of deposits by those of our customers with connections to Asia. Transfer risk may result when an entity is unable to obtain the foreign exchange needed to meet its obligations or to provide liquidity. This may adversely impact the recoverability of investments with or loans made to such entities. Adverse economic conditions in Asia, and in China or Taiwan in particular, may also negatively impact asset values and the profitability and liquidity of our customers who operate in this region.    The soundness of other financial institutions could adversely affect us.   Financial institutions are interrelated as a result of trading, clearing, counterparty or other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial industry, including brokers and dealers, commercial banks, investment banks, and other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the financial instrument exposure due us. The failure of financial institutions can also result in increased FDIC assessments for the DIF. Any such losses or increased assessments could have a material adverse effect on our financial condition and results of operations.   Credit, Interest Rate and Liquidity Risks   We may be required to make additional provisions for loan losses and charge off additional loans in the future, which could adversely affect our results of operations.   At December 31, 2021, our allowance for loan losses totaled $136.2 million and we had net charge-offs of $17.6 million for 2021. Although economic conditions in the real estate market in portions of Los Angeles, San Diego, Riverside, and San Bernardino counties and the Central Valley of California where many of our commercial real estate and construction loan customers are based, have continued to improve, the economic recovery in these areas of California is uneven and in some areas rather slow, with relatively high and persistent unemployment, and economic growth appears to have slowed. Moreover, rising interest rates may adversely affect real estate sales and the refinancing of existing real estate loans. As of December 31, 2021, we had approximately $8.1 billion in commercial real estate and construction loans. Any deterioration in the real estate market generally and in the commercial real estate and residential building segments in particular could result in additional loan charge-offs and provisions for loan losses in the future, which could have a material adverse effect on our financial condition, net income, and capital. In addition, a recent change in accounting standards will result in a significant change in how we recognize credit losses as further disclosed in the risk factor below entitled, “Our financial results could be adversely affected by changes in accounting standards or tax laws and regulations.”   35 Table of Contents   The allowance for credit losses is an estimate of probable credit losses. Actual credit losses in excess of the estimate could adversely affect our results of operations and capital.     A significant source of risk arises from the possibility that we could sustain losses because borrowers, guarantors, and related parties may fail to perform in accordance with the terms of their loans. The underwriting and credit monitoring policies and procedures that we have adopted to address this risk may not prevent unexpected losses that could have a material adverse effect on our business, financial condition, results of operations, and cash flows. The allowance for credit losses is based on management’s estimate of the probable losses from our credit portfolio. If actual losses exceed the estimate, the excess losses could adversely affect our results of operations and capital. Such excess losses could also lead to larger allowances for credit losses in future periods, which could in turn adversely affect results of operations and capital in those periods. If economic conditions differ substantially from the assumptions used in the estimate or adverse developments arise with respect to our credits, future losses may occur, and increases in the allowance may be necessary. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the adequacy of our allowance. These agencies may require us to establish additional allowances based on their judgment of the information available at the time of their examinations. No assurance can be given that we will not sustain credit losses in excess of present or future levels of the allowance for credit losses.   Our business is subject to interest rate risk, and fluctuations in interest rates could reduce our net interest income and adversely affect our business.     A substantial portion of our income is derived from the differential, or “spread,” between the interest earned on loans, investment securities, and other interest-earning assets, and the interest paid on deposits, borrowings, and other interest-bearing liabilities. The interest rate risk inherent in our lending, investing, and deposit taking activities is a significant market risk to us and our business. Income associated with interest earning assets and costs associated with interest-bearing liabilities may not be affected uniformly by fluctuations in interest rates. The magnitude and duration of changes in interest rates, events over which we have no control, may have an adverse effect on net interest income. Prepayment and early withdrawal levels, which are also impacted by changes in interest rates, can significantly affect our assets and liabilities. Increases in interest rates may adversely affect the ability of our floating rate borrowers to meet their higher payment obligations, which could in turn lead to an increase in non-performing assets and net charge-offs.    Generally, the interest rates on our interest-earning assets and interest-bearing liabilities do not change at the same rate, to the same extent, or on the same basis. Even assets and liabilities with similar maturities or periods of re-pricing may react in different degrees to changes in market interest rates. Interest rates on certain types of assets and liabilities may fluctuate in advance of changes in general market interest rates, while interest rates on other types of assets and liabilities may lag behind changes in general market rates. Certain assets, such as fixed and adjustable-rate mortgage loans, have features that limit changes in interest rates on a short-term basis and over the life of the asset. Therefore, as interest rates begin to increase, if our floating rate interest-earning assets do not reprice faster than our interest-bearing liabilities in a rising rate environment, our net interest income and, in turn, our profitability, could be adversely affected.   We seek to minimize the adverse effects of changes in interest rates by structuring our asset-liability composition to obtain the maximum spread. We use interest rate sensitivity analysis and a simulation model to assist us in estimating the optimal asset-liability composition. However, such management tools have inherent limitations that impair their effectiveness. Moreover, the long-term effects of the Federal Reserve’s unprecedented quantitative easing and tapering off are unknown, and while interest rates have begun to increase, they remain at historically low levels. There can be no assurance that we will be successful in minimizing the adverse effects of changes in interest rates.    36 Table of Contents   Inflation and deflation may adversely affect our financial performance.     The Consolidated Financial Statements and related financial data presented in this report have been prepared in accordance with GAAP. These principles require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation or deflation. The primary impact of inflation on our operations is reflected in increased operating costs. Conversely, deflation will tend to erode collateral values and diminish loan quality. Virtually all of our assets and liabilities are monetary in nature. As a result, interest rates generally have a more significant impact on our performance than the general levels of inflation or deflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the price of goods and services.    Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.     Liquidity is essential to our business. An inability to raise funds through deposits, FHLB advances and other borrowings, the sale of loans, the issuance of securities and other sources could have a material adverse effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities could be impaired by factors that affect us specifically or the financial services industry in general. Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity due to a market downturn or adverse regulatory action against us. Deposit balances can decrease when customers perceive alternative investments as providing a better risk/return tradeoff. If customers move money out of bank deposits and into other investments, we would lose a relatively low-cost source of funds, increasing our funding costs and reducing our net interest income and net income. Our ability to acquire deposits or borrow could also be impaired by factors that are not specific to us, such as a severe disruption of the financial markets or negative views and expectations about the prospects for the financial services industry as a whole.     Based on past experience, we believe that our deposit accounts are relatively stable sources of funds. If we increase interest rates paid to retain deposits, our earnings may be adversely affected, which could have an adverse effect on our business, financial condition and results of operations. Any decline in available funding could adversely impact our ability to originate loans, invest in securities, meet our expenses, pay dividends to our stockholders or to fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could have a material adverse impact on our liquidity, business, financial condition and results of operations.   If the Company ’ s goodwill were determined to be impaired, it would result in a charge against earnings and thus a reduction in stockholders ’ equity.     The Company tests goodwill for impairment on an annual basis, or more frequently, if necessary. Quoted market prices in active markets are the best evidence of fair value and are to be used as the basis for measuring impairment, when available. Other acceptable valuation methods include present value measurements based on multiples of earnings or revenues, or similar performance measures. If the Company were to determine that the carrying amount of the goodwill exceeded its implied fair value, the Company would be required to write down the value of the goodwill on the balance sheet, adversely affecting earnings as well as capital.    37 Table of Contents   Operational Risks   We may incur significant losses as a result of ineffective risk management processes and strategies.   We are exposed to many types of operational risks, including liquidity risk, credit risk, market risk, interest rate risk, legal and compliance risk, strategic risk, information security risk, and reputational risk. We are also reliant upon our employees, and our operations are subject to the risk of fraud, theft or malfeasance by our employees, vendors and others. We seek to monitor and control our risk exposure through a risk and control framework encompassing a variety of separate but complementary financial, credit, operational and compliance systems, and internal control and management review processes. However, these systems and review processes and the judgments that accompany their application may not be effective and, as a result, we may not anticipate every economic and financial outcome in all market environments or the specifics and timing of such outcomes, particularly in the event of the kinds of dislocations in market conditions experienced during the recession, which highlight the limitations inherent in using historical data to manage risk. If those systems and review processes prove to be ineffective in identifying and managing risks, our business, financial condition, results of operations and the value of our common stock could be materially and adversely affected. We may also suffer severe reputational damage.   Concentration of risk increases the potential for significant losses.   We have naturally developed concentrated exposures to those markets and asset classes in which we have specific knowledge or competency. In particular, we primarily operate in California markets with a concentration of Chinese-American individuals and businesses, and commercial and commercial real estate loans constitute a significant portion of our loan portfolio. In management's judgment, our extensive experience within these concentration areas helps us to better evaluate underwriting and other associated risks with extending credit. However, the presence of similar exposures concentrated in certain asset classes leaves us exposed to the risk of a focused downturn within a concentration area. Thus, our concentration in the California markets increases our exposure to materially higher credit losses if there is a deterioration in the economic conditions, housing conditions or real estate values in the California markets. Our concentration in commercial and commercial real estate lending also increases our exposure to risks generally associated with such lending. Our commercial and commercial real estate loans may have a greater risk of loss than residential mortgage loans, in part because these loans are generally larger or more complex to underwrite and are characterized by having a limited supply of real estate at commercially attractive locations, long delivery time frames for development and high interest rate sensitivity. Unexpected deterioration in the credit quality of our commercial or commercial real estate loan portfolios would require us to increase our provision for loan losses, which would reduce our profitability and could materially adversely affect our business, financial condition and results of operations. Moreover, with respect to commercial real estate loans, federal and state banking regulators are examining commercial real estate lending activity with heightened scrutiny and may require banks with higher levels of commercial real estate loans to implement more stringent underwriting, internal controls, risk management policies and portfolio stress testing, as well as possibly higher levels of allowances for losses and capital levels as a result of commercial real estate lending growth and exposures.   COVID-19 could have negative effects on our hospitality and CRE loans, including loans to hotels/motels, restaurants and the retail industry, which are dependent for repayment on the successful operation and management of the CRE, the strength of the CRE industry broadly and other factors outside of the borrower ’ s control.   38 Table of Contents   In response to COVID-19, many state and local governments have ordered certain restrictions on non-essential businesses and residents. Certain industries have been particularly hard hit, including the retail industry, the restaurant industry and the travel and hospitality industry. At December 31, 2021, we had outstanding loans to retail businesses/properties of $1.9 billion, or 11% of total loans, hotels & resorts of $301.3 million, or 2% of total loans, and restaurants of $144.0 million, or 1% of total loans. Our CRE loans are dependent on the profitable operation and management of the property securing the loan and its cash flows. The continued mutation and spread of COVID-19 could result in further reduction of demand for hotel rooms and related lodging and entertainment services in general, reduction in business and personal travel, reduction in discretionary spending by our borrowers’ customers, increases in employee health related costs for our customers, operational cost increases due to potential labor, food, energy, water, and transportation shortages, government forced closures and travel restrictions, or other unanticipated costs related to such force majeure events like COVID-19. These conditions could have a significant adverse impact, which could be material to our borrowers, by reducing the revenue and cash flows of our borrowers, impacting the borrowers’ ability to repay the loan, increasing the risk of default by our borrowers and/or reducing the foreclosure value of CRE that serves as collateral for certain of our loans. These conditions can also lead to a decline in property sales prices and related assets and properties planned for development. Loans may also be secured by depreciating assets where any repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance.   Any of the foregoing could negatively impact our borrowers, and their financial results, which, in turn, could adversely affect our financial condition and results of operations.   Our commercial loan, commercial real estate loan and construction loan portfolios expose us to risks that may be greater than the risks related to our other loans.   Our loan portfolio includes commercial loans and commercial real estate loans, which are secured by hotels and motels, shopping/retail centers, service station and car wash, industrial and warehouse properties, and other types of commercial properties. Commercial and commercial real estate loans may carry more risk as compared to other types of lending, because they typically involve larger loan balances often concentrated with a single borrower or groups of related borrowers. This may result in larger charge-offs on commercial and commercial real estate loans on a per loan basis than those incurred with our residential or consumer loan portfolios. These loans also may expose a lender to greater credit risk than loans secured by residential real estate. The payment experience on commercial real estate loans that are secured by income producing properties are typically dependent on the successful operation of the related real estate project and thus, may subject us to adverse conditions in the real estate market or to the general economy. The collateral securing these loans typically cannot be liquidated as easily as residential real estate. If we foreclose on these loans, our holding period for the collateral typically is longer than residential properties because there are fewer potential purchasers of the collateral.   Additionally, many of the Bank’s commercial real estate and commercial business loans are made to small to medium sized businesses that may have a heightened vulnerability to economic conditions. Moreover, we have made a portion of these loans in recent years and the borrowers may not have experienced a complete business or economic cycle. Furthermore, the deterioration of our borrowers’ businesses may hinder their ability to repay their loans with us, which could adversely affect our results of operations. Any unexpected deterioration in the credit quality of our commercial or commercial real estate loan portfolios would require us to increase our provision for loan losses, which would reduce our profitability and could materially adversely affect our business, financial condition, results of operations and prospects.   39 Table of Contents   Moreover, federal and state banking regulators are examining commercial real estate lending activity with heightened scrutiny and may require banks with higher levels of commercial real estate loans to implement more stringent underwriting, internal controls, risk management policies and portfolio stress testing, as well as possibly higher levels of allowances for losses and capital levels as a result of commercial real estate lending growth and exposures. Because a significant portion of our loan portfolio is comprised of commercial real estate loans, the banking regulators may require us to maintain higher levels of capital than we would otherwise be expected to maintain, which could limit our ability to leverage our capital and have a material adverse effect on our business, financial condition, results of operations and prospects.   In addition, the risks inherent in construction lending may continue to affect adversely our results of operations. Such risks include, among other things, the possibility that contractors may fail to complete, or complete on a timely basis, construction of the relevant properties; substantial cost overruns in excess of original estimates and financing (including do shortages in labor and raw materials and supplies); market deterioration during construction; and lack of permanent take-out financing. Loans secured by such properties also involve additional risk because they have no operating history. In these loans, loan funds are advanced upon the security of the project under construction (which is of uncertain value prior to completion of construction) and the estimated operating cash flow to be generated by the completed project. There is no assurance that such properties will be sold or leased so as to generate the cash flow anticipated by the borrower. A general decline in real estate sales and prices across the United States or locally in the relevant real estate market, a decline in demand for residential real estate, economic weakness, high rates of unemployment, and reduced availability of mortgage credit, are some of the factors that can adversely affect the borrowers’ ability to repay their obligations to us and the value of our security interest in collateral, and thereby adversely affect our results of operations and financial results.    Our investments and/or financings in certain tax-advantaged projects may not generate returns as anticipated and may have an adverse impact on our financial results.   We invest in and/or finance certain tax-advantaged projects promoting affordable housing and renewable energy sources. Our investments in these projects are designed to generate a return primarily through the realization of federal and state income tax credits, and other tax benefits, over specified time periods. We are subject to the risk that previously recorded tax credits, which remain subject to recapture by taxing authorities based on compliance features required to be met at the project level, will fail to meet certain government compliance requirements and will not be able to be fully realized. The possible inability to realize these tax credits and other tax benefits can have a negative impact on our financial results. The risk of not being able to realize the tax credits and other tax benefits depends on many factors outside of our control, including changes in the applicable provisions of the tax code and the ability of the projects to be completed and properly managed.    Our use of appraisals in deciding whether to make a loan on or secured by real property does not ensure the value of the real property collateral.     In considering whether to make a loan secured by real property, we typically require an appraisal of the property. However, an appraisal is only an estimate of the value of the property at the time the appraisal is made. If the appraisal does not reflect the amount that may be obtained upon any sale or foreclosure of the property, we may not realize an amount equal to the indebtedness secured by the property.   40 Table of Contents   Our use of third-party vendors and our other ongoing third-party business relationships are subject to increasing regulatory requirements and attention.   We regularly use third party vendors as part of our business. We also have substantial ongoing business relationships with other third parties. These types of third-party relationships are subject to increasingly demanding regulatory requirements and attention by our federal bank regulators. Recent regulation requires us to enhance our due diligence, ongoing monitoring and control over our third-party vendors and other ongoing third-party business relationships. In certain cases, we may be required to renegotiate our agreements with these vendors to meet these enhanced requirements, which could increase our costs. We expect that our regulators will hold us responsible for deficiencies in our oversight and control of our third-party relationships and in the performance of the parties with which we have these relationships. As a result, if our regulators conclude that we have not exercised adequate oversight and control over our third party vendors or other ongoing third party business relationships or that such third parties have not performed appropriately, we could be subject to enforcement actions, including civil money penalties or other administrative or judicial penalties or fines as well as requirements for customer remediation, any of which could have a material adverse effect our business, financial condition or results of operations.   Our deposit insurance premiums could increase in the future, which could have a material adverse impact on future earnings and financial condition.   The FDIC insures deposits at FDIC-insured financial institutions, including the Bank. The FDIC charges insured financial institutions premiums to maintain the DIF at a specific level. Unfavorable economic conditions, increased bank failures and additional failures decreased the DIF. According to the FDIC, the DIF reserve ratio reached 1.36% of total deposits as of September 30, 2018, exceeding the statutorily required minimum reserved ratio of 1.35% ahead of the September 30, 2020, deadline imposed by the Dodd-Frank Act. The FDIC has, in addition, established a higher reserve ratio of 2% as a long-term goal which goes beyond what is required by statute. There is no implementation deadline for the 2% ratio. The FDIC may increase the assessment rates or impose additional special assessments in the future to keep the DIF at the statutory target level. Any increase in the Bank's FDIC premiums could have an adverse effect on its financial condition and results of operations.   As we expand our business outside of California markets, including through acquisitions, we may encounter additional risks that could adversely affect our business and earnings.     We primarily operate in California markets with a concentration of Chinese-American individuals and businesses; however, one of our strategies is to expand beyond California into other domestic markets that have concentrations of Chinese-American individuals and businesses. We currently have operations in eight other states (New York, Washington, Illinois, Texas, Maryland, Massachusetts, Nevada, and New Jersey) and in Hong Kong. In the course of this expansion, we may encounter significant risks and uncertainties that could have a material adverse effect on our operations. These risks and uncertainties include increased expenses and operational difficulties arising from, among other things, our ability to attract sufficient business in new markets, to manage operations in noncontiguous market areas, to comply with all of the various local laws and regulations, and to anticipate events or differences in markets in which we have no current experience.   We have engaged in expansion through acquisitions and may consider other acquisitions in the future. There are risks associated with any such expansion. These risks include, among others, incorrectly assessing the asset quality of a bank acquired in a particular transaction, encountering greater than anticipated costs in integrating acquired businesses, facing resistance from customers or employees, and being unable to profitably deploy assets acquired in the transaction. Additional country- and region-specific risks are associated with transactions outside the United States, including in China. To the extent we issue capital stock in connection with additional transactions, if any, these transactions and related stock issuances may have a dilutive effect on earnings per share and share ownership.    41 Table of Contents   Our earnings, financial condition, and prospects after a merger or acquisition depend in part on our ability to successfully integrate the operations of the acquired company. We may be unable to integrate operations successfully or to achieve expected cost savings. Any cost savings which are realized may be offset by losses in revenues or other charges to earnings. As with any acquisition of financial institutions, there also may be business disruptions that cause us to lose customers or cause customers to remove their accounts from us and move their business to competing financial institutions.   In addition, our ability to grow may be limited if we cannot make acquisitions. We compete with other financial institutions with respect to proposed acquisitions. We cannot predict if or when we will be able to identify and attract acquisition candidates or make acquisitions on favorable terms.   We face substantial competition from our competitors.     We face substantial competition for deposits, loans, and for other banking services, as well as acquisitions, throughout our market area from the major banks and financial institutions that dominate the commercial banking industry. This may cause our cost of funds to exceed that of our competitors. These banks and financial institutions, including those with foreign ownership, may have greater resources than we do, including the ability to finance advertising campaigns and allocate their investment assets to regions of higher yield and demand and make acquisitions and invest in new banking technology. By virtue of their larger capital bases, our larger competitors have substantially greater lending limits than we do and perform certain functions, including trust services, which are not presently offered by us. We also compete for loans and deposits, as well as other banking services, such as payment services, with savings and loan associations, savings banks, brokerage houses, insurance companies, mortgage companies, credit unions, credit card companies and other financial and non-financial institutions and entities. These factors and ongoing consolidation among insured institutions in the financial services industry may materially and adversely affect our ability to market our products and services. Significant increases in the costs of monitoring and ensuring compliance with new banking regulations and the necessary costs of upgrading information technology and data processing capabilities can have a disproportionate impact on our ability to compete with larger institutions.   We are dependent on key personnel and the loss of one or more of those key personnel may materially and adversely affect our prospects.     Competition for qualified employees and personnel in the banking industry is intense and we believe there are a limited number of qualified persons with knowledge of, and experience in, the communities that we serve. The process of recruiting personnel with the combination of skills and attributes required to carry out our strategies is often lengthy. Our success depends to a significant degree upon our ability to attract and retain qualified management, loan origination, finance, customer service, administrative, marketing, and technical personnel and upon the continued contributions of our management and personnel. In particular, our success has been and continues to be highly dependent upon the abilities of key executives and certain other employees, including, but not limited to, our Executive Chairman of the Board, Dunson K. Cheng, our Chief Executive Officer, Chang M. Liu, and our Chief Financial Officer, Heng W. Chen.   Our compensation practices are subject to review and oversight, and may be subject to limitations, by the FDIC, the DFPI, the Federal Reserve and other regulators. Such limitations may or may not affect our competitors and could further affect our ability to attract and retain our executive officers and other key personnel. In April 2011 and April 2016, the Federal Reserve, other federal banking agencies and the SEC jointly published proposed rules designed to implement provisions of the Dodd-Frank Act prohibiting incentive compensation arrangements that would encourage inappropriate risk taking at covered financial institutions, which includes a bank or bank holding company with $1 billion or more of assets, such as the Bancorp and the Bank. It cannot be determined at this time whether or when a final rule will be adopted and whether compliance with such a final rule will substantially affect the manner in which we structure compensation for our executives and other employees. Depending on the nature and application of the final rules, we may not be able to successfully compete with certain financial institutions and other companies that are not subject to some or all of the rules to retain and attract executives and other high performing employees. If this were to occur, our business, financial condition and results of operations could be adversely affected, perhaps materially.   42 Table of Contents   Natural disasters, geopolitical events, public health crises and other catastrophic events beyond our control could adversely affect us.     Natural disasters such as earthquakes, landslides, wildfires, extreme weather conditions, hurricanes, floods, and other acts of nature, geopolitical events such as those involving civil unrest, changes in government regimes, terrorism or military conflict, climate change related events and pandemics and other public health crises, such as the COVID-19 pandemic, and other catastrophic events could, among other things, (i) adversely affect our business operations and those of our customers, counterparties and service providers; (ii) cause substantial damage and loss to real and personal property; (iii) impair our borrowers’ ability to service their loans; (iv) decrease the level and duration of deposits by customers; (v) erode the value of loan collateral; (vi) result in an increase in the amount of our non-performing loans and a higher level of non-performing assets (including real estate owned), net charge-offs, and provision for loan losses; or (vii) lead to other operational difficulties and impair our ability to manage our business. We also could be adversely affected if our key personnel or a significant number of our employees were to become unavailable due to a public health crisis (such as another outbreak of a contagious disease), natural disaster, war, act of terrorism, accident, or other reason. Natural disasters, extreme weather conditions, geopolitical events, public health crises and other catastrophic events could also negatively affect our customers, counterparties and service providers, as well as result in disruptions in general economic activity and the financial and real estate markets.   Governmental and societal responses to climate change could adversely affect our business and performance, including indirectly through impacts on our customers.   Governments have become increasingly focused on the effects of climate change and related environmental issues. For example, U.S. Treasury Secretary Yellen has identified climate change and its risk to the financial system as a high priority. In addition, the Federal Reserve Board became a member of the Network of Central Banks and Supervisors for Greening the Financial System and, in its Financial Stability Report of November 2020, specifically addressed the implications of climate change for markets, financial exposures, financial institutions, and financial stability. How governments act to mitigate climate and related environmental risks could have an adverse effect on our business and financial results. The Federal Reserve Board, for example, may incorporate these risks into its supervisory stress tests. In addition, consumers and businesses also may change their behavior on their own as a result of their concerns over the long-term impacts of climate change. We and our customers will need to respond to new laws and regulations as well as consumer and business preferences resulting from climate change concerns. We and our customers may face cost increases, asset value reductions, operating process changes, and the like. The impact on our loan and other customers will likely vary depending on their specific attributes, including reliance on or role in carbon intensive activities and the impact of rising sea levels and other effects of climate change. Among the impacts to us could be a drop in demand for our products and services, particularly in certain sectors. In addition, we could face reductions in creditworthiness on the part of some customers or in the value of assets securing loans. Our efforts to take these risks into account in making lending and other decisions, including by increasing our business with climate-friendly companies, may not be effective in protecting us from the negative impact of new laws and regulations or changes in consumer or business behavior. It is possible as well that changes in climate and related environmental risks, perceptions of them, and governmental responses to them may occur more rapidly than we are able to adapt without disrupting our business and impairing our financial results.   43 Table of Contents   Information, Information Technology and Privacy Risks   We depend on the accuracy and completeness of information about customers.   In deciding whether to extend credit, open a bank account or enter into other transactions with customers, we may rely on information furnished to us by or on behalf of customers, including financial statements and other financial information. We also may rely on representations of customers as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. We may further rely on invoices, contracts, and other supporting documentation provided by our customers, as well as our customers' representations that their financial statements conform to GAAP (or other applicable accounting standards in foreign markets) and present fairly, in all material respects, the financial condition, results of operations and cash flows of the customer. We also may rely on customer representations and certifications, or other audit or accountants' reports, with respect to the business and financial condition of our clients. Our financial condition, results of operations, financial reporting or reputation could be negatively affected if we rely on materially misleading, false, inaccurate or fraudulent information.   Our information systems may experience failures, interruptions, or breaches in security, which could have a material and adverse effect on our business, financial condition, results of operations and the value of our common stock.     We rely heavily on communications and information systems to conduct our business. Any failure, interruption, or breach or threatened breach of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan, and other systems. In the course of providing financial services, we store personally identifiable data concerning customers and employees of customers. While we have policies and procedures designed to prevent or limit the effect of the failure, interruption, or breaches of our information systems, there can be no assurance that any such failures, interruptions, or breaches will not occur or, if they do occur, that they will be adequately addressed. Privacy laws and regulations are matters of growing public concern and are continually changing in the states in which we operate.   In recent periods, there has been a rise in electronic fraudulent activity, security breaches, and cyber-attacks within the financial services industry, especially in the banking sector. Fraudulent activity can take many forms and has evolved and escalated as more tools for accessing financial services emerge. Some financial institutions have reported breaches of their websites and systems, some of which have involved sophisticated and targeted attacks intended to misappropriate sensitive or confidential information, destroy or corrupt data, disable or degrade service, disrupt operations or sabotage systems. These breaches can remain undetected for an extended period of time. Other examples include debit card/credit card fraud, check fraud, mechanical devices attached to ATM machines, social engineering and phishing attacks to obtain personal information, impersonation of our clients through the use of falsified or stolen credentials, employee fraud, information theft and other malfeasance.   The secure maintenance and transmission of confidential information, as well as the secure execution of transactions over our systems, are essential to protect us and our customers against fraud and security breaches and to maintain our customers’ confidence. Increases in criminal activity levels and sophistication, advances in computer capabilities, and other developments could result in a compromise or breach of the technology, processes, and controls that we use to prevent fraudulent transactions or to protect data about us, our customers, and underlying transactions, as well as the technology used by our customers to access our systems. Cyber security risks may also occur with our third-party service providers and may interfere with their ability to fulfill their contractual obligations to us, with attendant potential for financial loss or liability that could adversely affect our financial condition or results of operations. These risks will likely continue to increase in the future as we continue to increase our offerings of mobile services and other Internet or web-based products.   44 Table of Contents   The occurrence of any failures, interruptions, fraudulent activities or breaches could damage our reputation, result in a loss of customers, cause us to incur additional costs (including remediation and cyber security protection costs), disrupt our operations, affect our ability to grow our online and mobile banking services, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our business, financial condition, results of operations and the value of our common stock.    Our need to continue to adapt our information technology systems to allow us to provide new and expanded service could present operational issues, require significant capital spending, and disrupt our business.     The financial services market, including banking services, is continuing to undergo rapid changes with frequent introductions of new technology-driven products and services. In addition to better serving customers, the effective use of technology increases efficiency and may enable us to reduce costs. Our future success may depend, in part, on our ability to use technology to provide products and services that provide convenience to customers and to create additional efficiencies in our operations. As we continue to offer Internet banking and other online and mobile services to our customers, and continue to expand our existing conventional banking services, we will need to adapt our information technology systems to handle these changes in a way that meets constantly changing industry and regulatory standards. This can be very expensive and may require significant capital expenditures. In addition, our success will depend on, among other things, our ability to provide secure and reliable services, anticipate changes in technology, and efficiently develop and introduce services that are accepted by our customers and cost effective for us to provide. Some of our competitors have substantially greater resources to invest in technological improvements than we currently have. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. As a result, our ability to effectively compete to retain or acquire new business may be impaired, and our business, financial condition or results of operations, may be adversely affected.   Managing reputational risk is important to attracting and maintaining customers, investors, and employees.     Threats to our reputation can come from many sources, including adverse sentiment about financial institutions generally, unethical practices, employee misconduct, failure to deliver minimum standards of service or quality, compliance deficiencies, failure to protect confidential client information and questionable, illegal, or fraudulent activities of our customers. We have policies and procedures in place that seek to protect our reputation and promote ethical conduct, but these policies and procedures may not be fully effective. Negative publicity regarding our business, employees, or customers, with or without merit, may result in the loss of customers, investors, and employees, costly litigation, a decline in revenues, and increased governmental regulation.    45 Table of Contents   Regulations relating to privacy, information security and data protection could increase our costs, affect or limit how we collect and use personal information and adversely affect our business opportunities.   We are subject to various privacy, information security and data protection laws, including requirements concerning security breach notification, and we could be negatively impacted by these laws. For example, our business is subject to the Gramm-Leach-Bliley Act of 1999 which, among other things: (i) imposes certain limitations on our ability to share nonpublic personal information about our customers with nonaffiliated third parties; (ii) requires that we provide certain disclosures to customers about our information collection, sharing and security practices and afford customers the right to “opt out” of any information sharing by us with nonaffiliated third parties (with certain exceptions); and (iii) requires we develop, implement and maintain a written comprehensive information security program containing safeguards appropriate based on our size and complexity, the nature and scope of our activities, and the sensitivity of customer information we process, as well as plans for responding to data security breaches. Various state and federal banking regulators and states have also enacted data security breach notification requirements with varying levels of individual, consumer, regulatory or law enforcement notification in certain circumstances in the event of a security breach. Moreover, legislators and regulators in the United States are increasingly adopting or revising privacy, information security and data protection laws that potentially could have a significant impact on our current and planned privacy, data protection and information security-related practices, our collection, use, sharing, retention and safeguarding of consumer or employee information, and some of our current or planned business activities. This could also increase our costs of compliance and business operations and could reduce income from certain business initiatives. This includes increased privacy-related enforcement activity at the federal level, by the Federal Trade Commission, as well as at the state level, such as with regard to mobile applications.   Compliance with current or future privacy, data protection and information security laws (including those regarding security breach notification) affecting customer or employee data to which we are subject could result in higher compliance and technology costs and could restrict our ability to provide certain products and services, which could have a material adverse effect on our business, financial conditions or results of operations. Our failure to comply with privacy, data protection and information security laws could result in potentially significant regulatory or governmental investigations or actions, litigation, fines, sanctions and damage to our reputation, which could have a material adverse effect on our business, financial condition or results of operations.   Regulatory, Compliance and Legal Risks   The banking industry is highly regulated, and the regulatory framework, together with any future legislative or regulatory changes, could limit or restrict our activities, hamper our ability to increase our assets and earnings, and materially and adversely affect our profitability.   We operate in a highly regulated industry and are or may become subject to regulation by federal, state, and local governmental authorities and various laws, regulations, regulatory guidelines, and judicial and administrative decisions imposing requirements or restrictions on part or all of our operations, capitalization, payment of dividends, mergers and acquisitions, investments, loans and interest rates charged, interest rates paid on deposits, and locations of offices. We also must comply with numerous federal anti-money laundering, tax withholding and reporting, and consumer protection statutes and regulations. A considerable amount of management time and resources has been devoted to the oversight of, and the development and implementation of controls and procedures relating to, compliance with these laws and regulations, and we expect that significant time and resources will be devoted to compliance in the future. These laws and regulations mandate certain disclosure and reporting requirements and regulate the manner in which we must deal with our customers when taking deposits, making loans, collecting loans, and providing other services. We also are, or may become subject to, examination, supervision, and additional comprehensive regulation by various federal, state, and local authorities with regard to compliance with these laws and regulations. Failure to comply with laws, regulations, or policies could result in sanctions by regulatory agencies, civil money penalties, and/or reputation damage, which could have a material and adverse effect on our business, financial condition, results of operations and the value of our common stock.   46 Table of Contents   Because our business is highly regulated, the laws, rules, regulations, and supervisory guidance and policies applicable to us are subject to regular modification and change. Perennially, various laws, rules and regulations are proposed, which, if adopted, could impact our operations, increase our capital requirements or substantially restrict our growth and adversely affect our ability to operate profitably by making compliance much more difficult or expensive, restricting our ability to originate or sell loans, or further restricting the amount of interest or other charges or fees earned on loans or other products. The Dodd-Frank Act, for example, instituted major changes to the banking and financial institutions regulatory regimes, such as changes to Regulation Z promulgated by the CFPB that may make it more difficult for us to underwrite consumer mortgages and to compete with large national mortgage service providers. Further regulation could increase the assessment rate we are required to pay to the FDIC, adversely affecting our earnings. Other changes to statutes, regulations, or regulatory policies, including changes in interpretation or implementation of statutes, regulations, or policies, could affect us in substantial and unpredictable ways. It is very difficult to predict the competitive impact that any such changes would have on the banking and financial services industry in general or on our business in particular. Such changes may, among other things, increase the cost of doing business, limit permissible activities, or affect the competitive balance between banks and other financial institutions. See Part I — Item 1 — “Business — Regulation and Supervision.”   We are subject to stringent capital requirements, including those required by Basel III.     The U.S. federal bank regulators have jointly adopted capital requirements on banks and bank holding companies as required by the Dodd-Frank Act, which incorporate the elements of Basel Committee’s Basel III accords and have the effect of raising our capital requirements and imposing new capital requirements beyond those previously required.  Increased regulatory capital requirements (and the associated compliance costs) whether due to the adoption of new laws and regulations, changes in existing laws and regulations, or more expansive or aggressive interpretations of existing laws and regulations, may require us to raise additional capital, or impact our ability to pay dividends or pay compensation to our executives, which could have a material and adverse effect on our business, financial condition, results of operations and the value of our common stock.  If we do not meet minimum capital requirements, we will be subject to prompt corrective action by federal bank regulatory agencies. Prompt corrective action can include progressively more restrictive constraints on operations, management and capital distributions. For additional discussion regarding our capital requirements, please see “Item 1. Business – Regulation and Supervision – Capital Adequacy Requirements” above.   We may become subject to supervisory action by bank supervisory authorities that could have a material adverse effect on our business, financial condition, and the value of our common stock.   Under federal and state laws and regulations pertaining to the safety and soundness of financial institutions, the Federal Reserve Bank of San Francisco (the “FRB SF”) has authority over the Bancorp and separately the DFPI and FDIC have authority over the Bank to compel or restrict certain actions if the Bancorp or the Bank should violate any laws or regulations, if its capital should fall below adequate capital standards as a result of operating losses, or if these regulators otherwise determine that the Bancorp or the Bank have engaged in unsafe or unsound practices, including failure to exercise proper risk oversight over the many areas of the Bancorp’s and the Bank’s operations. These regulators, as well as the CFPB, also have authority over the Bancorp’s and the Bank’s compliance with various statutes and consumer protection and other regulations. Among other matters, the corrective actions that may be required of the Bancorp or the Bank following the occurrence of any of the foregoing may include, but are not limited to, requiring the Bancorp and/or the Bank to enter into informal or formal enforcement orders, including board resolutions, memoranda of understanding, written agreements, supervisory letters, commitment letters, and consent or cease and desist orders to take corrective action and refrain from unsafe and unsound practices; removing officers and directors; restricting expansion activities; assessing civil monetary penalties; and taking possession of, closing and liquidating the Bank. If we are unable to meet the requirements of any corrective actions, we could become subject to supervisory action. The terms of any such supervisory action could have a material and adverse effect on our business, financial condition, results of operations and the value of our common stock.   47 Table of Contents   We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations.   The Bank Secrecy Act, the USA PATRIOT Act of 2001, and other laws and regulations require financial institutions, among other duties, to institute and maintain an effective anti-money laundering program and file suspicious activity and currency transaction reports as appropriate. The federal Financial Crimes Enforcement Network is authorized to impose significant civil money penalties for violations of those requirements and has recently engaged in coordinated enforcement efforts with federal banking regulators, as well as with the U.S. Department of Justice, Drug Enforcement Administration, and Internal Revenue Service. We are also subject to increased scrutiny of compliance with the rules enforced by the Office of Foreign Assets Control and compliance with the Foreign Corrupt Practices Act. In addition, our Hong Kong Branch is subject to the anti-money laundering laws and regulations of Hong Kong. If our policies, procedures and systems are deemed deficient, we would be subject to liability, including fines and regulatory actions, which may include restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plan, including our acquisition plans. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us. Any of these results could materially and adversely affect our business, financial condition, results of operations and the value of our common stock.   We are subject to the CRA, fair lending and other laws and regulations, and our failure to comply with these laws and regulations could lead to material penalties.   The CRA, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose nondiscriminatory lending and other requirements on financial institutions. The U.S. Department of Justice and other federal agencies, including the FDIC and CFPB, are responsible for enforcing these laws and regulations. A successful challenge to an institution’s performance under the CRA, fair lending and other compliance laws and regulations could result in a wide variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition of restrictions on mergers and acquisitions activity and restrictions on expansion. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. The costs of defending, and any adverse outcome from, any such challenge could damage our reputation or could have a material adverse effect on our business, financial condition or results of operations.   Reforms to and uncertainty regarding LIBOR may adversely affect our business.   On July 27, 2017, the United Kingdom’s Financial Conduct Authority (“FCA”), which regulates LIBOR, announced that it will no longer persuade or compel banks to submit rates for the calculation of LIBOR after 2021. While Intercontinental Exchange Inc., the company that administers LIBOR plans to continue publishing LIBOR, liquidity in the interbank markets that those LIBOR estimates are based upon has been declining. Accordingly, there is considerable uncertainty regarding the publication of such rates beyond 2021. In April 2018, the Federal Reserve Bank of New York in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, announced the replacement of U.S. LIBOR with a new index calculated by short-term repurchase agreements, backed by U.S. Treasury securities called the Secured Overnight Financing Rate (“SOFR”). The first publication of SOFR was released in April 2018. Whether or not SOFR attains market traction as a LIBOR replacement tool remains in question and the future of LIBOR at this time is uncertain. The uncertainty as to the nature and effect of such reforms and actions and the political discontinuance of LIBOR may adversely affect the value of and return on our financial assets and liabilities that are based on or are linked to LIBOR, our results of operations or financial condition. In addition, these reforms may also require extensive changes to the contracts that govern these LIBOR based products, as well as our systems and processes.   48 Table of Contents   As of December 31, 2021, approximately $2.2 billion of our outstanding loans, and, in addition, certain derivative contracts, borrowings and other financial instruments have attributes that are either directly or indirectly dependent on LIBOR. The transition from LIBOR has resulted in and could continue to result in added costs and employee efforts and could present additional risk. We are subject to litigation and reputational risks if we are unable to renegotiate and amend existing contracts with counterparties that are dependent on LIBOR, including contracts that do not have fallback language. The timing and manner in which each customer’s contract transitions to SOFR, Ameribor Unsecured Overnight Rate ("AMERIBOR"), or Bloomberg Short Term Bank Yield Index ("BSBY") will vary on a case-by-case basis. There continues to be substantial uncertainty as to the ultimate effects of the LIBOR transition, including with respect to the acceptance and use of SOFR, AMERIBOR, BSBY and other benchmark rates. Since SOFR, AMERIBOR, and BSBY rates are calculated differently, payments under contracts referencing new rates will differ from those referencing LIBOR, which may lead to increased volatility as compared to LIBOR. The transition has impacted our market risk profiles and required changes to our risk and pricing models, valuation tools, product design and hedging strategies. Furthermore, failure to adequately manage this transition process with our customers could adversely impact our reputation. Although we are currently unable to assess what the ultimate impact of the transition from LIBOR will be, failure to adequately manage the transition could have a material adverse effect on our business, financial condition and results of operations.   Governmental monetary policies and intervention to stabilize the U.S. financial system may affect our business and are beyond our control.   The business of banking is affected significantly by the fiscal and monetary policies of the Federal government and its agencies. Such policies are beyond our control. We are particularly affected by the policies established by the Federal Reserve in relation to the supply of money and credit in the United States. The instruments of monetary policy available to the Federal Reserve can be used in varying degrees and combinations to directly affect the availability of bank loans and deposits, as well as the interest rates charged on loans and paid on deposits, and this can and does have a material effect on our business.   Adverse results in legal proceedings could adversely affect our business and financial condition.   Various aspects of our operations involve the risk of legal liability. We have been, and expect to continue to be, named or threatened to be named as defendants in legal proceedings arising from our business activities. We establish accruals for legal proceedings when information related to the loss contingencies represented by those proceedings indicates both that a loss is probable and that the amount of the loss can be reasonably estimated, but we do not have accruals for all legal proceedings where we face a risk of loss. In addition, amounts accrued may not represent the ultimate loss to us from those legal proceedings. Thus, our ultimate losses may be higher or lower, and possibly significantly so, than the amounts accrued for loss contingencies arising from legal proceedings, and these losses could have a material and adverse effect on our business, financial condition, results of operations and the value of our common stock.   Liabilities from environmental regulations could materially and adversely affect our business and financial condition.   In the course of the Bank’s business, the Bank may foreclose and take title to real estate and could be subject to environmental liabilities with respect to these properties. The Bank may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination or may be required to investigate or clear up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, as the owner or former owner of any contaminated site, the Bank may be subject to common law claims by third parties based on damages, and costs resulting from environmental contamination emanating from the property. If the Bank ever becomes subject to significant environmental liabilities, its business, financial condition, results of operations and the value of our common stock could be materially and adversely affected.     49 Table of Contents   Changes in accounting standards or tax laws and regulations could adversely affect our financial results.   From time to time, the Financial Accounting Standards Board (the “FASB”) and the SEC will change the financial accounting and reporting standards that govern the preparation of our financial statements. In addition, from time to time, federal and state taxing authorities will change the tax laws and regulations, and their interpretations. These changes and their effects can be difficult to predict and can materially and adversely impact how we record and report our financial condition and results of operations.     In addition, changes to tax law could increase our effective tax rates. These law changes may be retroactive to previous periods and as a result could negatively affect our current and future financial performance. For example, the recent changes in the tax laws may have an adverse effect on the market for, and valuation of, residential properties, and on the demand for such loans in the future and could make it harder for borrowers to make their loan payments. In addition, these recent changes may also have a disproportionate effect on taxpayers in states with high residential home prices and high state and local taxes. If home ownership becomes less attractive, demand for mortgage loans could decrease. The value of the properties securing loans in our loan portfolio may be adversely impacted as a result of the changing economics of home ownership, which could require an increase in our provision for loan losses, which would reduce our profitability and could materially adversely affect our business, financial condition and results of operations.   Risks Related to Ownership of Our Common Stock   The price of our common stock may fluctuate significantly, and this may make it difficult for you to sell shares of common stock owned by you at times or at prices you find attractive.     The trading price of our common stock may fluctuate widely as a result of a number of factors, many of which are outside our control. In addition, the stock market is subject to fluctuations in the share prices and trading volumes that affect the market prices of the shares of many companies. These broad market fluctuations could adversely affect the market price of our common stock. Among the factors that could affect our stock price are:      ● actual or anticipated quarterly fluctuations in our operating results and financial condition and prospects;     ● changes in revenue or earnings estimates or publication of research reports and recommendations by financial analysts;     ● failure to meet analysts’ revenue or earnings estimates;     ● speculation in the press or investment community;     ● strategic actions by us or our competitors, such as acquisitions or restructurings;     ● acquisitions of other banks or financial institutions;     ● actions by institutional stockholders;     ● fluctuations in the stock price and operating results of our competitors;     ● general market conditions and, in particular, developments related to market conditions for the financial services industry;     ● proposed or adopted regulatory changes or developments;     ● anticipated or pending investigations, proceedings, or litigation that involve or affect us;     ● successful management of reputational risk; and     ● domestic and international economic factors, such as interest or foreign exchange rates, stock, commodity, credit, or asset valuations or volatility, unrelated to our performance.   50 Table of Contents   The stock market and, in particular, the market for financial institution stocks, has experienced significant volatility. As a result, the market price of our common stock may be volatile. In addition, the trading volume in our common stock may fluctuate more than usual and cause significant price variations to occur. The trading price of the shares of our common stock and the value of our other securities will depend on many factors, which may change from time to time, including, without limitation, our financial condition, performance, creditworthiness and prospects, future sales of our equity or equity related securities, and other factors identified above in “Forward-Looking Statements,” and in this Item 1A — “Risk Factors.” The capital and credit markets can experience volatility and disruption. Such volatility and disruption can reach unprecedented levels, resulting in downward pressure on stock prices and credit availability for certain issuers without regard to their underlying financial strength. A significant decline in our stock price could result in substantial losses for individual stockholders and could lead to costly and disruptive securities litigation.   An investment in our common stock is not an insured deposit.   Our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund or by any other public or private entity. Investment in our common stock is inherently risky for the reasons described in this “Risk Factors” section, elsewhere in this report and other documents we file with the SEC and is subject to the same market forces that affect the price of common stock in any company. As a result, if you acquire our common stock, you could lose some or all of your investment.   Statutory restrictions and restrictions by our regulators on dividends and other distributions from the Bank may adversely impact us by limiting the amount of distributions the Bancorp may receive. Statutory and contractual restrictions and our regulators may also restrict the Bancorp ’ s ability to pay dividends.     The ability of the Bank to pay dividends to us is limited by various regulations and statutes, including California law, and our ability to pay dividends on our outstanding stock is limited by various regulations and statutes, including Delaware law.   Substantially all of the Bancorp’s cash flow comes from dividends that the Bank pays to us. Various statutory provisions restrict the amount of dividends that the Bank can pay to us without regulatory approval.   The Federal Reserve Board has previously issued Federal Reserve Supervision and Regulation Letter SR-09-4 that states that bank holding companies are expected to inform and consult with the Federal Reserve supervisory staff prior to taking any actions that could result in a diminished capital base, including any payment or increase in the rate of dividends. In addition, if we are not current in our payment of dividends on our Junior Subordinated Notes, we may not pay dividends on our common stock. Further, new capital conservation buffer requirements will limit the ability of the Bank to pay dividends to the Bancorp if we are not compliant with those capital cushions.   If the Bank were to liquidate, the Bank’s creditors would be entitled to receive distributions from the assets of the Bank to satisfy their claims against the Bank before the Bancorp, as a holder of the equity interest in the Bank, would be entitled to receive any of the assets of the Bank as a distribution or dividend.   The restrictions described above, together with the potentially dilutive impact of the warrant initially issued to the U.S. Treasury in connection with our participation in the TARP Capital Purchase Program and subsequently sold by the U.S. Treasury in a secondary public offering, could have a negative effect on the value of our common stock. Moreover, holders of our common stock are entitled to receive dividends only when, as and if declared by our board of directors. Although we have historically paid cash dividends on our common stock, we are not required to do so and our board of directors could reduce or eliminate our common stock dividend in the future, which could adversely affect the market price of our common stock.     51 Table of Contents   The issuance of preferred stock could adversely affect holders of common stock, which may negatively impact their investment.     Our board of directors is authorized to issue preferred stock without any action on the part of the stockholders. Our board of directors also has the power, without stockholder approval, to set the terms of any such classes or series of preferred stock that may be issued, including voting rights, dividend rights and preferences over the common stock with respect to dividends or upon the liquidation, dissolution, or winding up of our business and other terms. If we issue preferred stock in the future that has a preference over the common stock with respect to the payment of dividends or upon liquidation, dissolution or winding up, or if we issue preferred stock with voting rights that dilute the voting power of the common stock, the rights of holders of the common stock or the market price of the common stock could be adversely affected.     Certain provisions of our charter and bylaws could make the acquisition of our company more difficult.     Certain provisions of our restated certificate of incorporation, as amended, and our restated bylaws, as amended, could make the acquisition of our company more difficult. These provisions include authorized but unissued shares of preferred and common stock that may be issued without stockholder approval; three classes of directors serving staggered terms; special requirements for stockholder proposals and nominations for director; and super-majority voting requirements in certain situations including certain types of business combinations.   Our outstanding debt securities restrict our ability to pay dividends on our common stock.     We have issued an aggregate of $119.1 million in trust preferred securities (collectively, the “Trust Preferred Securities”). Payments to investors in respect of the Trust Preferred Securities are funded by distributions on certain series of securities issued by us, with similar terms to the relevant series of Trust Preferred Securities, which we refer to as the “Junior Subordinated Notes.” If we are unable to pay interest in respect of the Junior Subordinated Notes (which will be used to make distributions on the Trust Preferred Securities), or if any other event of default occurs, then we will generally be prohibited from declaring or paying any dividends or other distributions, or redeeming, purchasing or acquiring, any of our capital securities, including the common stock, during the next succeeding interest payment period applicable to any of the Junior Subordinated Notes.    Moreover, any other financing agreements that we enter into in the future may limit our ability to pay cash dividends on our capital stock, including the common stock. In the event that any other financing agreements in the future restrict our ability to pay such dividends, we may be unable to pay dividends in cash on the common stock unless we can refinance amounts outstanding under those agreements.    We may need to raise additional capital, which may dilute the interests of holders of our common stock or otherwise have an adverse effect on their investment.     Should economic conditions deteriorate, particularly in the California commercial real estate and residential real estate markets where our business is concentrated, we may need to raise more capital to support any additional provisions for loan losses and loan charge-offs. In addition, we may need to raise more capital to meet other regulatory requirements, including new required capital standards, if our losses are higher than expected, if we are unable to meet our capital requirements, or if additional capital is required for our growth. There can be no assurance that we would succeed in raising any such additional capital, and any capital we obtain may dilute the interests of holders of our common stock, or otherwise have an adverse effect on their investment.   52 Table of Contents   Item 1B. Unresolved Staff Comments   The Company has not received written comments regarding its periodic or current reports from the staff of the Securities and Exchange Commission that were issued not less than 180 days before the end of its 2021 fiscal year and that remain unresolved.   Item 2.     Properties   Cathay General Bancorp   As of the date of the filing of this annual report, the Bancorp neither owns nor leases any real or personal property. The Bancorp uses the premises, equipment, and furniture of the Bank at 777 North Broadway, Los Angeles, California 90012 and at 9650 Flair Drive, El Monte, California 91731, in exchange for payment of a management fee to the Bank.   Cathay Bank   The Bank’s head office is located in a 36,727 square foot building in the Chinatown area of Los Angeles. The Bank owns both the building and the land upon which the building is situated. The Bank maintains certain of its administrative offices at a seven-story 102,548 square foot office building located at 9650 Flair Drive, El Monte, California 91731. The Bank also owns this building and land in El Monte.   The Bank owns its branch offices in Monterey Park, Alhambra, Westminster, San Gabriel, City of Industry, Cupertino, Artesia, New York City (2 locations), Flushing (3 locations), Chicago, and Rockville in the state of Maryland. In addition, the Bank has certain operating and administrative departments located at 4128 Temple City Boulevard, Rosemead, California, where it owns the building and land with approximately 27,600 square feet of space.   The other branch and representative offices and other properties are leased by the Bank under leases with expiration dates ranging from May 2023 to December 2029, exclusive of renewal options. As of December 31, 2021, the Bank’s investment in premises and equipment totaled $99.4 million, net of accumulated depreciation. See Note 6 and Note 13 to the Consolidated Financial Statements.   Item 3.     Legal Proceedings   See the information under section entitled “Legal Proceedings” in Note 12 to the Consolidated Financial Statements. That information is incorporated into this item by reference.   Item 4.      Mine Safety Disclosures   Not Applicable.   53 Table of Contents   PART II     Item 5.     Market for Registrant ’ s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities   Market Information   Bancorp’s common stock is listed on the NASDAQ Global Select Market under the symbol “CATY.” As of February 15, 2022, Bancorp had outstanding approximately 79,286,834 shares of common stock with approximately 1,564 holders of record. For information on Bancorp’s dividend policy and the statutory and regulatory limitations on the ability of Bancorp to pay dividends to its shareholders and on the Bank to pay dividends to Bancorp, see “Item 1. Business-Regulation and Supervision — Dividends” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Capital Resources – Dividend Policy.”.   Securities Authorized for Issuance under Equity Compensation Plans   The information required by this item regarding equity compensation plans is incorporated by reference to the information set forth in Part III, Item 12 in this report.   Performance Graph   The graph and accompanying information furnished below shows the cumulative total shareholder return over a five-year period through December 31, 2021, assuming an investment of $100 was made and that all dividends were reinvested, in each of our common stock, the Standard & Poor’s (S&P) 500 Index, and the S&P U.S. BMI Banks–Western Region Index. The S&P U.S. BMI Banks–Western Region Index is a market-weighted index comprised of publicly traded banks and bank holding companies (including the Company) most of which are based in California and the remainder of which are based in eight other western states, including Oregon, Washington, and Nevada. We will furnish, without charge, on the written request of any person who is a stockholder of record as of the record date for the 2022 annual meeting of stockholders, a list of the companies included in the S&P U.S. BMI Banks–Western Region Index. Requests for this information should be addressed to May Chan, Secretary, Cathay General Bancorp, 777 North Broadway, Los Angeles, California 90012.   The comparisons in the graph below are based upon historical data and are not indicative of, or intended to forecast, the future performance of, or returns on, our common stock. Such information furnished herewith shall not be deemed to be incorporated by reference into any of our filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, and shall not be deemed to be “soliciting material” or to be “filed” under the Securities Act or the Securities Exchange Act with the Securities and Exchange Commission except to the extent that the Company specifically requests that such information be treated as soliciting material or specifically incorporates it by reference into a filing under the Securities Act or the Securities Exchange Act.   54 Table of Contents               Period Ending       Index   12/31/2016     12/31/2017     12/31/2018     12/31/2019     12/31/2020     12/31/2021   Cathay General Bancorp     100.00       113.40       92.45       108.61       95.97       132.19   S&P 500 Index     100.00       121.83       116.49       153.17       181.35       233.41   S&P U.S. BMI Banks - Western Region Index     100.00       111.50       88.28       107.65       80.56       124.21                                                     Source: S&P Global Market Intelligence © 2022                                             Unregistered Sales of Equity Securities   There were no sales of any equity securities by the Company during the period covered by this Annual Report on Form 10-K that were not registered under the Securities Act.   Issuer Purchases of Equity Securities   On April 1, 2021, the Board of Directors approved a new stock repurchase program to buy back up to $75.0 million of Bancorp’s common stock. The $75.0 million share repurchased program was completed on August 5, 2021, with the repurchase of 1,832,481 shares for a total of $75.0 million, at an average cost of $40.93 per share.   55 Table of Contents   On September 2, 2021, the Board of Directors approved a new stock repurchase program to buy back up to $125.0 million of the Company’s common stock. Through December 31, 2021, the Company repurchased 2,153,576 shares of common stock for a total of $92.1 million, at an average cost of $42.77 per share under the September 2021 buyback program.   Issuer Purchases of Equity Securities Period   (a) Total Number of Shares (or Units) Purchased     (b) Average Price Paid per Share (or Unit)     (c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs     (d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs October 1, 2021 - October 31, 2021     106,720     $ 42.26       106,720     $ 94,821,432 November 1, 2021 - November 30, 2021     880,818     $ 44.37       880,818     $ 55,736,837 December 1, 2021 - December 31, 2021     523,500     $ 43.63       523,500     $ 32,895,703 Total     1,511,038     $ 43.97       1,511,038     $ 32,895,703     Item 6.     Reserved     Item 7.     Management ’ s Discussion and Analysis of Financial Condition and Results of Operations   General   The following discussion is intended to provide information to facilitate the understanding and assessment of the consolidated financial condition and results of operations of the Bancorp and its subsidiaries. It should be read in conjunction with this Annual Report and the audited Consolidated Financial Statements and Notes appearing elsewhere in this Annual Report. The following discussion and analysis of our financial condition and results of operations contains forward-looking statements. These statements are based on current expectations and assumptions, which are subject to risks and uncertainties. See “Forward-Looking Statements” and “Risk Factors Summary.” Actual results could differ materially because of various factors, including but not limited to those discussed in “Risk Factors,” under Part I, Item 1A of this Annual Report.   The Bank offers a wide range of financial services. As of the filing date of this report, the Bank operates 31 branches in Southern California, 16 branches in Northern California, 10 branches in New York State, four branches in Washington State, two branches in Illinois, two branches in Texas, one branch in each of Maryland, Massachusetts, Nevada, and New Jersey, one branch in Hong Kong, and a representative office in Beijing, in Shanghai, and in Taipei. The Bank is a commercial bank, servicing primarily individuals, professionals, and small to medium-sized businesses in the local markets in which its branches are located.   The financial information presented herein includes the accounts of the Bancorp, its subsidiaries, including the Bank, and the Bank’s consolidated subsidiaries. All material transactions between these entities are eliminated.   56 Table of Contents   Critical Accounting Policies   The discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of the Consolidated Financial Statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of our Consolidated Financial Statements. Actual results may differ from these estimates under different assumptions or conditions.   Certain accounting policies that are fundamental to understanding our financial condition and results of operations involve significant judgments and assumptions by management that have a material impact on the carrying value of certain assets and liabilities. Management considers such accounting policies to be critical accounting policies. The judgments and assumptions used by management are based on historical experience and other factors that are believed to be reasonable under the circumstances.   Management believes the following are critical accounting policies that require the most significant judgments and estimates used in the preparation of the Consolidated Financial Statements:   Allowance for Credit Losses ( “ ACL ” ) on Loans Held for Investment   The Bank maintains the allowance for credit losses at a level that the Bank considers appropriate to absorb the estimated and known risks in the loan portfolio and off-balance sheet unfunded credit commitments. Allowance for credit losses is comprised of the allowance for loan losses and the reserve for off-balance sheet unfunded credit commitments. With this risk management objective, the Bank’s management has an established monitoring system that it believes is designed to identify individually evaluated and potential problem loans, and to permit periodic evaluation of impairment and the appropriate level of the allowance for credit losses in a timely manner.   In addition, the Company’s Board of Directors has established a written credit policy that includes a credit review and control system that the Board of Directors believes should be effective in ensuring that the Bank maintains an appropriate allowance for credit losses. The Board of Directors provides oversight for the allowance evaluation process, including quarterly evaluations, and determines whether the allowance is appropriate to absorb losses in the credit portfolio. The determination of the amount of the allowance for credit losses and the provision for credit losses are based on management’s current judgment about the credit quality of the loan portfolio and takes into consideration known relevant internal and external factors that affect collectability when determining the appropriate level for the allowance for credit losses. The nature of the process by which the Bank determines the appropriate allowance for credit losses requires the exercise of considerable judgment. Additions to the allowance for credit losses are made by charges to the provision for credit losses. While management utilizes its business judgment based on the information available, the ultimate appropriateness of the allowance is dependent upon a variety of factors, many of which are beyond the Bank’s control, including but not limited to the performance of the Bank’s loan portfolio, the economy and market conditions, changes in interest rates, and the view of the regulatory authorities toward loan classifications. Identified credit exposures that are determined to be uncollectible are charged against the allowance for credit losses. Recoveries of previously charged off amounts, if any, are credited to the allowance for credit losses. A weakening of the economy or other factors that adversely affect asset quality could result in an increase in the number of delinquencies, bankruptcies, or defaults, and a higher level of non-performing assets, net charge-offs, and provision for credit losses in future periods.   The allowance for loan losses was $136.2 million and the allowance for off-balance sheet unfunded credit commitments was $7.1 million at December 31, 2021, which represented the amount believed by management to be appropriate to absorb lifetime credit losses in the loan portfolio, including unfunded credit commitments. The allowance for loan losses represented 0.83% of period-end gross loans and 202.4% of non-performing loans at December 31, 2021. The comparable ratios were 1.10% of period-end gross loans and 237.3% of non-performing loans at December 31, 2020.   57 Table of Contents   The allowance for credit losses is discussed in more detail in “Risk Elements of the Loan Portfolio — Allowance for Credit Losses ” below. Management has reviewed the foregoing critical accounting policies and related disclosures with the Audit Committee of the Company’s Board of Directors.   Recent Developments: Impact of and Response to COVID-19 Pandemic   The ongoing COVID-19 pandemic has significantly heightened the level of challenges, risks and uncertainties facing our Company and its operations.   Additional potential impacts arising from, and our anticipated responses to, the COVID-19 pandemic are set forth below. See also the COVID-related risk factors as previously disclosed in Part I, Item 1A, of this Annual Report on Form 10-K.   The below table details our exposure to borrowers in industries generally considered to be the most impacted by the COVID-19 pandemic:       December 31, 2021       Industry (1)   Loan Balance     Percent of Total Loan Portfolio           (In millions)               Restaurants   $ 144.0       1.0 %     Hotels/motels     301.0       2.0       Retail businesses/properties     1,871.0       11.0       Total   $ 2,316.0       14.0 %                       (1)   Balances capture credit exposures in the business segments that manage the significant majority of industry relationships. Balances consist of commercial real estate secured loans where the collateral consist of restaurants, hotels/motels or have a retail dependency.     While we have not experienced disproportionate impacts among our business segments as of December 31, 2021, borrowers in the industries detailed in the table above (and potentially other industries) could have greater sensitivity to the economic downturn resulting from COVID-19 with potentially longer recovery periods than other business lines.   Loan modifications   We began receiving requests from our borrowers for loan deferrals in March 2020 following the onset of the pandemic. Modifications include the deferral of principal payments or the deferral of principal and interest payments for terms generally 90 - 180 days. Requests are evaluated individually, and approved modifications are based on the unique circumstances of each borrower. At December 31, 2021, $70.0 million of loans remain under loan modifications.   The CARES Act, as extended by the CAA, permits financial institutions to suspend requirements under GAAP for loan modifications to borrowers affected by COVID-19 and is intended to provide interpretive guidance as to conditions that would constitute a short-term modification that would not meet the definition of a troubled debt restructuring (“TDR”). Such conditions include the following (i) the loan modification is made 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. The Company is applying this guidance to qualifying loan modifications.   58 Table of Contents   Paycheck Protection Program (PPP)   As part of the CARES Act, the Small Business Administration (SBA) has been authorized to guarantee loans under the PPP through December 31, 2021 for small businesses who meet the necessary eligibility requirements in order to keep their workers on the payroll. One of the notable features of the PPP is that borrowers are eligible for loan forgiveness if borrowers, among other conditions, maintain their staff and payroll and if loan amounts are used to cover payroll, mortgage interest, rents and utilities payments. PPP loans have a two to five year term and earn interest at a rate of 1%. We began accepting applications on April 3, 2020. As of December 31, 2021, our outstanding PPP loans had a current balance of $90.5 million and $337.0 million of PPP loans had been forgiven by the U.S. Treasury or repaid by the borrowers. PPP loans are guaranteed by the SBA and therefore we believe PPP loans generally do not represent a material credit risk.   Capital and liquidity   While we believe we have sufficient capital and do not anticipate any need for additional liquidity as of December 31, 2021, in response to the uncertainty regarding the severity and duration of the COVID-19 pandemic, we are prepared to take additional actions, as needed, to maintain strong capital levels and ensure the strength of our liquidity position. Such actions may include pledging additional collateral to increase our borrowing capacity with the FRB, if necessary. Our Board of Directors also will continue to evaluate the impacts of the COVID-19 pandemic and the appropriateness of declaring future dividends and the rate of any future dividends as well as any stock repurchases, in light of our capital and liquidity needs.   Asset impairment   At this time, as of December 31, 2021, we do not believe there exists any impairment to our goodwill and intangible assets, long-lived assets, right of use assets, or available-for-sale investment securities due to the COVID-19 pandemic. It is uncertain whether prolonged effects of the COVID-19 pandemic will result in future impairment charges related to any of the aforementioned assets. Continued and sustained declines in Bancorp’s stock price and/or other credit related impacts could give rise to triggering events in the future that could result in a write-down in the value of our goodwill, which could have a material adverse impact on our results of operations.   Our processes, controls and business continuity plan   As a financial institution, we are considered an essential business and therefore continue to operate on a modified basis to comply with governmental restrictions and public health authority guidelines. The health and safety of our employees and customers is a major concern to our management. We are continuing to permit employees to work from home when feasible or, if working from one of our locations is required, to maintain appropriate social distancing and observe other health precautions. We have also taken such other actions as social distancing, restrictions on in-person meetings and conferences, Company travel restrictions and increased sanitary protocols. We believe these actions offer the best protection for our employees and customers and enhance our ability to continue providing our banking services.   Through this time of disruption, we have remained open for business supporting our customers while implementing our business continuity plan to mitigate the risks of the spread of COVID-19 to our employees and customers. While physical access to our bank offices remains restricted, customer business is still being transacted through drive-up facilities, online, telephone or by appointment.   We believe that we are positioned to continue these business continuity measures for the foreseeable future, however, no assurances can be provided as these circumstances may change depending on the duration and severity of the pandemic.   59 Table of Contents   Results of Operations   Overview   For the year ended December 31, 2021, we reported net income of $298.3 million, or $3.80 per diluted share, compared to net income of $228.9 million, or $2.87 per diluted share, in 2020, and net income of $279.1 million, or $3.48 per diluted share, in 2019. The $69.4 million increase in net income from 2020 to 2021 was primarily the result of increases in net interest income and decreases in provision for credit losses, partially offset by increases in income taxes. The return on average assets in 2021 was 1.52%, compared to 1.22% in 2020, and to 1.61% in 2019. The return on average stockholders’ equity was 12.11% in 2021, compared to 9.70% in 2020, and to 12.63% in 2019.   Highlights     ● Record net income of $298.3 million and EPS of $3.80 per share in 2021.     ● Total deposits, excluding time deposits, increased for the year by $3.1 billion, or 33.0%, to $12.5 billion from $9.4 billion in 2020.   Net income available to common stockholders and key financial performance ratios are presented below for the three years indicated:       Year Ended December 31,       2021     2020     2019       (In thousands, except per share data)   Net income   $ 298,304     $ 228,860     $ 279,135   Basic earnings per common share   $ 3.81     $ 2.88     $ 3.49   Diluted earnings per common share   $ 3.80     $ 2.87     $ 3.48   Return on average assets     1.52 %     1.22 %     1.61 % Return on average stockholders' equity     12.11 %     9.70 %     12.63 % Total average assets   $ 19,591,538     $ 18,736,854     $ 17,337,267   Total average equity   $ 2,463,021     $ 2,359,735     $ 2,209,642   Efficiency ratio     43.92 %     47.65 %     44.75 % Effective income tax rate     21.88 %     9.89 %     20.10 %   Net Interest Income   Comparison of 2021 with 2020   Net interest income increased $45.6 million, or 8.3%, from $552.1 million in 2020 to $597.8 million in 2021. The increase in net interest income was due primarily to the decrease in interest expense from time deposits partially offset by lower interest income from loans.   Average loans for 2021 were $15.8 billion, a $326.6 million, or 2.1% increase from $15.5 billion in 2020. Compared with 2020, average commercial mortgage loans increased $304.1 million, or 4.1%, and average real estate construction loans increased $39.8 million, or 6.3%. Average investment securities were $1.0 billion in 2021, a decrease of $169.8 million, or 14.0%, from 2020. Average interest-bearing cash on deposits with financial institutions increased $689.3 million, or 71.8%, to $1.6 billion in 2021 from $960.3 million in 2020.   Average interest-bearing deposits were $13.0 billion in 2021, an increase of $434.2 billion, or 3.5%, from $12.5 billion in 2020, primarily due to increases of $1.1 billion, or 38.9%, in money market accounts, $455.3 million, or 28.6%, in interest bearing demand deposits, and $138.1 million, or 18.2%, in savings accounts, offset by decreases of $1.3 billion, or 17.7%, in time deposits.   60 Table of Contents   Interest income decreased $34.1 million, or 4.9%, from $700.6 million in 2020 to $666.5 million in 2021 primarily due to decreases in the rate of loans:     ● Changes in volume: Average interest-earning assets increased $846.1 million, or 4.8%, to $18.5 billion in 2021, compared with the average interest-earning assets of $17.7 billion in 2020. Average loans increased $326.6 million and average interest-bearing deposits with other financial institutions increased $689.3 million in 2021. Offsetting the above increases was a decrease of $169.8 million in average investment securities. The changes in volume contributed to interest income increase of $12.4 million.     ● Changes in rate: The average yield of interest-bearing assets decreased to 3.59% in 2021 from 3.96% in 2020. The decrease in rate on loans resulted in a decrease of $42.0 million in interest income, the decrease in rate on deposits with other financial institutions resulted in a decrease of $708 thousand interest income, and the decrease in rate on investment securities resulted in a decrease of $3.8 million in interest income. The changes in rate contributed to interest income decrease of $46.5 million.     ● Change in the mix of interest-earning assets: Average gross loans, which generally have a higher yield than other types of investments, comprised 85.4% of total average interest-earning assets in 2021, a decrease from 87.6% in 2020. Average investment securities comprised 5.6% of total average interest-bearing assets in 2021, a decrease from 6.9% in 2020.   Interest expense decreased by $79.7 million, or 53.7%, to $68.8 million in 2021, compared with $148.5 million in 2020, primarily due to decreased cost from time deposits, FHLB advances, and long-term debt. The overall decrease in interest expense was primarily due to decreases in rates on interest bearing deposits, volume decreases in long term debts and volume and rate decreases in other borrowings as discussed below:     ● Changes in volume: Average interest-bearing deposits increased $434.2 billion, or 3.5%, offset by decreases of $250.5 million, or 76.8%, in average FHLB advances and other borrowings. The changes in volume caused a decrease in interest expense of $13.5 million.     ● Changes in rate: The average costs of interest-bearing deposits, FHLB advances and other borrowings, and long-term debt decreased to 0.48% and 1.57% and 4.85% in 2021 from 1.09%, 1.73%, and 4.86% in 2020, respectively. The changes in rate caused interest expense to decrease by $66.2 million.     ● Change in the mix of interest-bearing liabilities: Average interest-bearing deposits of $13.0 billion increased to 98.5% of total interest-bearing liabilities in 2021 compared to 96.6% in 2020. Offsetting the increase, average FHLB advances and other borrowings of $75.5 million decreased to 0.6% of total interest-bearing liabilities. Average long-term debt of $119.1 million remained unchanged at 0.9% of total interest-bearing liabilities in 2021 compared to 0.9% in 2020.   Net interest margin, defined as net interest income to average interest-earning assets, was 3.22% in 2021 compared to 3.12% in 2020.   Comparison of 2020 with 2019   Net interest income decreased $22.8 million, or 4.0%, from $574.9 million in 2019 to $552.1 million in 2020. The decrease in net interest income was due primarily to the decrease in loan interest income, offset by decreases in interest expense from time deposits.   61 Table of Contents   Average loans for 2020 were $15.5 billion, a $1.0 billion, or 6.9% increase from $14.5 billion in 2019. Compared with 2019, average residential mortgage loans increased $325.2 million, or 7.7%, average commercial mortgage loans increased $438.4 million, or 6.3%, average commercial loans increased $184.2 million, or 6.7%, and average real estate construction loans increased $44.8 million, or 7.7%. Average investment securities were $1.2 billion in 2020, a decrease of $226.9 million, or 15.7%, from 2019. Average interest-bearing cash on deposits with financial institutions increased $707.0 million, or 279.1%, to $960.3 million in 2020 from $253.3 million in 2019.   Average interest-bearing deposits were $12.5 billion in 2020, an increase of $1.0 billion, or 8.7%, from $11.5 billion in 2019, primarily due to increases of $891.5 million, or 44.3%, in money market accounts, $301.2 million, or 23.3%, in interest bearing demand deposits, and $28.6 million, or 3.9%, in savings accounts, offset by decreases of $191.1 million, or 2.6%, in time deposits.     ● Interest income decreased $68.7 million, or 8.9%, from $769.3 million in 2019 to $700.6 million in 2020 primarily due to decreases in the rate of loans:     ● Changes in volume: Average interest-earning assets increased $1.5 billion, or 9.3%, to $17.7 billion in 2020, compared with the average interest-earning assets of $16.2 billion in 2019. Average loans increased $1.0 billion and average interest-bearing deposits with other financial institutions increased $707.0 million in 2020 which contributed to the increase in interest income. Offsetting the above increases was a decrease of $226.9 million in average investment securities. The changes in volume contributed to interest income increase of $47.6 million.     ● Changes in rate: The average yield of interest-bearing assets decreased to 3.96% in 2020 from 4.74% in 2019. The decrease in rate on loans resulted in a decrease of $100.0 million interest income, the decrease in rate on deposits with other financial institutions resulted in a decrease of $8.3 million interest income, and the decrease in rate on investment securities resulted in a decrease of $7.8 million interest income. The changes in rate contributed to interest income decrease of $116.3 million.     ● Change in the mix of interest-earning assets: Average gross loans, which generally have a higher yield than other types of investments, comprised 87.6% of total average interest-earning assets in 2020, a decrease from 89.4% in 2019. Average investment securities comprised 6.9% of total average interest-bearing assets in 2020, a decrease from 8.9% in 2019.   Interest expense decreased by $45.9 million, or 23.6%, to $148.5 million in 2020, compared with $194.4 million in 2019, primarily due to decreased cost from time deposits, FHLB advances, and long-term debt. The overall decrease in interest expense was primarily due to decreases in rates on interest bearing deposits, volume decreases in long term debts and volume and rate decreases in other borrowings as discussed below:     ● Changes in volume: Average interest-bearing deposits increased $1.0 billion, or 9.0%, offset by decreases of $53.8 million, or 14.2%, in average FHLB advances and other borrowings and decreases in average long-term debt of $45.8 million, or 27.8%. The changes in volume caused an increase in interest expense of $1.3 million.     ● Changes in rate: The average costs of interest-bearing deposits, FHLB advances and other borrowings, and long-term debt decreased to 1.09% and 1.73% and increased to 4.86% in 2020 from 1.55%, 2.21%, and 4.76% in 2019, respectively. The changes in rate caused interest expense to decrease by $47.2 million.     ● Change in the mix of interest-bearing liabilities: Average interest-bearing deposits of $12.5 billion increased to 96.6% of total interest-bearing liabilities in 2020 compared to 95.5% in 2019. Offsetting the increase, average FHLB advances and other borrowings of $326.0 million decreased to 2.5% of total interest-bearing liabilities. Average long-term debt of $119.1 million decreased to 0.9% of total interest-bearing liabilities in 2020 compared to 1.4% in 2019.   62 Table of Contents   Net interest margin, defined as net interest income to average interest-earning assets, was 3.12% in 2020 compared to 3.54% in 2019.   The following table sets forth information concerning average interest-earning assets, average interest-bearing liabilities, and the average yields and rates paid on those assets and liabilities in 2021, 2020 and 2019. Average outstanding amounts included in the table are daily averages.   Interest-Earning Assets and Interest-Bearing Liabilities                       Average                     Average                     Average       2021     Interest     Yield/     2020     Interest     Yield/     2019     Interest     Yield/       Average     Income/     Rate     Average     Income/     Rate     Average     Income/     Rate       Balance     Expense     (1 )(2)     Balance     Expense     (1 )(2)     Balance     Expense     (1 )(2)       ($ In thousands)   Interest-earning assets:                                                                         Total loans (1)   $ 15,827,550     $ 649,224       4.10 %   $ 15,500,910     $ 677,193       4.37 %   $ 14,510,678     $ 729,619       5.03 % Investment securities     1,046,187       14,151       1.35 %     1,215,957       20,599       1.69 %     1,442,820       33,037       2.29 % Federal Home Loan Bank stock     17,250       991       5.74 %     17,300       952       5.50 %     17,266       1,207       6.99 % Interest-bearing deposits     1,649,564       2,145       0.13 %     960,276       1,830       0.19 %     253,296       5,404       2.13 % Total interest-earning assets   $ 18,540,551     $ 666,511       3.59 %   $ 17,694,443     $ 700,574       3.96 %   $ 16,224,060     $ 769,267       4.74 % Non-interest earning assets:                                                                         Cash and due from banks   $ 157,952                     $ 148,234                     $ 199,917                   Other non-earning assets     1,041,667                       1,052,693                       1,039,098                   Total non-interest earning assets   $ 1,199,619                     $ 1,200,927                     $ 1,239,015                   Less: Allowance for loan losses     (142,969 )                     (156,225 )                     (124,431 )                 Deferred loan fees     (5,664 )                     (2,291 )                     (1,377 )                 Total assets   $ 19,591,537                     $ 18,736,854                     $ 17,337,267                                                                                             Interest-bearing liabilities:                                                                         Interest-bearing demand deposits   $ 2,047,177     $ 2,249       0.11 %   $ 1,591,924     $ 2,816       0.18 %   $ 1,290,752     $ 2,371       0.18 % Money market deposits     4,034,246       18,241       0.45 %     2,903,837       21,574       0.74 %     2,012,306       21,508       1.07 % Savings deposits     897,663       769       0.09 %     759,581       1,006       0.13 %     731,027       1,432       0.20 % Time deposits     5,979,191       40,542       0.68 %     7,268,738       111,629       1.54 %     7,459,800       152,791       2.05 % Total interest-bearing deposits   $ 12,958,277     $ 61,801       0.48 %   $ 12,524,080     $ 137,025       1.09 %   $ 11,493,885     $ 178,102       1.55 %                                                                           Other borrowings     75,516       1,182       1.57 %     326,023       5,648       1.73 %     379,816       8,412       2.21 % Long-term debt     119,136       5,773       4.85 %     119,136       5,791       4.86 %     164,976       7,847       4.76 % Total interest-bearing liabilities   $ 13,152,929     $ 68,756       0.52 %   $ 12,969,239     $ 148,464       1.14 %   $ 12,038,677     $ 194,361       1.61 % Non-interest bearing liabilities:                                                                         Demand deposits     3,751,626                       3,158,828                       2,837,946                   Other liabilities     223,961                       249,052                       251,002                   Today equity     2,463,021                       2,359,735                       2,209,642                   Total liabilities and equity   $ 19,591,537                     $ 18,736,854                     $ 17,337,267                                                                                             Net interest spread                     3.07 %                     2.82 %                     3.13 % Net interest income           $ 597,755                     $ 552,110                     $ 574,906           Net interest margin                     3.22 %                     3.12 %                     3.54 %     (1) Yields and amounts of interest earned include loan fees. Non-accrual loans are included in the average balance.   (2) Calculated by dividing net interest income by average outstanding interest-earning assets.   63 Table of Contents   Net Interest Income  — Changes Due to Rate and Volume (1)       2021 - 2020     2020 - 2019       Increase/(Decrease) in     Increase/(Decrease) in       Net Interest Income Due to:     Net Interest Income Due to:       Change in     Change in     Total     Change in     Change in     Total       Volume     Rate     Change     Volume     Rate     Change       (In thousands)   Interest-earning assets                                                 Loans   $ 14,047     $ (42,016 )   $ (27,969 )   $ 47,556     $ (99,982 )   $ (52,426 ) Investment securities     (2,639 )     (3,809 )     (6,448 )     (4,686 )     (7,752 )     (12,438 ) Federal Home loan Bank stock     (2 )     41       39       2       (257 )     (255 ) Deposits with other banks     1,023       (708 )     315       4,727       (8,301 )     (3,574 ) Total changes in interest income     12,429       (46,492 )     (34,063 )     47,599       (116,292 )     (68,693 )                                                   Interest-Bearing Liabilities                                                 Interest-bearing demand deposits     674       (1,241 )     (567 )     536       (91 )     445   Money market deposits     6,759       (10,092 )     (3,333 )     7,808       (7,742 )     66   Savings deposits     161       (398 )     (237 )     54       (480 )     (426 ) Time deposits     (17,137 )     (53,950 )     (71,087 )     (3,822 )     (37,340 )     (41,162 ) Other borrowings     (3,969 )     (497 )     (4,466 )     (1,089 )     (1,675 )     (2,764 ) Long-term debt     —       (18 )     (18 )     (2,225 )     169       (2,056 ) Total changes in interest expense     (13,512 )     (66,196 )     (79,708 )     1,262       (47,159 )     (45,897 )                                                   Change in net interest income   $ 25,941     $ 19,704     $ 45,645     $ 46,337     $ (69,133 )   $ (22,796 )     (1) Changes in interest income and interest expense attributable to changes in both volume and rate have been allocated proportionately to changes due to volume and changes due to rate.   Provision for Credit Losses   The provision for credit losses represents the charge against current earnings that is determined by management, through a credit review process, as the amount needed to maintain an allowance for loan losses and an allowance for off-balance sheet unfunded credit commitments that management believes to be sufficient to absorb credit losses inherent in the Bank’s loan portfolio and credit commitments. The Bank recorded a reversal of $16.0 million for credit losses in 2021 compared with a provision of $57.5 million for credit losses in 2020, and a reversal of $7.0 million in 2019. Net charge-offs for 2021 were $17.6 million, or 0.11% of average loans, compared to net recoveries for 2020 of $14.2 million, or 0.09% of average loans, and net recoveries for 2019 of $7.8 million, or 0.05% of average loans.   Non-interest Income   Non-interest income increased $11.8 million, or 27.5%, to $54.6 million for 2021, from $42.8 million for 2020, compared to $44.8 million for 2019.  Non-interest income includes depository service fees, letters of credit commissions, securities gains (losses), gains (losses) from loan sales, gains from sale of premises and equipment, gains on acquisition, and other sources of fee income. These other fee-based services include wire transfer fees, safe deposit fees, fees on loan-related activities, fee income from our Wealth Management division, and foreign exchange fees.   Comparison of 2021 with 2020   The increase in non-interest income from 2020 to 2021 was primarily due to a $4.5 million increase in wealth management fees, $4.3 million increase in derivative fees and $1.3 million increase in the Bank Owned Life Insurance death benefit income.   64 Table of Contents   Comparison of 2020 with 2019   The decrease in non-interest income from 2019 to 2020 was primarily due to a $6.9 million decrease in net gains from equity securities, offset in part by a $2.5 million increase in gain on low-income housing, a $1.5 million increase in gain on sales of securities, and a $1.3 million increase in fees and commissions income from wealth management.   Non-interest Expense   Non-interest expense includes expenses related to salaries and benefits of employees, occupancy expenses, marketing expenses, computer and equipment expenses, amortization of core deposit intangibles, amortization of investment is affordable housing and alternative energy partnerships, and other operating expenses.   Comparison of 2021 with 2020   Non-interest expense totaled $286.5 million in 2021 compared to $283.5 million in 2020. The increase of $3.1 million, or 1.1%, in non-interest expense in 2021 compared to 2020 was primarily due to a combination of the following:     ● Salaries and employee benefits increased $8.8 million, or 7.1%.   ● Professional Service increased $3.1 million, or 14.1%.   ● Computer and equipment expenses increased $2.5 million, or 22.2%.   ● Marketing expenses increased $1.7 million, or 32.3.%   ● Amortization of investments in affordable housing and alternative energy partnerships decreased $12.8 million, or 21.9%.   The efficiency ratio, defined as non-interest expense divided by the sum of net interest income before provision for loan losses plus non-interest income, decreased to 43.92% in 2021 compared to 47.65% in 2020 due primarily to an increase in non-interest expense and higher net interest income as explained above.   Comparison of 2020 with 2019   Non-interest expense totaled $283.5 million in 2020 compared to $277.3 million in 2019. The increase of $6.2 million, or 2.2%, in non-interest expense in 2020 compared to 2019 was primarily due to a combination of the following:     ● Amortization of investments in affordable housing and alternative energy partnerships increased $18.5 million, or 46.5%.   ● Salaries and employee benefits decreased $5.3 million, or 4.1%.   ● Other Real Estate Owned expenses decreased $4.2 million.   ● Marketing expenses decreased $2.4 million, or 31.1%.   The efficiency ratio, increased to 47.65% in 2020 compared to 44.75% in 2019 due primarily to an increase in non-interest expense and lower net interest income as explained above.   Income Tax Expense   Income tax expense was $83.5 million in 2021, compared to $25.1 million in 2020, and $70.2 million in 2019. The effective tax rate was 21.9% for 2021, 9.9% for 2020, and 20.1% for 2019. The effective tax rate includes the impact of low-income housing and alternative energy investments.   65 Table of Contents   Our tax returns are open for audits by the Internal Revenue Service back to 2018 and by the California Franchise Tax Board back to 2017. The audit by the Internal Revenue Service for 2017 was completed in July 2020 and did not have an impact on income tax expense. From time to time, there may be differences of opinion with respect to the tax treatment accorded transactions. When, and if, such differences occur, and the related tax effects become probable and estimable, such amounts will be recognized.   Financial Condition   Total assets were $20.9 billion at December 31, 2021, an increase of $1.9 billion, or 10.0%, from $19 billion at December 31, 2020, primarily due to an increase of $1.0 billion in short-term investments and interest-bearing deposits, an increase of $726.6 million in net loans, and an increase of $89.3 million in securities available for sale and equity securities.   Investment Securities   Investment securities were $1.1 billion and represented 5.4% of total assets at December 31, 2021, compared with $1.0 billion and 5.4% of total assets at December 31, 2020. The following table summarizes the carrying value of our portfolio of securities for each of the past two years:       As of December 31,       2021     2020       (In thousands)                     Securities Available-for-Sale:                 U.S. treasury securities   $ —     $ 80,948   U.S. government agency entities     87,509       99,839   Mortgage-backed securities     888,665       727,068   Collateralized mortgage obligations     9,117       10,324   Corporate debt securities     142,018       118,371   Total   $ 1,127,309     $ 1,036,550                     Equity Securities                 Mutual funds     6,230       6,413   Preferred stock of government sponsored entities     1,811       5,485   Other equity securities     14,278       11,846   Total   $ 22,319     $ 23,744     Effective January 1, 2021, upon the adoption of ASU 2016-13, Financial Instruments - Credit Losses, debt securities available-for-sale are measured at fair value and subject to impairment testing. When an available-for-sale debt security is considered impaired, the Company must determine if the decline in fair value has resulted from a credit-related loss or other factors and then, (1) recognize an allowance for credit losses by a charge to earnings for the credit-related component (if any) of the decline in fair value, and (2) recognize in other comprehensive income (loss) any non-credit related components of the fair value change. If the amount of the amortized cost basis expected to be recovered increases in a future period, the valuation reserve would be reduced, but not more than the amount of the current existing reserve for that security.   For available-for-sale (“AFS”) debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value with the credit component of the unrealized loss of the impaired AFS debt security recognized as an allowance for credit losses, and a corresponding provision for credit losses on the consolidated statement of income. For AFS debt securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors.   66 Table of Contents   In making this assessment, management considers the extent to which fair value is less than amortized cost, the payment structure of the security, failure of the issuer of the security to make scheduled interest or principal payments, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. Any fair value changes that have not been recorded through an allowance for credit losses is recognized in other comprehensive income. In the current period, management evaluated the securities in an unrealized loss position and determined that their unrealized losses were a result of the level of market interest rates relative to the types of securities and pricing changes caused by shifting supply and demand dynamics and not a result of downgraded credit ratings or other indicators of deterioration of the underlying issuers' ability to repay. Accordingly, we determined the unrealized losses were not credit-related and recognized the unrealized losses in "other comprehensive income" in stockholders' equity. Although we periodically sell securities for portfolio for management purposes, we do not foresee having to sell any impaired securities strictly for liquidity needs and believe that it is more likely than not we would not be required to sell any impaired securities before recovery of their amortized cost.   Securities available-for-sale represented 5.4% of total assets as of December 31, 2021, compared to 5.4% of total assets as of December 31, 2020. Securities available-for-sale were $1.1 billion as of December 31, 2021, compared to $1.0 billion as of December 31, 2020.   The tables below show the related fair value and the gross unrealized losses of the Company’s investment portfolio, aggregated by investment category and the length of time that individual securities has been in a continuous unrealized loss position, as of December 31, 2021, and December 31, 2020:       As of December 31, 2021       Less than 12 months     12 months or longer     Total       Fair     Gross Unrealized     Fair     Gross Unrealized     Fair     Gross Unrealized       Value     Losses     Value     Losses     Value     Losses       (In thousands)                                                     Securities Available-for-Sale                                                 U.S. treasury securities   $ —     $ —     $ —     $ —     $ —     $ —   U.S. government agency entities     —       —       2,337       135       2,337       135   Mortgage-backed securities     527,276       6,659       6,496       755       533,772       7,414   Collateralized mortgage obligations     8,989       417       128       13       9,117       430   Corporate debt securities     103,720       2,122       19,468       532       123,188       2,654   Total   $ 639,985     $ 9,198     $ 28,429     $ 1,435     $ 668,414     $ 10,633                                                         As of December 31, 2020       Less than 12 months     12 months or longer     Total       Fair     Gross Unrealized     Fair     Gross Unrealized     Fair     Gross Unrealized       Value     Losses     Value     Losses     Value     Losses       (In thousands)                                                     Securities Available-for-Sale                                                 U.S. treasury securities   $ 40,952     $ 6     $ —     $ —     $ 40,952     $ 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     67 Table of Contents   The scheduled maturities and taxable-equivalent yields by security type are presented in the following table:   Securities Portfolio Maturity Distribution and Yield Analysis:                                               As of December 31, 2021               After One     After Five                       One Year     Year to     Years to     Over Ten               or Less     Five Years     Ten Years     Years     Total       (In thousands)   Maturity Distribution:                                         Securities Available-for-Sale:                                         U.S. treasury securities   $ —     $ —     $ —     $ —     $ —   U.S. government agency entities     —       —       32,463       55,046       87,509   Mortgage-backed securities (1)     1       960       94,918       792,786       888,665   Collateralized mortgage obligations (1)     —       —       128       8,989       9,117   Corporate debt securities     5,009       123,188       13,821       —       142,018   Total   $ 5,010     $ 124,148     $ 141,330     $ 856,821     $ 1,127,309                                             Weighted-Average Yield:                                         Securities Available-for-Sale:                                         U.S. treasury securities     — %     — %     — %     — %     — % U.S. government agency entities     —       —       0.67       0.79       0.74   Mortgage-backed securities (1)     3.49       2.85       2.92       2.24       2.32   Collateralized mortgage obligations (1)     —       —       3.88       1.57       1.60   Corporate debt securities     1.08       1.50       4.29       —       1.75   Total     1.08 %     1.51 %     2.54 %     2.14 %     2.12 %   (1) Securities reflect stated maturities and do not reflect the impact of anticipated prepayments.   Equity Securities   For the year ended December 31, 2021, the Company recognized a net loss of $1.4 million due to the decrease in fair value of equity investments with readily determinable fair values, compared to a net loss of $1.1 million in 2020. Equity securities were $22.3 million as of December 31, 2021, compared to $23.7 million as of December 31, 2020.   Loans   Loans represented 85.37% of average interest-earning assets during 2021, compared with 87.6% during 2020. Gross loans increased by $698.1 million, or 4.5%, to $16.3 billion at December 31, 2021, compared with $15.6 billion at December 31, 2020. The increase in gross loans was primarily attributable to the following:     ● Commercial mortgage loans increased $588.2 million, or 7.8%, to $8.1 billion at December 31, 2021, compared to $7.6 billion at December 31, 2020. Total commercial mortgage loans accounted for 49.8% of gross loans at December 31, 2021, compared to 48.3% at December 31, 2020. Commercial mortgage loans consist primarily of commercial retail properties, shopping centers, owner-occupied industrial facilities, office buildings, multiple-unit apartments, hotels, and multi-tenanted industrial properties, and are typically secured by first deeds of trust on such commercial properties.     ● Total residential mortgage loans increased by $36.6 million, or 0.9%, to $4.2 billion at December 31, 2021, compared to $4.1 billion at December 31, 2020, primarily due to the low level of interest rates, the originations of limited documentation mortgages, and loan purchases.   68 Table of Contents     ● Commercial loans, including PPP loans, increased $145.6 million, or 5.1%, to $3.0 billion at December 31, 2021, compared to $2.8 billion at December 31, 2020. Commercial loans consist primarily of short-term loans (typically with a maturity of one year or less) to support general business purposes, or to provide working capital to businesses in the form of lines of credit, trade-finance loans, loans for commercial purposes secured by cash, and SBA loans.     ● Real estate construction loans decreased $68.5 million, or 10.1%, to $611.0 million at December 31, 2021, compared to $679.5 million at December 31, 2020.   Our lending relates predominantly to activities in the states of California, New York, Texas, Washington, Massachusetts, Illinois, New Jersey, Maryland, and Nevada. We also lend to domestic clients who are engaged in international trade. Loans outstanding in our branch in Hong Kong were $275.6 million as of December 31, 2021, compared to $280.5 million as of December 31, 2020.   The classification of loans by type and amount outstanding as of December 31 for each of the past five years is presented below:       Loan Type and Mix                                                 As of December 31,       2021     2020     2019     2018     2017       (In thousands)                                             Commercial loans   $ 2,982,399     $ 2,836,833     $ 2,778,744     $ 2,741,965     $ 2,461,266   Residential mortgage loans and equity lines     4,601,493       4,569,944       4,436,561       3,943,820       3,242,354   Commercial mortgage loans     8,143,272       7,555,027       7,275,262       6,724,200       6,482,695   Real estate construction loans     611,031       679,492       579,864       581,454       678,805   Installment and other loans     4,284       3,100       5,050       4,349       5,170   Gross loans     16,342,479       15,644,396       15,075,481       13,995,788       12,870,290                                             Less:                                         Allowance for loan losses     (136,157 )     (166,538 )     (123,224 )     (122,391 )     (123,279 ) Unamortized deferred loan fees     (4,321 )     (2,494 )     (626 )     (1,565 )     (3,245 ) Total loans, net   $ 16,202,001     $ 15,475,364     $ 14,951,631     $ 13,871,832     $ 12,743,766   Loans held for sale   $ —     $ —     $ —     $ —     $ 8,000       The loan maturities in the table below are based on contractual maturities as of December 31, 2021. As is customary in the banking industry, loans that meet underwriting criteria can be renewed by mutual agreement between us and the borrower. Because we are unable to estimate the extent to which our borrowers will renew their loans, the table is based on contractual maturities. As a result, the data shown below should not be viewed as an indication of future cash flows.   69 Table of Contents   Contractual Maturity of Loan Portfolio                                       As of December 31, 2021       Within One Year     One to Five Years     Over Five Years     Total       (In thousands)   Commercial loans                                 Floating rate   $ 2,199,317     $ 440,483     $ 123,380     $ 2,763,180   Fixed rate     84,255       110,524       24,440       219,219   Residential mortgage loans and equity lines                                 Floating rate     45       524       3,017,285       3,017,854   Fixed rate     5,749       20,347       1,557,543       1,583,639   Commercial mortgage loans                                 Floating rate     451,166       1,801,562       3,581,961       5,834,689   Fixed rate     335,501       1,556,906       416,176       2,308,583   Real estate construction loans                                 Floating rate     392,149       214,589       4,285       611,023   Fixed rate     8       —       —       8   Installment and other loans                                 Floating rate     4,274       10       —       4,284   Fixed rate     —       —       —       —   Gross loans   $ 3,472,464     $ 4,144,945     $ 8,725,070     $ 16,342,479   Floating rate     3,046,951       2,457,168       6,726,911       12,231,030   Fixed rate     425,513       1,687,777       1,998,159       4,111,449   Gross loans   $ 3,472,464     $ 4,144,945     $ 8,725,070     $ 16,342,479   Allowance for loan losses                             (136,157 ) Unamortized deferred loan fees                             (4,321 ) Total loans, net                           $ 16,202,001     Deposits   The Bank primarily uses customer deposits to fund its operations, and to a lesser extent advances from the Federal Home Loan Bank (“FHLB”), and other borrowings. The Bank’s deposits are generally obtained from the Bank’s geographic market area. The Bank utilizes traditional marketing methods to attract new customers and deposits, by offering a wide variety of products and services and utilizing various forms of advertising media. Although the vast majority of the Bank’s deposits are retail in nature, the Bank does engage in certain wholesale activities, primarily accepting deposits generated by brokers. The Bank considers wholesale deposits to be an alternative borrowing source rather than a customer relationship and, as such, their levels are determined by management’s decisions as to the most economic funding sources. Brokered-deposits totaled $394.0 million, or 2.2%, of total deposits, at December 31, 2021, compared to $1.2 billion, or 7.2%, at December 31, 2020.   70 Table of Contents   The Bank’s total deposits increased $2.0 billion, or 12.4%, to $18.1 billion at December 31, 2021, from $16.1 billion at December 31, 2020, primarily due to a $1.3 billion, or 37.3%, increase in money market deposits, a $1.1 billion, or 33.5%, increase in non-interest-bearing demand deposits, a $596.3 million, or 31.0%, increase in NOW deposits offset by a $1.2 billion, or 17.3% decrease in time deposits. The following table displays the deposit mix balances as of the end of the past three years:       Deposit Mix                                                         Year Ended December 31,       2021     2020     2019       Amount     %     Amount     %     Amount     %       (In thousands)   Deposits                                                 Non-interest-bearing demand deposits   $ 4,492,054       24.9 %   $ 3,365,086       20.9 %   $ 2,871,444       19.5 % Interest bearing demand deposits     2,522,442       14.0       1,926,135       12.0       1,358,152       9.2   Money market deposits     4,611,579       25.5       3,359,191       20.8       2,260,764       15.4   Savings deposits     915,515       5.1       785,672       4.9       758,903       5.2   Time deposits     5,517,252       30.5       6,673,317       41.4       7,443,045       50.7   Total deposits   $ 18,058,842       100.0 %   $ 16,109,401       100.0 %   $ 14,692,308       100.0 %   Average total deposits increased $1.0 billion, or 6.5%, to $16.7 billion in 2021, compared with average total deposits of $15.7 billion in 2020.   The following table displays average deposits and rates for the past five years:       Average Deposits and Average Rates                                                                                         Year Ended December 31,       2021     2020     2019     2018     2017       Amount     %     Amount     %     Amount     %     Amount     %     Amount     %       (In thousands)   Deposits                                                                                 Non-interest-bearing demand deposits   $ 3,751,626       — %   $ 3,158,828       — %   $ 2,837,946       — %   $ 2,819,711       — %   $ 2,599,109       — % Interest bearing demand deposits     2,047,177       0.11       1,591,924       0.18       1,290,752       0.18       1,389,326       0.20       1,304,052       0.17   Money market deposits     4,034,246       0.45       2,903,837       0.74       2,012,306       1.07       2,200,847       0.74       2,360,188       0.64   Savings deposits     897,663       0.09       759,581       0.13       731,027       0.20       791,982       0.20       834,973       0.21   Time deposits     5,979,191       0.68       7,268,738       1.54       7,459,800       2.05       6,031,061       1.43       4,947,052       0.95   Total deposits   $ 16,709,903       0.37 %   $ 15,682,908       0.87 %   $ 14,331,831       1.24 %   $ 13,232,927       0.81 %   $ 12,045,374       0.55 %   Management considers the Bank’s time deposits of $250 thousand or more, which totaled $2.9 billion at December 31, 2021, to be generally less volatile than other wholesale funding sources primarily because approximately 92.7% of the Bank’s CDs of $250 thousand or more have been on deposit with the Bank for two years or more.  Management monitors the CDs of $250 thousand or more portfolio to help identify any changes in the deposit behavior in the market and of the Bank’s customers.   71 Table of Contents   Approximately 96.4% of the Bank’s CDs mature within one year as of December 31, 2021. The following tables display time deposits by maturity:       Time Deposits by Maturity                                 At December 31, 2021       Time Deposits - under $100,000     Time Deposits - $100,000 and over     Total Time Deposits       (In thousands)   Less than three months   $ 411,064     $ 1,789,581     $ 2,200,645   Three to six months      97,319       880,230       977,549   Six to twelve months     177,505       1,963,107       2,140,612   Over one year     63,665       134,781       198,446   Total   $ 749,553     $ 4,767,699     $ 5,517,252                             Percent of total deposits      4.2 %     26.4 %     30.6 %     The following table displays time deposits with a remaining term of more than one year at December 31, 2021:   Maturities of Time Deposits with a Remaining Term   of More Than One Year for Each   of the Five Years Following December 31, 2021                 (In thousands)   2023    $ 139,734   2024   $ 58,088   2025   $ 144   2026   $ 467   2027   $ 13     Borrowings   Borrowings include securities sold under agreements to repurchase, Federal funds purchased, funds obtained as advances from the FHLB of San Francisco, and borrowings from other financial institutions.   As of December 31, 2021, there were no over-night borrowings from the FHLB in both 2021 and 2020. As of December 31, 2021, the advances from the FHLB were $20.0 million at a weighted average rate of 2.89% compared to $150.0 million at a weighted average rate of 2.15% as of December 31, 2020. As of December 31, 2021, final maturity for the FHLB advances is $20.0 million in May 2023.   72 Table of Contents   Long-term Debt   We established three special purpose trusts in 2003 and two in 2007 for the purpose of issuing Guaranteed Preferred Beneficial Interests in their Subordinated Debentures to outside investors (“Capital Securities”). The proceeds from the issuance of the Capital Securities as well as our purchase of the common stock of the special purpose trusts were invested in Junior Subordinated Notes of the Company (“Junior Subordinated Notes”). The trusts exist for the purpose of issuing the Capital Securities and investing in Junior Subordinated Notes. Subject to some limitations, payment of distributions out of the monies held by the trusts and payments on liquidation of the trusts, or the redemption of the Capital Securities, are guaranteed by the Company to the extent the trusts have funds on hand at such time. The obligations of the Company under the guarantees and the Junior Subordinated Notes are subordinate and junior in right of payment to all indebtedness of the Company and will be structurally subordinated to all liabilities and obligations of the Company’s subsidiaries. The Company has the right to defer payments of interest on the Junior Subordinated Notes at any time or from time to time for a period of up to twenty consecutive quarterly periods with respect to each deferral period. Under the terms of the Junior Subordinated Notes, the Company may not, with certain exceptions, declare or pay any dividends or distributions on its capital stock or purchase or acquire any of its capital stock if it has deferred payment of interest on any Junior Subordinated Notes.   At December 31, 2021, Junior Subordinated Notes totaled $119.1 million with a weighted average interest rate of 2.38%, compared to $119.1 million with a weighted average rate of 2.40% at December 31, 2020. The Junior Subordinated Notes have a stated maturity term of 30 years and qualify as Total Capital for these periods.   Off-Balance-Sheet Arrangements, Commitments, Guarantees, and Contractual Obligations   In the normal course of business, we enter into various transactions, which, in accordance with GAAP, are not included in the Consolidated Balance Sheets. We enter into these transactions to meet the financing needs of our customers. These transactions include commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the Consolidated Balance Sheets.   Loan Commitments. We enter into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Substantially all of our commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of loan funding. We minimize our exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures. Management assesses the credit risk associated with certain commitments to extend credit in determining the level of the allowance for credit losses.   Standby Letters of Credit. Standby letters of credit are written conditional commitments issued by us to secure the obligations of a customer to a third party. In the event the customer does not perform in accordance with the terms of an agreement with the third party, we would be required to fund the commitment. The maximum potential amount of future payments we could be required to make is represented by the contractual amount of the commitment. If the commitment is funded, we would be entitled to seek reimbursement from the customer. Our policies generally require that standby letter of credit arrangements contain security and debt covenants similar to those contained in loan agreements.   73 Table of Contents   Capital Resources   Stockholders ’ Equity   Total equity was $2.4 billion at December 31, 2021, an increase of $28.1 million, or 1.2%, from $2.4 billion at December 31, 2020, primarily due to net income of $298.3 million, proceeds from dividend reinvestment of $3.6 million, and stock based compensation of $6.0 million, offset by other comprehensive income of $8.4 million, shares withheld related to net share settlement of RSUs of $2.6 million, purchase of treasury stock of $167.1 million, and common stock cash dividends of $99.3 million. The Company paid cash dividends of $1.27 per common share in 2021, $1.24 per common share in 2020, and $1.24 per common share in 2019.   On April 1, 2021, the Board of Directors approved a stock repurchase program to buy back up to $75.0 million of Bancorp’s common stock. The $75 million share repurchased program was completed on August 5, 2021, with the repurchase of 1,832,481 shares for a total of $75.0 million, at an average cost of $40.93 per share.   On September 2, 2021, the Board of Directors approved a new stock repurchase program to buy back up to $125.0 million of the Bancorp’s common stock. As of December 31, 2021, the Company repurchased 2,153,576 shares of common stock for a total of $92.1 million, at an average cost of $42.77 per share.   Capital Adequacy   Management seeks to retain our capital at a level sufficient to support future growth, protect depositors and stockholders, and comply with various regulatory requirements. The primary measure of capital adequacy is based on the ratio of risk-based capital to risk-weighted assets. At December 31, 2021, the Company’s Tier 1 risk-based capital ratio of 12.80%, total risk-based capital ratio of 14.41%, and Tier 1 leverage capital ratio of 10.40%, calculated under the Basel III Capital Rules, continue to place the Company in the “well capitalized” category for regulatory purposes, which is defined as institutions with a Tier 1 risk-based capital ratio equal to or greater than 8%, a total risk-based capital ratio equal to or greater than 10%, and a Tier 1 leverage capital ratio equal to or greater than 5%. At December 31, 2020, the Company’s Tier 1 risk-based capital ratio was 13.53%, total risk-based capital ratio was 15.47%, and Tier 1 leverage capital ratio was 10.94%.   A table displaying the Bancorp’s and the Bank’s capital and leverage ratios at December 31, 2021, and 2020, is included in Note 21 to the Consolidated Financial Statements.   Dividend Policy   Holders of common stock are entitled to dividends as and when declared by our Board of Directors out of funds legally available for the payment of dividends. Although we have historically paid cash dividends on our common stock, we are not required to do so. We increased the common stock dividend from $0.24 per share in the fourth quarter of 2017, to $0.31 per share in the fourth quarter of 2018, to $0.34 per share in the fourth quarter of 2021. The amount of future dividends will depend on our earnings, financial condition, capital requirements and other factors, and will be determined by our Board of Directors. The terms of our Junior Subordinated Notes also limit our ability to pay dividends. If we are not current in our payment of dividends on our Junior Subordinated Notes, we may not pay dividends on our common stock.   Substantially all of the revenues of the Company available for payment of dividends derive from amounts paid to it by the Bank. The Bank paid dividends to the Bancorp totaling $230.0 million during 2021, $146.0 million during 2020, and $239.0 million during 2019.   74 Table of Contents   The Federal Reserve Board issued Federal Reserve Supervision and Regulation Letter SR-09-4 that states that bank holding companies are expected to inform and consult with the Federal Reserve supervisory staff prior to declaring and paying a dividend that exceeds earnings for the period for which the dividend is being paid.   Under California State banking law, the Bank may not without regulatory approval pay a cash dividend which exceeds the lesser of the Bank’s retained earnings or its net income for the last three fiscal years, less any cash distributions made during that period. Under this regulation, the amount of retained earnings available for cash dividends to the Company immediately after December 31, 2021, was restricted to approximately $207.8 million. For additional information on statutory and regulatory limitations on the ability of Bancorp to pay dividends to its shareholders and on the Bank to pay dividends to Bancorp, see “Item 1. Business-Regulation and Supervision — Dividends.”   Risk Elements of the Loan Portfolio   Non-performing Assets   Non-performing assets include loans past due 90 days or more and still accruing interest, non-accrual loans, and OREO. Our policy is to place loans on non-accrual status if interest and principal or either interest or principal is past due 90 days or more, or in cases where management deems the full collection of principal and interest unlikely. After a loan is placed on non-accrual status, any previously accrued but unpaid interest is reversed and charged against current income and subsequent payments received are generally first applied towards the outstanding principal balance of the loan. Depending on the circumstances, management may elect to continue the accrual of interest on certain past due loans if partial payment is received and/or the loan is well collateralized and in the process of collection. The loan is generally returned to accrual status when the borrower has brought the past due principal and interest payments current and, in the opinion of management, the borrower has demonstrated the ability to make future payments of principal and interest as scheduled.   Management reviews the loan portfolio regularly to see to identify problem loans. During the ordinary course of business, management may become aware of borrowers that may not be able to meet the contractual requirements of their loan agreements. Such loans are placed under closer supervision with consideration given to placing the loan on non-accrual status, the need for an additional allowance for loan losses, and (if appropriate) partial or full charge-off.   Total non-performing portfolio assets decreased $5.9 million, or 7.6%, to $71.7 million at December 31, 2021, compared to $77.6 million at December 31, 2020, primarily due to a decrease of $3.5 million, $1.8 million and $0.6 million in accruing loans past due 90 days or more, nonaccrual loans and OREO, respectively.      75 Table of Contents   As a percentage of gross loans, excluding loans held for sale, plus OREO, our non-performing assets decreased to 0.44% at December 31, 2021, from 0.50% at December 31, 2020. The non-performing portfolio loan, excluding loans held for sale, coverage ratio, defined as the allowance for credit losses to non-performing loans, excluding loans held for sale, decreased to 212.9% at December 31, 2021, from 237.3% at December 31, 2020. The following table presents the breakdown of total non-accrual, past due, and restructured loans for the past five years:   Non-accrual, Past Due and Restructured Loans       As of December 31,       2021     2020     2019     2018     2017       (In thousands)   Accruing loans past due 90 days or more   $ 1,439     $ 4,982     $ 6,409     $ 3,773     $ —   Non-accrual loans     65,846       67,684       40,523       41,815       48,787   Total non-performing loans     67,285       72,666       46,932       45,588       48,787   Other real estate owned     4,368       4,918       10,244       12,674       9,442   Total non-performing assets   $ 71,653     $ 77,584     $ 57,176     $ 58,262     $ 58,229                                             Accruing troubled debt restructurings (TDRs)   $ 12,837     $ 27,721     $ 35,336     $ 65,071     $ 68,565   Non-accrual TDRs (included in non-accrual loans)   $ 8,175     $ 8,985     $ 18,048     $ 24,189     $ 33,416   Non-accrual loans held for sale   $ —     $ —     $ —     $ —     $ 8,000   Non-performing assets as a percentage of gross loans and OREO at year-end     0.44 %     0.50 %     0.38 %     0.42 %     0.45 % Allowance for credit losses as a percentage of gross loans     0.88 %     1.10 %     0.84 %     0.89 %     0.99 % Allowance for credit losses as a percentage of non-performing loans     212.91 %     237.27 %     270.77 %     273.41 %     262.09 %   The effect of non-accrual loans on interest income for the past five years is presented below:       Year Ended December 31,       2021     2020     2019     2018     2017       (In thousands)   Non-accrual Loans                                         Contractual interest due   $ 4,032     $ 3,093     $ 1,775     $ 1,618     $ 3,254   Interest recognized     1,074       1,008       85       66       86   Net interest foregone   $ 2,958     $ 2,085     $ 1,690     $ 1,552     $ 3,168     As of December 31, 2021, there were no commitments to lend additional funds to those borrowers whose loans had been restructured, were considered impaired, or were on non-accrual status.   Non-accrual Loans   Total non-accrual portfolio loans were $65.8 million at December 31, 2021, decreased $1.9 million, or 2.8%, from $67.7 million at December 31, 2020. The allowance for the collateral-dependent loans is calculated based on the difference between the outstanding loan balance and the value of the collateral as determined by recent appraisals, sales contracts, or other available market price information, less cost to sell. The allowance for collateral-dependent loans varies from loan to loan based on the collateral coverage of the loan at the time of designation as non-performing. We continue to monitor the collateral coverage of these loans, based on recent appraisals, on a quarterly basis and adjust the allowance accordingly.   76 Table of Contents   The following tables present the type of properties securing the non-accrual portfolio loans and the type of businesses the borrowers engaged in as of the dates indicated:       December 31, 2021     December 31, 2020       Real             Real               Estate (1)     Commercial     Estate (1)     Commercial       (In thousands)   Type of Collateral                                 Single/multi-family residence   $ 12,456     $ 7,697     $ 7,126     $ 9,031   Commercial real estate     36,832       338       37,471       338   Land     —       2,744       —       2,634   Personal property (UCC)     —       5,779       —       11,084   Total   $ 49,288     $ 16,558     $ 44,597     $ 23,087     (1)   Real estate includes commercial mortgage loans, real estate construction loans, and residential mortgage loans and equity lines.       December 31, 2021     December 31, 2020       Real             Real               Estate (1)     Commercial     Estate (1)     Commercial       (In thousands)   Type of Business                                 Real estate development   $ 13,775     $ —     $ 12,875     $ 33   Wholesale/Retail     24,600       12,468       25,291       11,290   Import/Export     —       3,190       —       6,191   Other     10,913       900       6,431       5,573   Total   $ 49,288     $ 16,558     $ 44,597     $ 23,087     (1)   Real estate includes commercial mortgage loans, real estate construction loans, and residential mortgage loans and equity lines.   Troubled Debt Restructurings   A troubled debt restructuring (“TDR”) is a formal modification of the terms of a loan when the Bank, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower. The concessions may be granted in various forms, including reduction of the stated interest rate, reduction of the amount of principal amortization, forgiveness of a portion of a loan balance or accrued interest, or an extension of the maturity date. Although these loan modifications are considered under ASC Subtopic 310-40 to be TDRs, the loans must have, pursuant to the Bank’s policy, performed under the restructured terms and have demonstrated sustained performance under the modified terms for six months before being returned to accrual status. The sustained performance considered by management pursuant to its policy includes the periods prior to the modification if the prior performance met or exceeded the modified terms. This would include cash paid by the borrower prior to the restructure to set up interest reserves. Loans classified as TDRs are reported as individually evaluated loans.   The allowance for credit loss on a TDR is measured using the same method as all other loans held for investment, except when the value of a concession cannot be measured using a method other than the discounted cash flow method. When the value of a concession is measured using the discounted cash flow method, the allowance for credit loss is determined by discounting the expected future cash flows at the original interest rate of the loan.   77 Table of Contents   The CARES Act as extended by the CAA permits financial institutions to suspend requirements under GAAP for loan modifications to borrowers affected by COVID-19 and is intended to provide interpretive guidance as to conditions that would constitute a short-term modification that would not meet the definition of a TDR. Such conditions include the following (i) the loan modification is made 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.   A summary of TDRs by type of loan and by accrual/non-accrual status as of the dates indicated is shown below:       December 31, 2021   Accruing TDRs   Payment Deferral     Rate Reduction     Rate Reduction and Payment Deferral     Total       (In thousands)   Commercial loans    $ 3,368     $ —     $ —     $ 3,368   Commercial mortgage loans     438       5,522       168       6,128   Residential mortgage loans     1,464       249       1,628       3,341   Total accruing TDRs   $ 5,270     $ 5,771     $ 1,796     $ 12,837                                         December 31, 2021   Non-accrual TDRs   Payment Deferral     Rate Reduction     Rate Reduction and Payment Deferral     Total       (In thousands)   Commercial loans    $ 7,717     $ —     $ —     $ 7,717   Residential mortgage loans     458       —       —       458   Total non-accrual TDRs   $ 8,175     $ —     $ —     $ 8,175                                         December 31, 2020   Accruing TDRs   Payment Deferral     Rate Reduction     Rate Reduction and Payment Deferral     Total       (In thousands)   Commercial loans   $ 3,983     $ —     $ —     $ 3,983   Commercial mortgage loans      515       5,635       13,425       19,575   Residential mortgage loans     1,724       275       2,164       4,163   Total accruing TDRs   $ 6,222     $ 5,910     $ 15,589     $ 27,721                                         December 31, 2020   Non-accrual TDRs   Payment Deferral     Rate Reduction     Rate Reduction and Payment Deferral     Total       (In thousands)   Commercial loans    $ 8,462     $ —     $ —     $ 8,462   Residential mortgage loans      523       —       —       523   Total non-accrual TDRs   $ 8,985     $ —     $ —     $ 8,985     78 Table of Contents   Impaired Loans   Prior to January 1, 2021, a loan was considered to be impaired when it was probable that we would be unable to collect all amounts due according to the contractual terms of the loan agreement based on current circumstances and events. The assessment for impairment occurs when and while such loans are on non-accrual as a result of delinquency of over 90 days or receipt of information indicating that full collection of principal is doubtful, or when the loan has been restructured in a TDRs. Those loans with a balance less than our defined selection criteria, generally when a loan amount is $500,000 or less, were treated as a homogeneous portfolio. If loans meeting the defined criteria were not collateral dependent, we measured the impairment based on the present value of the expected future cash flows discounted at the loan’s effective interest rate. If loans meeting the defined criteria were collateral dependent, we measured the impairment by using the loan’s observable market price or the fair value of the collateral.   We generally obtained an appraisal to determine the amount of impairment at the date that the loan became impaired. The appraisals were based on “as is” or bulk sale valuations. To ensure that appraised values remained current, we obtained an updated appraisal every twelve months from qualified independent appraisers. If the fair value of the collateral, less cost to sell, was less than the recorded amount of the loan, we then recognized impairment by creating or adjusting an existing valuation allowance with a corresponding charge to the provision for loan losses. If an impaired loan was expected to be collected through liquidation of the collateral, the amount of impairment, excluding disposal costs (which range between 3% to 6% of the fair value, depending on the size of impaired loan), is charged off against the allowance for loan losses. Non-accrual impaired loans, including TDRs, were not returned to accrual status unless the unpaid interest has been brought current and full repayment of the recorded balance was expected or if the borrower had made six consecutive monthly payments of the scheduled amounts due, and TDRs were reviewed for continued impairment until they are no longer reported as TDRs.   As of December 31, 2021, recorded investment in non-accrual loans was $65.8 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 10.7% of the contractual balances for non-accrual loans as of December 31, 2021. For impaired loans, the amounts previously charged off represents 7.1% as of December 31, 2020, of the contractual balances for impaired loans. As of December 31, 2021, $49.3 million, or 74.9%, of the $65.8 million of non-accrual loans were secured by real estate compared to $44.6 million, or 65.9% of the $67.7 million of non-accrual loans that were secured by real estate as of December 31, 2020. The Bank generally seeks to obtain current appraisals, sales contracts, or other available market price information intended to provide updated factors in evaluating potential loss.   At December 31, 2020, $6.4 million of the $166.5 million allowance for loan losses was allocated for impaired loans and $160.1 million was allocated to the general allowance.   The allowance for loan losses to non-performing loans was 202.4% at December 31, 2021, compared to 229.2% at December 31, 2020, primarily due to an increase in the non-accrual loans. Non-accrual loans also include those TDRs that do not qualify for accrual status.   79 Table of Contents   The following table presents non-accrual loans and the related allowance as of December 31, 2021:         As of December 31, 2021       Unpaid Principal Balance     Recorded Investment     Allowance       (In thousands)   With no allocated allowance:                         Commercial loans   $ 15,879     $ 11,342     $ —   Commercial mortgage loans     24,437       21,209       —   Residential mortgage and equity lines     6,020       5,850       —   Subtotal   $ 46,336     $ 38,401     $ —   With allocated allowance:                         Commercial loans   $ 14,294     $ 5,217     $ 894   Commercial mortgage loans     17,930       16,964       3,631   Residential mortgage and equity lines     6,048       5,264       22   Subtotal   $ 38,272     $ 27,445     $ 4,547   Total non-accrual loans   $ 84,608     $ 65,846     $ 4,547     In connection with the adoption of ASU 2016-13, the Company no longer provides information on impaired loans. The following table presents impaired loans and the related allowance as of December 31, 2020:       Impaired Loans       As of 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 and equity lines     6,379       6,307       —   Subtotal   $ 58,816     $ 53,578     $ —   With allocated allowance:                         Commercial loans   $ 13,703     $ 6,372     $ 1,030   Commercial mortgage loans     31,134       31,003       5,254   Residential mortgage and equity lines     5,005       4,452       145   Subtotal   $ 49,842     $ 41,827     $ 6,429   Total impaired loans   $ 108,658     $ 95,405     $ 6,429     80 Table of Contents   Loan Interest Reserves   In accordance with customary banking practice, construction loans and land development loans generally are originated where interest on the loan is disbursed from pre-established interest reserves included in the total original loan commitment. Our construction and land development loans generally include optional renewal terms after the maturity of the initial loan term. New appraisals are obtained prior to extension or renewal of these loans in part to determine the appropriate interest reserve to be established for the new loan term. Loans with interest reserves are generally underwritten to the same criteria, including loan to value and, if applicable, pro forma debt service coverage ratios, as loans without interest reserves. Construction loans with interest reserves are monitored on a periodic basis to gauge progress towards completion. Interest reserves are frozen if it is determined that additional draws would result in a loan to value ratio that exceeds policy maximums based on collateral property type. Our policy limits in this regard are consistent with supervisory limits and range from 50% in the case of land to 85% in the case of one to four family residential construction projects.   As of December 31, 2021, construction loans of $520.5 million were disbursed with pre-established interest reserves of $51.1 million compared to $643.5 million of such loans disbursed with pre-established interest reserves of $71.0 million at December 31, 2020.  The balance for construction loans with interest reserves which have been extended was $20.4 million with pre-established interest reserves of $0.4 million at December 31, 2021, compared to $127.0 million with pre-established interest reserves of $4.4 million at December 31, 2020.  Land loans of $46.2 million were disbursed with pre-established interest reserves of $0.6 million at December 31, 2021, compared to $24.7 million land loans disbursed with pre-established interest reserves of $0.5 million at December 31, 2020.  The balance for land loans with interest reserves which have been renewed was $0.9 million at December 31, 2021, with pre-established interest reserves of $58 thousand, compared to $0.9 million land loans with pre-established interest reserves of $58 thousand at December 31, 2020.    At December 31, 2021 and December 31, 2020, the Bank had no loans on non-accrual status with available interest reserves.  At December 31, 2021 and 2020, there was zero and $4.3 million of non-accrual non-residential construction loans that were originated with pre-established interest reserves, respectively.  While we typically expect loans with interest reserves to be repaid in full according to the original contractual terms, some loans may require one or more extensions beyond the original maturity before full repayment.  Typically, these extensions are required due to construction delays, delays in the sale or lease of property, or some combination of these two factors.   Loan Concentration   Most of the Company’s business activities are with customers located in the high-density Asian-populated areas of Southern and Northern California; New York City; New York; Dallas and Houston, Texas; Seattle, Washington; Boston, Massachusetts; Chicago, Illinois; Nevada; 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 our loans are collateralized with real property or other pledged collateral of the borrowers. The Company generally expects our loans to be paid off from the operating profits of the borrowers, refinancing by another lender, or through sale by the borrowers of the collateral. There are no loan concentrations to multiple borrowers in similar activities that exceeded 10% of total loans as of December 31, 2021, or as of December 31, 2020.   81 Table of Contents   The Federal banking regulatory agencies issued final guidance on December 6, 2006, regarding risk management practices for financial institutions with high or increasing concentrations of commercial real estate ("CRE") loans on their balance sheets. The regulatory guidance reiterates the need for sound internal risk management practices for those institutions that have experienced rapid growth in CRE lending, have notable exposure to specific types of CRE, or are approaching or exceeding the supervisory criteria used to evaluate the CRE concentration risk, but the guidance is not to be construed as a limit for CRE exposure. The supervisory criteria are: (1) total reported loans for construction, land development, and other land represent 100% of the institution's total risk-based capital, and (2) both total CRE loans represent 300% or more of the institution's total risk-based capital and the institution's CRE loan portfolio has increased 50% or more within the last thirty-six months. The Bank’s loans for construction, land development, and other land represented 31% of total risk-based capital as of December 31, 2021, and 35% as of December 31, 2020. Total CRE loans represented 285% of total risk-based capital as of December 31, 2021, and 273% as of December 31, 2020, which were within the Bank’s internal limit of 400%, of total capital. See Part I — Item 1A — “Risk Factors” for a discussion of some of the factors that may affect us.   Allowance for Credit Losses   The Bank maintains the allowance for credit losses at a level that the Bank’s management considers appropriate to cover the estimated and known inherent risks in the loan portfolio and off-balance sheet unfunded credit commitments. Allowance for credit losses is comprised of allowances for loan losses and for off-balance sheet unfunded credit commitments. With this risk management objective, the Bank’s management has an established monitoring system that is designed to identify individually evaluated and potential problem loans, and to permit periodic evaluation of impairment and the appropriate level of the allowance for credit losses in a timely manner.     In addition, the Board of Directors of the Bank has established a written credit policy that includes a credit review and control system that it believes should be effective in ensuring that the Bank maintains an appropriate allowance for credit losses. The Board of Directors provides oversight for the allowance evaluation process, including quarterly evaluations, and determines whether the allowance is appropriate to absorb losses in the credit portfolio. The determination of the amount of the allowance for credit losses and the provision for credit losses is based on management’s current judgment about the credit quality of the loan portfolio and takes into consideration known relevant internal and external factors that affect collectability when determining the appropriate level for the allowance for credit losses. The nature of the process by which the Bank determines the appropriate allowance for credit losses requires the exercise of considerable judgment. Additions or reductions to the allowance for credit losses are made by charges or credits to the provision for credit losses. While management utilizes its business judgment based on the information available, the ultimate appropriateness of the allowance is dependent upon a variety of factors, many of which are beyond the Bank’s control, including but not limited to the performance of the Bank’s loan portfolio, the economy and market conditions, changes in interest rates, and the view of the regulatory authorities toward loan classifications. Identified credit exposures that are determined to be uncollectible are charged against the allowance for credit losses. Recoveries of previously charged off amounts, if any, are credited to the allowance for credit losses. A weakening of the economy or other factors that adversely affect asset quality can result in an increase in the number of delinquencies, bankruptcies, and defaults, and a higher level of non-performing assets, net charge-offs, and provision for loan losses. See Part I — Item 1A — “Risk Factors” for additional factors that could cause actual results to differ materially from forward-looking statements or historical performance.     The allowance for loan losses was $136.2 million and the allowance for off-balance sheet unfunded credit commitments was $7.1 million at December 31, 2021, which represented the amount believed by management to be appropriate to absorb credit losses inherent in the loan portfolio. The allowance for credit losses, which is the sum of the allowances for loan losses and for off-balance sheet unfunded credit commitments, was $143.3 million at December 31, 2021, compared to $172.4 million at December 31, 2020, a decrease of $29.1 million, or 16.9%. The allowance for credit losses represented 0.9% of period-end gross loans and 212.9% of non-performing loans at December 31, 2021. The comparable ratios were 1.10% of period-end gross loans and 237.3% of non-performing loans at December 31, 2020.   82 Table of Contents   Critical Accounting Policies and Estimates   Our accounting policies are fundamental to understanding management’s discussion and analysis of results of operations and financial condition. We identify critical policies and estimates as those that require management to make particularly difficult, subjective, and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. We have identified the policy and estimates relate to the allowance for credit losses on loans as a critical accounting policy.   Our critical accounting policies and estimates are described in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Annual Report Form 10-K. For more information, please also see Note 1, Summary of Significant Accounting Policies contained in Item 8, Financial Statements and Supplementary Data.   Expected Credit Losses Estimate for Loans   In January 2021, we adopted ASC 326, which replaces the incurred loss methodology with an expected loss methodology.  The allowance for credit losses on loans held for investment is the combination of the allowance for loan losses and the reserve for unfunded loan commitments. The allowance for loan losses is reported as a reduction of the amortized cost basis of loans, while the reserve for unfunded loan commitments is included within “Other liabilities” on the Consolidated Balance Sheets. The amortized cost basis of loans does not include interest receivable, which is included in “Other assets” on the Consolidated Balance Sheets. The “Provision for credit losses” on the Consolidated Statement of Operations and Comprehensive Income is a combination of the provision for loan losses and the provision for unfunded loan commitments.   Under the CECL methodology, expected credit losses reflect losses over the remaining contractual life of an asset, considering the effect of prepayments and available information about the collectability of cash flows, including information about relevant historical experience, current conditions, and reasonable and supportable forecasts of future events and circumstances. Thus, the CECL methodology incorporates a broad range of information in developing credit loss estimates. For further information regarding the calculation of the allowance for credit losses on loans held for investment using the CECL methodology effective January 1, 2021, see Notes 1 and 4 to the Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data.”   In calculating our allowance for credit losses for the year ended 2021, the change in Moody’s forecast of future GDP, unemployment rates, CRE and home price indexes, resulted in a decrease in the allowance for credit losses. Our methodology and framework along with the 8-quarter reasonable and supportable forecast period and the 4-quarter reversion period have remained consistent since the implementation of CECL on January 1, 2021. Certain management assumptions are reassessed every quarter based on current expectations for credit losses, while other assumptions are assessed and updated on at least an annual basis.   The use of different economic forecasts, whether based on different scenarios, the use of multiple or single scenarios, or updated economic forecasts and scenarios, can change the outcome of the calculations. In addition to the economic forecasts, there are numerous components and assumptions that are integral to the overall estimation of allowance for credit losses.   The determination of the allowance for credit losses is complex and dependent on numerous models, assumptions, and judgments made by management. Management's current expectation for credit losses as quantified in the allowance for credit losses, considers the impact of assumptions and is reflective of historical credit experience, economic forecasts viewed to be reasonable and supportable, current loan composition, and relative credit risks known as of the balance sheet date.   The Company’s CECL methodology utilizes an eight-quarter reasonable and supportable (“R&S”) forecast period, and a four-quarter reversion period. Management relies on multiple forecasts, blending them into a single loss estimate. Generally speaking, the blended scenario approach would include the Baseline, the Alternative Scenario 1 – Upside – 10th Percentile and the Alternative Scenario 3 – Downside – 90th Percentile forecasts. After the R&S period, the Company will revert straight-line for the four-quarter reversion period to the long-term loss rates for each of the six portfolios of loans.  The contractual term excludes renewals and modifications but includes pre-approved extensions and prepayment assumptions where applicable.   Our allowance for credit losses is sensitive to a number of inputs, including macroeconomic forecast assumptions and credit rating migrations during the period. Our macroeconomic forecasts used in determining the December 31, 2021, allowance for credit losses consisted of three scenarios. The baseline scenario reflects ongoing GDP growth and falling unemployment in 2022, generally in line with market expectations, and consistent with waning COVID transmission and improved supply chains. The upside scenario reflects a faster recovery in consumer spending and stronger productivity growth in 2022 relative to the baseline scenario. The downside scenario contemplates a double-dip recession due to resurgent COVID infections that results in negative GDP growth, rising unemployment, and deteriorating credit conditions in early 2022. We placed the most weight on our baseline scenario, with the remaining weighting split equally between the upside and downside scenarios.   Keeping all other factors constant, we estimate that if we had applied 100% weighting to the downside scenario, the allowance for credit losses as of December 31, 2021, would have been approximately $80.3 million higher. This estimate is intended to reflect the sensitivity of the allowance for credit losses to changes in our scenario weights and is not intended to be indicative of future changes in the allowance for credit losses.   Management believes the allowance for credit losses is appropriate for the current expected credit losses in our loan portfolio and associated unfunded commitments, and the credit risk ratings and inherent loss rates currently assigned are reasonable and appropriate as of the reporting date. It is possible that others, given the same information, may at any point in time reach different conclusions that could result in a significant impact to the Company's financial statements.   83 Table of Contents   The following table sets forth the information relating to the allowance for loan losses, charge-offs, recoveries, and the reserve for off-balance sheet credit commitments for the past five years:   Allowance for Credit Losses                                                 Amount Outstanding as of December 31,       2021     2020     2019     2018     2017       (In thousands)   Allowance for loan losses                                         Balance at beginning of year   $ 166,538     $ 123,224     $ 122,391     $ 123,279     $ 118,966   Impact of ASU 2016-13 adoption     (1,560 )     —       —       —       —   Adjusted beginning balance   $ 164,978     $ 123,224     $ 122,391     $ 123,279     $ 118,966   (Reversal)/provision for credit losses     (11,210 )     57,500       (7,000 )     (4,500 )     (2,500 ) Charge-offs :                                         Commercial loans     (20,051 )     (21,996 )     (6,997 )     (629 )     (3,313 ) Real estate loans     (3 )     —       —       (2,577 )     (860 ) Total charge-offs     (20,054 )     (21,996 )     (6,997 )     (3,206 )     (4,173 ) Recoveries:                                         Commercial loans     1,706       7,267       4,155       1,875       3,402   Construction loans     76       —       4,612       177       229   Real estate loans     661       543       6,063       4,766       7,336   Installment loans and other loans      —       —       —       —       19   Total recoveries     2,443       7,810       14,830       6,818       10,986   Balance at end of period   $ 136,157     $ 166,538     $ 123,224     $ 122,391     $ 123,279                                             Reserve for off-balance sheet credit commitments                                         Balance at beginning of year   $ 5,880     $ 3,855     $ 2,250     $ 4,588     $ 3,224   Impact of ASU 2016-13 adoption     6,018       —       —       —       —   Adjusted beginning balance   $ 11,898     $ 3,855     $ 2,250     $ 4,588     $ 3,224   (Reversal)/provision for credit losses     (4,798 )     2,025       1,605       (2,338 )     1,364   Balance at the end of period   $ 7,100     $ 5,880     $ 3,855     $ 2,250     $ 4,588                                             Average loans outstanding during the year (1)   $ 15,827,550     $ 15,500,910     $ 14,510,678     $ 13,280,665     $ 11,936,389   Ratio of net charge-offs/(recoveries) to average loans outstanding during the year (1)     0.11 %     0.09 %     (0.05 )%     (0.03 )%     (0.06 )% Provision/(reversal) for credit losses to average loans outstanding during the year (1)     (0.07 )%     0.37 %     (0.05 )%     (0.03 )%     (0.02 )% Allowance for credit losses to non-performing portfolio loans at year-end (2)     212.91 %     237.27 %     270.77 %     273.41 %     262.09 % Allowance for credit losses to gross loans at year-end (1)     0.88 %     1.10 %     0.84 %     0.89 %     0.99 %                                           (1) Excluding loans held for sale                                         (2) Excluding non-accrual loans held for sale                                           84 Table of Contents   Prior to January 1, 2021, our allowance for loan losses consisted of the following:     •  Specific allowance: For impaired loans, we provide specific allowances for loans that are not collateral dependent based on an evaluation of the present value of the expected future cash flows discounted at the loan’s effective interest rate and for loans that are collateral dependent based on the fair value of the underlying collateral determined by the most recent valuation information received, which may be adjusted based on factors such as changes in market conditions from the time of valuation. If the measure of the impaired loan is less than the recorded investment in the loan, the deficiency will be charged off against the allowance for loan losses or, alternatively, a specific allocation will be established.         •  General allowance: The unclassified portfolio is segmented on a group basis. Segmentation is determined by loan types and common risk characteristics. The non-impaired loans are grouped into 19 segments: two commercial segments, ten commercial real estate segments, one residential construction segment, one non-residential construction segment, one SBA segment, one installment loans segment, one residential mortgage segment, one equity lines of credit segment, and one overdrafts segment. The allowance is provided for each segmented group based on the group’s historical loan loss experience aggregated based on loan risk classifications which take into account the current financial condition of the borrowers and guarantors, the prevailing value of the underlying collateral if collateral dependent, charge-off history, management’s knowledge of the portfolio, general economic conditions, environmental factors including the trends in delinquency and non-accrual, and other significant factors, such as the national and local economy, volume and composition of the portfolio, strength of management and loan staff, underwriting standards, and concentration of credit. Management also reviews reports on past-due loans to ensure appropriate classification. In the fourth quarter of 2016, management reevaluated and increased the look back period from five to eight years to capture historical loan losses from the last recession. The look back period is anchored from the first quarter of 2009 and has been extended through forty-eight quarters through the fourth quarter of 2020. The general allowance is affected by loan volumes, quarterly net charge-offs/recoveries and historical loss rates. In addition, risk factor calculations for pass rated loans included a specified loss emergence period and were determined based on five-year average of observed net losses, unless trends would indicate that a different weighting would be appropriate. These refinements maintained the Bank’s allowance at a level consistent with the prior quarter.          85 Table of Contents   The table set forth below reflects management’s allocation of the allowance for loan losses by loan category and the ratio of each loan category to the total loans as of the dates indicated:       Allocation of Allowance for Loan Losses       As of December 31,       2021     2020     2019     2018     2017               Percentage             Percentage             Percentage             Percentage             Percentage               of Loans in             of Loans in             of Loans in             of Loans in             of Loans in               Each             Each             Each             Each             Each               Category             Category             Category             Category             Category               to Average             to Average             to Average             to Average             to Average       Amount     Gross Loans     Amount     Gross Loans     Amount     Gross Loans     Amount     Gross Loans     Amount     Gross Loans       (In thousands)   Type of Loans:                                                                                 Commercial loans   $ 43,394       18.4 %   $ 68,742       18.8 %   $ 57,021       18.9 %   $ 54,978       19.1 %   $ 49,796       19.1 % Residential mortgage loans and equity lines     25,379       28.7       17,737       29.4       13,108       29.1       14,282       26.9       11,013       24.5   Commercial mortgage loans     61,081       48.7       49,205       47.8       33,602       48.0       33,487       49.5       37,610       51.2   Real estate construction loans     6,302       4.2       30,854       4.0       19,474       4.0       19,626       4.5       24,838       5.2   Installment and other loans     1   &#x