CATHAY GENERAL BANCORP (CATY) FY 2021 MD&A

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.

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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.

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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:

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.

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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.

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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

Net income available to common stockholders and key financial performance ratios are presented below for the three years indicated:

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.

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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:

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:

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.

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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 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:

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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.

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Net Interest Income — Changes Due to Rate and Volume (1)

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.

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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:

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:

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.

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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:

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.

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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:

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The scheduled maturities and taxable-equivalent yields by security type are presented in the following table:

(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:

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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:

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.

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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.

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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:

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:

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.

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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:

The following table displays time deposits with a remaining term of more than one year at December 31, 2021:

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.

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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.

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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.

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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.

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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

The effect of non-accrual loans on interest income for the past five years is presented below:

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.

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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:

(1)   Real estate includes commercial mortgage loans, real estate construction loans, and residential mortgage loans and equity lines.

(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.

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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:

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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.

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The following table presents non-accrual loans and the related allowance as of December 31, 2021:

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:

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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.

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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.

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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.

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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: