CATHAY GENERAL BANCORP 10-K

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       —       —       —       19       —       18       —       22       —   Total   $ 136,157       100.0 %   $ 166,538       100.0 %   $ 123,224       100.0 %   $ 122,391       100.0 %   $ 123,279       100.0 %     The allowance allocated to commercial loans was $43.4 million at December 31, 2021, compared to $68.7 million at December 31, 2020. The decrease is due primarily to a decrease in the allowance of $31.5 million from the adoption of ASU 2016-13 and net charge offs of $18.3 million offset by a provision for loan losses of $24.5 million.   The allowance allocated to residential mortgage loans and equity lines was $25.4 million at December 31, 2021, compared to $17.7 million at December 31, 2020. The increase is due primarily to an increase in the allowance of $19.2 million from the adoption of ASU 2016-13 offset by a reversal for loan losses of $11.9 million related to improvements in projected future macro-economic conditions in 2021.   The allowance allocated to commercial mortgage loans was $61.1 million at December 31, 2021, compared to $49.2 million at December 31, 2020. The increase is due primarily to an increase in the allowance of $35.0 million from the adoption of ASU 2016-13 offset by a reversal for loan losses of $23.4 million related to the improvements in projected future macro-economic conditions in 2021.   The allowance allocated for construction loans decreased to $6.3 million at December 31, 2021, from $30.9 million at December 31, 2020. The decrease is due primarily to a decrease in the allowance of $24.3 million from the adoption of ASU 2016-13. The $24.3 million decrease in allowance was primarily due to a change in methodology from the incurred loss model in 2020 to CECL based modeling in 2021. Under the CECL based modeling, the allowance is determined using actual loss experience, average life of loans, loan-to-collateral value among other factors, as compared to only historical loss experience used in incurred loss model.   Please also 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.   86 Table of Contents   Liquidity   Liquidity is our ability to maintain sufficient cash flow to meet maturing financial obligations and customer credit needs, and to take advantage of investment opportunities as they are presented in the marketplace. Our principal sources of liquidity are growth in deposits, proceeds from the maturity or sale of securities and other financial instruments, repayments from securities and loans, Federal funds purchased, securities sold under agreements to repurchase, and advances from the FHLB. For December 2021, our average monthly liquidity ratio (defined as net cash plus short-term and marketable securities to net deposits and short-term liabilities) was 17.3% compared to 14.7% for December 2020.   The Bank is a shareholder of the FHLB, which enables the Bank to have access to lower-cost FHLB financing when necessary. At December 31, 2021, the Bank had an approved credit line with the FHLB of San Francisco totaling $5.0 billion. Total advances from the FHLB of San Francisco were $20 million and standby letter of credits issued by FHLB on the Company’s behalf were $676.4 million as of December 31, 2021. These borrowings bear fixed rates and are secured by loans. See Note 8 to the Consolidated Financial Statements. At December 31, 2021, the Bank pledged $773.3 thousand of its commercial loans to the Federal Reserve Bank’s Discount Window under the Borrower-in-Custody program. The Bank had borrowing capacity of $2.4 million from the Federal Reserve Bank Discount Window at December 31, 2021.   Liquidity can also be provided through the sale of liquid assets, which consist of federal funds sold, securities purchased under agreements to resell, securities available-for-sale and equity securities. At December 31, 2021, securities available-for-sale totaled $1.1 billion, with $30.5 million pledged as collateral for borrowings and other commitments. The remaining $1.1 billion was available as additional liquidity or to be pledged as collateral for additional borrowings.   Approximately 96% of our time deposits mature within one year or less as of December 31, 2021. Management anticipates that there may be some outflow of these deposits upon maturity due to the keen competition in the Bank’s marketplace. However, based on our historical runoff experience, we expect the outflow will not be significant and anticipate that the outflow can be replenished through our normal growth in deposits. As of December 31, 2021, management believes all the above-mentioned sources will provide adequate liquidity during the next twelve months for the Bank to meet its operating needs. Deposits and other sources of liquidity, however, may be adversely impacted by the COVID-19 pandemic.   The business activities of the Bancorp consist primarily of the operation of the Bank and limited activities in other investments. The Bancorp obtains funding for its activities primarily through dividend income contributed by the Bank, proceeds from the issuance of the Bancorp common stock through our Dividend Reinvestment Plan and the exercise of stock options. Dividends paid to the Bancorp by the Bank are subject to regulatory limitations. Management believes the Bancorp’s liquidity generated from its prevailing sources is sufficient to meet its operational needs.   Please also see Note 12 to the Consolidated Financial Statements regarding commitments and contingencies.   Recent Accounting Pronouncements   In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” ASU No. 2020-04 is effective for all entities as of March 12, 2020, through December 31, 2022. This ASU provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The ASU is intended to help stakeholders during the global market-wide reference rate transition period. Therefore, it will be in effect for a limited time through December 31, 2022. In January 2021, the FASB issued ASU 2021-01 as subsequent amendments, which expanded the scope of Topic 848 to include all affected derivatives and clarified certain optional expedients and exceptions regarding the hedge accounting for derivative contracts affected by the discounting transition. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.   87 Table of Contents   Please see Note 1 to the Consolidated Financial Statements for details of other recent accounting pronouncements and their expected impact, if any, on the Consolidated Financial Statements.   Item   7A.           Quantitative and Qualitative Disclosures about Market Risk   Market Risk   Market risk is the risk of loss from adverse changes in market prices and rates. We believe the principal market risk to the Company is the interest rate risk inherent in our lending, investing, deposit taking and borrowing activities, due to the fact that interest-earning assets and interest-bearing liabilities do not re-price at the same rate, to the same extent, or on the same basis.   As part of our asset and liability management, we monitor and manage our interest rate risk through analyzing the re-pricing characteristics of our loans, securities, deposits, and borrowings on an on-going basis. The primary objective of our asset and liability management is to manage and minimize the adverse effects of changes in interest rates on our earnings, cash flows, values of our assets and liabilities, and ultimately the underlying market value of our equity, while structuring our asset-liability composition to seek to obtain the maximum spread in a safe and sound manner. Many factors affect the spread between interest earned on assets and interest paid on liabilities, including economic and financial conditions, movements in interest rates, consumer preferences and regulatory actions.   Management meets regularly to monitor the interest rate risk, the sensitivity of our assets and liabilities to interest rate changes, the book and fair values of assets and liabilities, our investment activities, and changes in the composition of our interest earning assets and interest-bearing liabilities. Our strategy has been to seek to reduce the sensitivity of our earnings to interest rate fluctuations by more closely matching the effective maturities or repricing characteristics of our assets and liabilities. Certain assets and liabilities, however, may react in different degrees to changes in market interest rates. Further, interest rates on certain types of assets and liabilities may fluctuate prior to changes in market interest rates, while interest rates on other types may lag behind.   We use a net interest income simulation model as a method to help manage interest rate risk and estimate the extent of the differences in the behavior of the lending, investing, and funding rates to changing interest rates, so as to project future earnings or market values under alternative interest rate scenarios. The net interest income simulation model is designed to measure the volatility of net interest income and net portfolio value, defined as net present value of assets and liabilities, under immediate rising or falling interest rate scenarios in 25 basis points increments.   We establish a tolerance level in our policy for net interest income volatility of plus or minus 5% when the hypothetical rate change is plus or minus 200 basis points. When the net interest rate simulation projects that our tolerance level will be met or exceeded, we seek corrective action after considering, among other things, market conditions, customer reaction, and the estimated impact on profitability. At December 31, 2021, if interest rates were to increase instantaneously by 100 basis points, the simulation indicated that our net interest income over the next twelve months would increase by 9.43%, and if interest rates were to increase instantaneously by 200 basis points, the simulation indicated that our net interest income over the next twelve months would increase by 19.63%. Conversely, if interest rates were to decrease instantaneously by 100 basis points, the simulation indicated that our net interest income over the next twelve months would decrease by 1.30%, and if interest rates were to decrease instantaneously by 200 basis points, the simulation indicated that our net interest income over the next twelve months would decrease by 1.51%.   88 Table of Contents   Our simulation model also projects the net market value of our portfolio of assets and liabilities. We have established a tolerance level to value the net market value of our portfolio of assets and liabilities in our policy to a change of not less than 0% when the hypothetical rate change is plus or minus 200 basis points. At December 31, 2021, if interest rates were to increase instantaneously by 200 basis points, the simulation indicated that the net market value of our portfolio of assets and liabilities would increase by 12.23%, and conversely, if interest rates were to decrease instantaneously by 200 basis points, the simulation indicated that the net market value of our assets and liabilities would decrease by 7.11%.   Although we believe our simulation modeling is helpful in managing interest rate risk, the model does require significant assumptions for, among other factors, the projection of loan prepayment rates on mortgage related assets, loan volumes and pricing, and deposit and borrowing volume and pricing, that might prove inaccurate. Because these assumptions are inherently uncertain, the model does not necessarily represent our forecast, and the simulated results may not be indicative of actual changes to our net interest income. Actual results will differ from simulated results due to the timing, magnitude, and frequency of interest rate changes, the differences between actual experience and the assumed volume, changes in market conditions, and management strategies, among other factors.   89 Table of Contents   Quantitative Information about Interest Rate Risk   The following table shows the carrying value of our financial instruments that are sensitive to changes in interest rates, categorized by expected maturity, as well as the instruments’ total fair values at December 31, 2021, and 2020. For assets, expected maturities are based on contractual maturity. For liabilities, we use our historical experience and decay factors to estimate the deposit runoffs of interest-bearing transactional deposits. We use certain assumptions to estimate fair values and expected maturities that are described in Note 15 to the Consolidated Financial Statements. Off-balance sheet commitments to extend credit, letters of credit, and bill of lading guarantees represent the contractual unfunded amounts. Off-balance sheet financial instruments represent fair values. The results presented may vary if different assumptions are used or if actual experience differs from the assumptions used.                                                               December 31,       Average                                                     2021     2020       Interest     Expected Maturity Date at December 31,             Fair             Fair       Rate     2022     2023     2024     2025     2026     Thereafter     Total     Value     Total     Value       (In thousands)   Interest-Sensitive Assets:                                                                                         Mortgage-backed securities and collateralized mortgage obligations      2.31 %   $ 1     $ 63     $ 6     $ 489     $ 401     $ 896,820     $ 897,780     $ 897,780     $ 737,392     $ 737,392   Other investment securities      1.37 %   $ 5,009     $ 10,003     $ 20,407     $ 19,468     $ 73,311     $ 101,331     $ 229,529     $ 229,529     $ 299,158     $ 299,158   Loans     3.94 %   $ 3,472,465     $ 1,097,728     $ 771,523     $ 823,619     $ 1,452,075     $ 8,725,069     $ 16,342,479     $ 16,499,869     $ 15,644,396     $ 16,103,471   Interest Sensitive Liabilities:                                                                                   Other interest-bearing deposits      0.26 %   $ 1,581,346     $ 974,311     $ 697,815     $ 475,278     $ 2,420,707     $ 1,900,079     $ 8,049,536     $ 8,049,536     $ 6,070,998     $ 6,070,998   Time deposits      0.68 %   $ 5,318,805     $ 139,735     $ 58,088     $ 144     $ 467     $ 13     $ 5,517,252     $ 5,510,130     $ 6,673,317     $ 6,689,724   Advances from the Federal Home Loan Bank      2.89 %   $ —     $ 20,000     $ —     $ —     $ —     $ —     $ 20,000     $ 21,279     $ 150,000     $ 155,133   Other borrowings      — %   $ —     $ —     $ —     $ —     $ —     $ 23,145     $ 23,145     $ 18,945     $ 23,714     $ 19,632   Long-term debt      2.38 %   $ —     $ —     $ —     $ —     $ —     $ 119,136     $ 119,136     $ 62,274     $ 119,136     $ 65,487                                                                                             Off-Balance Sheet Financial Instruments:                                                                                         Commitments to extend credit     $ 1,256,102     $ 795,636     $ 352,971     $ 145,828     $ 165,536     $ 581,290     $ 3,297,363     $ (12,594 )   $ 2,977,528     $ (8,432 ) Standby letters of credit     $ 170,748     $ 6,437     $ 1,428     $ 29,635     $ 1,146     $ 57,095     $ 266,489     $ (2,640 )   $ 234,200     $ (1,630 ) Other letters of credit     $ 16,652     $ —     $ —     $ —     $ —     $ —     $ 16,652     $ (13 )   $ 16,821     $ (16 ) Bill of lading guarantees     $ —     $ —     $ —     $ —     $ —     $ —     $ —     $ —     $ 238     $ —     Financial Derivatives   It is our policy not to speculate on the future direction of interest rates. However, from to time, we may enter into financial derivatives in order to seek mitigation of exposure to interest rate risks related to our interest-earning assets and interest-bearing liabilities. We believe that these transactions, when properly structured and managed, may provide a hedge against inherent interest rate risk in our assets or liabilities and against risk in specific transactions. In such instances, we may enter into interest rate swap contracts or other types of financial derivatives. Prior to considering any hedging activities, we seek to analyze the costs and benefits of the hedge in comparison to other viable alternative strategies. All hedges must be approved by the Bank’s Investment Committee.   The Company follows ASC Topic 815 that establishes accounting and reporting standards for financial derivatives, including certain financial derivatives embedded in other contracts, and hedging activities. It requires the recognition of all financial derivatives as assets or liabilities in the Company’s Consolidated Balance Sheets and measurement of those financial derivatives at fair value. The accounting treatment of changes in fair value is dependent upon whether or not a financial derivative is designated as a hedge and, if so, the type of hedge. Fair value is determined using third-party models with observable market data. For derivatives designated as cash flow hedges, changes in fair value are recognized in other comprehensive income and are reclassified to earnings when the hedged transaction is reflected in earnings. For derivatives designated as fair value hedges, changes in the fair value of the derivatives are reflected in current earnings, together with changes in the fair value of the related hedged item if there is a highly effective correlation between changes in the fair value of the interest rate swaps and changes in the fair value of the underlying asset or liability that is intended to be hedged. If there is not a highly effective correlation between changes in the fair value of the interest rate swap and changes in the fair value of the underlying asset or liability that is intended to be hedged, then only the changes in the fair value of the interest rate swaps are reflected in the Company’s Consolidated Financial Statements.   90 Table of Contents   The Company offers various interest rate derivative contracts to its customers. When derivative transactions are executed with its customers, the derivative contracts are offset by paired trades with third-party financial institutions including with central counterparties (“CCP”). Certain derivative contracts entered with CCPs are settled-to-market daily to the extent the CCP’s rulebooks legally characterize the variation margin as settlement. Derivative contracts are intended to allow borrowers to lock in attractive intermediate and long-term fixed rate financing while not increasing the interest rate risk to the Company. These transactions are generally not linked to specific Company assets or liabilities on the Consolidated Balance Sheets or to forecasted transactions in a hedging relationship and, therefore, are economic hedges. The contracts are marked to market at each reporting period. The changes in fair values of the derivative contracts traded with third-party financial institutions are expected to be largely comparable to the changes in fair values of the derivative transactions executed with customers throughout the terms of these contracts, except for the credit valuation adjustment component.  The Company records credit valuation adjustments on derivatives to properly reflect the variances of credit worthiness between the Company and the counterparties, considering the effects of enforceable master netting agreements and collateral arrangements. As of December 31, 2021 and 2020, the Company had outstanding interest rate derivative contracts with certain customers and third-party financial institutions with a notional amount of $457.0 million and $83.2 million, respectively.   In May 2014, the Bancorp entered into interest rate swap contracts in the notional amount of $119.1 million for a period of ten years. The objective of these interest rate swap contracts, which were designated as hedging instruments in cash flow hedges, was to hedge the quarterly interest payments on Bancorp’s $119.1 million of Junior Subordinated Debentures that had been issued to five trusts, throughout the ten-year period beginning in June 2014 and ending in June 2024, from the risk of variability of these payments resulting from changes in the three-month LIBOR interest rate. As of December 31, 2021, and 2020, the ineffective portion of these interest rates swaps was not significant.   The notional amount and net unrealized loss of the Company’s cash flow derivative financial instruments as of December 31, 2021, and December 31, 2020, were as follows:       December 31, 2021     December 31, 2020   Cash flow swap hedges:   ($ in thousands)   Notional   $ 119,136     $ 119,136   Weighted average fixed rate-pay     2.61 %     2.61 % Weighted average variable rate-receive     0.16 %     0.44 %                   Unrealized loss, net of taxes (1)   $ (3,276 )   $ (6,890 )                       Year ended       December 31, 2021     December 31, 2020   Periodic net settlement of swaps (2)   $ 2,949     $ 2,193                     (1)-Included in other comprehensive income.                 (2)-the amount of periodic net settlement of interest rate swaps was included in interest expense.     As of December 31, 2021, the Bank’s outstanding interest rate swap contracts had a notional amount of $324.8 million for various terms from three to ten years. The Bank entered into these interest rate swap contracts that are matched to individual fixed-rate commercial real estate loans in the Bank’s loan portfolio. These contracts have been designated as hedging instruments to hedge the risk of changes in the fair value of the underlying commercial real estate loans due to changes in interest rates. The swap contracts are structured so that the notional amounts reduce over time to match the contractual amortization of the underlying loan and allow prepayments with the same pre-payment penalty amounts as the related loan. As of December 31, 2021, and 2020, the ineffective portion of these interest rate swaps was not significant.   The Company has designated as a partial-term hedging election $404.4 million and $25.0 million notional as last-of-layer hedge on pool of loans with a notational value of $748.6 million and $44.7 million as of December 31, 2021 and 2020, respectively. The loans are not expected to be affected by prepayment, defaults, or other factors affecting the timing and amount of cash flows under the last-of-layer method. The Company has entered into a pay-fixed and receive 1-Month LIBOR interest rate swap to convert the last-of-layer $404.4 million portion of a $748.6 million fixed rate loan tranche in order to reduce the Company’s exposure to higher interest rates for the last-of-layer tranche. As of December 31, 2021 and 2020, the last-of-layer loan tranche had a fair value basis adjustment of $30 thousand and $342 thousand, respectively. The interest rate swap converts this last-of-layer tranche into a floating rate instrument. The Company’s risk management objective with respect to this last-of-layer interest rate swap is to reduce interest rate exposure as to the last-of-layer tranche.   91 Table of Contents   Interest rate swap contracts involve the risk of dealing with institutional derivative counterparties and their ability to meet contractual terms. Institutional counterparties must have a strong credit profile and be approved by the Company’s Board of Directors. The Company’s credit exposure on interest rate swaps is limited to the net favorable value and interest payments of all swaps by each counterparty. Credit exposure may be reduced by the amount of collateral pledged by the counterparty. Bancorp’s interest rate swaps have been assigned by the counterparties to a derivatives clearing organization and daily margin is indirectly maintained with the derivatives clearing organization. Cash posted as collateral by Bancorp related to derivative contracts totaled $5.9 million as of December 31, 2021, and $11.9 million as of December 31, 2020.   The notional amount and net unrealized loss of the Company’s fair value derivative financial instruments as of December 31, 2021, and December 31, 2020, were as follows:       December 31, 2021     December 31, 2020   Fair value swap hedges:   ($ in thousands)   Notional   $ 729,280     $ 478,266   Weighted average fixed rate-pay     2.65 %     4.56 % Weighted average variable rate spread     1.31 %     2.46 % Weighted average variable rate-receive     1.43 %     3.11 %                   Net unrealized loss (1)   $ (1,013 )   $ (15,082 )                       Year ended       December 31, 2021     December 31, 2020   Periodic net settlement of SWAPs (2)   $ (9,345 )   $ (7,719 )                   (1)-the amount is included in other non-interest income.                 (2)-the amount of periodic net settlement of interest rate swaps was included in interest income.     From time to time, the Company enters into foreign exchange forward contracts with various counterparties to mitigate the risk of fluctuations in foreign currency exchange rates for foreign exchange certificates of deposit or foreign exchange contracts entered into with our clients. These contracts are not designated as hedging instruments and are recorded at fair value in our Consolidated Balance Sheets. Changes in the fair value of these contracts as well as the related foreign exchange certificates of deposit and foreign exchange contracts are recognized immediately in net income as a component of non-interest income. Period end gross positive fair values are recorded in other assets and gross negative fair values are recorded in other liabilities. The notional amount and fair value of the Company’s derivative financial instruments not designated as hedging instruments as of December 31, 2021, and December 31, 2020, were as follows:       December 31, 2021     December 31, 2020   Derivative financial instruments not designated as hedging instruments:   (In thousands)   Notional amounts:                 Option contracts   $ 676     $ —   Forward, and swap contracts with positive fair value   $ 181,997     $ 151,244   Forward, and swap contracts with negative fair value   $ 51,782     $ 132,813   Fair value:                 Option contracts   $ 2,911     $ —   Forward, and swap contracts with positive fair value   $ 1,113     $ 4,658   Forward, and swap contracts with negative fair value   $ (327 )   $ (2,200 )   92 Table of Contents   Item 8.     Financial Statements and Supplementary Data   For financial statements, see “Index to Consolidated Financial Statements” on page F-1.   Item 9.     Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   Not Applicable.