UNITED STATES

securities and exchange commission

Washington, D.C. 20549

 

form 10-q

(Mark One)

[ X

[ X ]quarterly report pursuant to section 13 or 15(d) ofTHE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period endedSeptember 30, 2016

OR

[    ]transition report pursuant to section 13 or 15 (d) ofthe SECURITIES EXCHANGE ACT OF 1934

 quarterly report pursuant to section 13 or 15(d) of THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period endedSeptember 30, 2017

OR

[    ]

transition report pursuant to section 13 or 15 (d) of the SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                                                   to                                                 

 

Commission file number     001-31830     

Commission file number001-31830 

 

Cathay General Bancorp


(Exact name of registrant as specified in its charter)

 

Delaware

 Delaware  

95-4274680

 (State(State of other jurisdiction of incorporation

or organization)

 (I.R.S.(I.R.S. Employer

Identification No.)

 
777 North Broadway, Los Angeles, California 90012
(Address of principal executive offices)  (Zip Code)

Registrant's telephone number, including area code:

(213) 625-4700


(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.                                                  Yes ☑          No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).           Yes ☑          No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See definitionthe definitions of “largelarge accelerated filer,” “accelerated filer,” and “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

 Accelerated filer

Non-accelerated filer

 Non-accelerated filer      ☐      (Do not check if a smaller reporting company)

Smaller reporting company☐company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).                                                             Yes ☐          No ☑

Indicate the number of shares outstanding of each of the issuer’sissuer’s classes of common stock, as of the latest practicable date.

 

Common stock, $.01 par value, 78,890,06580,819,967 shares outstanding as of October 31, 2016.2017.

 

 

Table of Contents

 

CATHAY GENERAL BANCORP AND SUBSIDIARiesSUBSIDIARies

3RDRD quarter 2016quarter 2017 REPORT ON FORM 10-Q

table of contents

PART I – 

FINANCIAL INFORMATION

3

  

Item 1.

Item 1. FINANCIAL STATEMENTS (Unaudited)

3

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

6

Item 2.

Item 2. MANAGEMENT’SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

3540

Item 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

5664

Item 4.

CONTROLS AND PROCEDURES

5765
   

PART II  –

OTHER INFORMATION

5766
  
 Item 1.     LEGAL PROCEEDINGS57

Item 1.

Item 1A.     RISK FACTORS

LEGAL PROCEEDINGS

5866

Item 1A.

RISK FACTORS

66

Item 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

5876

Item 3.

DEFAULTS UPON SENIOR SECURITIES

5876

Item 4.

MINE SAFETY DISCLOSURES

5867

Item 5.

OTHER INFORMATION

5867

Item 6.     EXHIBITS

59

EXHIBITS

67
   
 SIGNATURES60

SIGNATURES

68

 

 

Table of Contents

 

Forward-Looking Statements

 

In this Quarterly Report on Form 10-Q, the term “Bancorp” refers to Cathay General Bancorp and the term “Bank” refers to Cathay Bank. The terms “Company,” “we,” “us,” and “our” refer to Bancorp and the Bank collectively.

 

The statements in this report include forward-looking statements within the meaning of the applicable provisions of the Private Securities Litigation Reform Act of 1995 regarding management’s beliefs, projections, and assumptions concerning future results and events. We intend such forward-looking statements to be covered by the safe harbor provision for forward-looking statements in these provisions. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including statements about anticipated future operating and financial performance, financial position and liquidity, growth opportunities and growth rates, growth plans, acquisition and divestiture opportunities, business prospects, strategic alternatives, business strategies, financial expectations, regulatory and competitive outlook, loan and deposit growth, investment and expenditure plans, financing needs and availability, level of nonperforming assets, and other similar forecasts and statements of expectation and statements of assumptions underlying any of the foregoing. Words such as “aims,” “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “hopes,” “intends,” “may,” “optimistic,” “plans,” “potential,” “possible,” “predicts,” “projects,” “seeks,” “shall,” “should,” “will,” and variations of these words and similar expressions are intended to identify these forward-looking statements. Forward-looking statements by us are based on estimates, beliefs, projections, and assumptions of management and are not guarantees of future performance. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. Such risks and uncertainties and other factors include, but are not limited to, adverse developments or conditions related to or arising from:

 

 

U.S. and international business and economic conditions;

 

possible additional provisions for loan losses and charge-offs;

 

credit risks of lending activities and deterioration in asset or credit quality;

 

extensive laws and regulations and supervision thatthat we are subject to, including potential supervisory action by bank supervisory authorities;

 

increased costs of compliance and other risks associated with changes in regulation, including the implementation of the Dodd-Frank Wall Street Reform and ConsumerConsumer Protection Act (the “Dodd-Frank Act”);

 

higher capital requirements from the implementation of the Basel III capital standards;

 

compliance with the Bank Secrecy Act and other money laundering statutes and regulations;

 

potential goodwill impairment;

 

liquiliquiditydity risk;

 

fluctuations in interest rates;

 

risks associated with acquisitions and the expansion of our business into new markets;

 

inflation and deflation;

 

real estate market conditions and the value of real estate collateral;

environmental liabilities;

1


Table of Contents

 

 

environmental liabilities;

ourour ability to compete, withincluding against larger competitors;

 

our ability to retain key personnel;

 

successful management of reputational risk;

 

natural disasters and geopolitical events;

 

general economic or business conditions in Asia, and other regions where the Bank has operations;operations;

 

failures, interruptions, or security breaches of our information systems;

 

our ability to adapt our systems to technological changes;

 

risk management processes and strategies;

 

adverse results in legal proceedings;

 

the impact of regulatory enforcement actions, if any;

certain provisions in our charter and bylaws that may affect acquisition of the Company;

 

changes in accounting standards or tax laws and regulations;

 

market disruption and volatility;

 

fluctuations in the Bancorprestrictions’s stock price;

restrictions on dividends and other distributions by laws and regulations and by our regulators and our capital structure;

 

issuanceissuances of preferred stock;

 

capital level requirements and successfully raising additional capital, if needed, and the resulting dilutiondilution of interests of holders of our common stock; and

 

the soundness of other financial institutions.

 

These and other factors are further described in Bancorp’sBancorp’s Annual Report on Form 10-K for the year ended December 31, 20152016 (Item 1A in particular), other reports and registration statements filed with the Securities and Exchange Commission (“SEC”), and other filings itBancorp makes with the SEC from time to time. Actual results in any future period may also vary from the past results discussed in this report. Given these risks and uncertainties, readers are cautioned not to place undue reliance on any forward-looking statements, which speak to the date of this report. We have no intention and undertake no obligation to update any forward-looking statement or to publicly announce any revision of any forward-looking statement to reflect future developments or events, except as required by law.

 

Bancorp’sBancorp’s filings with the SEC are available at the website maintained by the SEC at http://www.sec.gov, or by request directed to Cathay General Bancorp, 9650 Flair Drive, El Monte, California 91731, Attention: Investor Relations (626) 279-3286.

 

2


Table of Contents

 

PART I – FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS (Unaudited)

 

CATHAY GENERAL BANCORP AND SUBSIDIARIESSUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

(In thousands, except share and per share data)

 

September 30, 2016

  

December 31, 2015

  

September 30, 2017

  

December 31, 2016

 
                

Assets

                

Cash and due from banks

 $203,877  $180,130  $167,886  $218,017 

Short-term investments and interest bearing deposits

  791,757   536,880   573,059   967,067 

Securities available-for-sale (amortized cost of $1,283,808 in 2016 and $1,595,723 in 2015)

  1,298,469   1,586,352 

Securities available-for-sale (amortized cost of $1,364,955 in 2017 and $1,317,012 in 2016)

  1,368,487   1,314,345 

Loans held for sale

  4,750   6,676   -   7,500 

Loans

  11,010,457   10,163,452   12,597,434   11,201,275 

Less: Allowance for loan losses

  (117,942)  (138,963)  (121,535)  (118,966)

Unamortized deferred loan fees, net

  (5,519)  (8,262)  (3,424)  (4,994)

Loans, net

  10,886,996   10,016,227   12,472,475   11,077,315 

Federal Home Loan Bank stock

  18,900   17,250   30,681   17,250 

Other real estate owned, net

  20,986   24,701   18,115   20,070 

Affordable housing investments and alternative energy partnerships, net

  225,535   182,943   298,426   251,077 

Premises and equipment, net

  106,885   108,924   107,954   105,607 

Customers’ liability on acceptances

  13,339   40,335 

Customers’ liability on acceptances

  12,009   12,182 

Accrued interest receivable

  31,868   30,558   42,190   37,299 

Goodwill

  372,189   372,189   372,189   372,189 

Other intangible assets, net

  3,158   3,677   9,408   2,949 

Other assets

  120,080   147,284   255,538   117,902 

Total assets

 $14,098,789  $13,254,126  $15,728,417  $14,520,769 
                

Liabilities and Stockholders’ Equity

        

Liabilities and Stockholders’ Equity

        

Deposits

                

Non-interest-bearing demand deposits

 $2,246,661  $2,033,048  $2,730,006  $2,478,107 

Interest-bearing deposits:

                

Demand deposits

  1,073,436   966,404   1,379,100   1,230,445 

Money market deposits

  2,131,190   1,905,719   2,370,724   2,198,938 

Savings deposits

  633,345   618,164   925,312   719,949 

Time deposits

  4,854,064   4,985,752   5,156,553   5,047,287 

Total deposits

  10,938,696   10,509,087   12,561,695   11,674,726 
                

Securities sold under agreements to repurchase

  350,000   400,000   100,000   350,000 

Advances from the Federal Home Loan Bank

  700,000   275,000   595,000   350,000 

Other borrowings for affordable housing investments

  17,705   18,593 

Other borrowings of affordable housing investments

  17,518   17,662 

Long-term debt

  119,136   119,136   119,136   119,136 

Deferred payments from acquisition

  136,056   - 

Acceptances outstanding

  13,339   40,335   12,009   12,182 

Other liabilities

  166,474   144,197   218,304   168,524 

Total liabilities

  12,305,350   11,506,348   13,759,718   12,692,230 

Commitments and contingencies

  -   -   -   - 

Stockholders’ Equity

        

Common stock, $0.01 par value, 100,000,000 shares authorized, 87,090,319 issued and 78,879,676 outstanding at September 30, 2016, and 87,002,931 issued and 80,806,116 outstanding at December 31, 2015

  871   870 

Stockholders’ Equity

        

Common stock, $0.01 par value, 100,000,000 shares authorized, 89,027,259 issued and 80,816,616 outstanding at September 30, 2017, and 87,820,920 issued and 79,610,277 outstanding at December 31, 2016

  890   878 

Additional paid-in-capital

  886,081   880,822   932,521   895,480 

Accumulated other comprehensive income/(loss), net

  1,903   (8,426)

Accumulated other comprehensive loss, net

  (217)  (3,715)

Retained earnings

  1,144,173   1,059,660   1,275,094   1,175,485 

Treasury stock, at cost (8,210,643 shares at September 30, 2016, and 6,196,815 shares at December 31, 2015)

  (239,589)  (185,148)

Treasury stock, at cost (8,210,643 shares at September 30, 2017, and at December 31, 2016)

  (239,589)  (239,589)

Total equity

  1,793,439   1,747,778   1,968,699   1,828,539 

Total liabilities and equity

 $14,098,789  $13,254,126  $15,728,417  $14,520,769 

 

See accompanying notes to unaudited condensed consolidated financial statements

 

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CATHAY GENERAL BANCORP AND SUBSIDIARIESSUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE INCOME

(Unaudited)

 

 Three months ended September 30,  Nine months ended September 30,  

Three months ended September 30,

  

Nine months ended September 30,

 
 

2016

  

2015

  

2016

  

2015

  

2017

  

2016

  

2017

  

2016

 
 

(In thousands, except share and per share data)

  

(In thousands, except share and per share data)

 

Interest and Dividend Income

                                

Loans receivable, including loan fees

 $118,500  $109,943  $349,212  $315,038  $146,383  $118,500  $401,129  $349,212 

Investment securities

  4,850   6,142   16,974   15,262   5,692   4,850   14,817   16,974 

Federal Home Loan Bank stock

  393   524   1,122   2,782 

Federal Home Loan Bank and FRB stock

  607   393   1,317   1,122 

Term federal funds sold

  108   -   108   - 

Deposits with banks

  412   258   1,094   1,105   1,288   412   3,140   1,094 

Total interest and dividend income

  124,155   116,867   368,402   334,187   154,078   124,155   420,511   368,402 
                                

Interest Expense

                                

Time deposits

  10,701   10,407   32,177   28,321   11,678   10,701   33,429   32,177 

Other deposits

  4,212   3,217   11,783   9,010   5,101   4,212   14,245   11,783 

Securities sold under agreements to repurchase

  3,828   3,977   11,696   11,836   874   3,828   3,489   11,696 

Advances from Federal Home Loan Bank

  134   164   442   374   872   134   1,465   442 

Long-term debt

  1,456   1,456   4,336   4,320   1,456   1,456   4,320   4,336 

Deferred payments from acquisition

  901   -   901   - 

Total interest expense

  20,331   19,221   60,434   53,861   20,882   20,331   57,849   60,434 
                                

Net interest income before reversal for credit losses

  103,824   97,646   307,968   280,326   133,196   103,824   362,662   307,968 

Reversal for loan losses

  -   (1,250)  (15,650)  (8,400)  -   -   (2,500)  (15,650)

Net interest income after reversal for credit losses

  103,824   98,896   323,618   288,726   133,196   103,824   365,162   323,618 
                                

Non-Interest Income

                                

Securities gains/(losses), net

  1,692   (16)  3,141   (3,369)  24   1,692   (439)  3,141 

Letters of credit commissions

  1,212   1,455   3,698   4,114   1,302   1,212   3,618   3,698 

Depository service fees

  1,401   1,409   4,109   4,003   1,407   1,401   4,259   4,109 

Gain from acquisition

  5,440   -   5,440   - 

Other operating income

  4,506   6,308   14,461   18,576   4,788   4,506   12,953   14,461 

Total non-interest income

  8,811   9,156   25,409   23,324   12,961   8,811   25,831   25,409 
                                

Non-Interest Expense

                                

Salaries and employee benefits

  22,881   20,725   71,313   67,804   27,913   22,881   79,929   71,313 

Occupancy expense

  4,734   4,412   13,587   12,419   5,312   4,734   14,733   13,587 

Computer and equipment expense

  2,337   3,893   7,360   8,783   2,643   2,337   7,895   7,360 

Professional services expense

  4,999   3,792   13,981   11,408   4,942   4,999   14,541   13,981 

Data processing service expense

  2,279   1,895   6,556   5,822   2,918   2,279   7,846   6,556 

FDIC and State assessments

  2,288   2,403   7,640   6,907 

FDIC and regulatory assessments

  2,552   2,288   7,261   7,640 

Marketing expense

  1,516   1,436   3,314   3,577   2,103   1,516   4,833   3,314 

Other real estate owned expense/(income)

  (176)  250   612   (1,053)  369   (176)  747   612 

Amortization of investments in low income housing and alternative energy partnerships

  5,432   15,427   35,626   23,277   5,723   5,432   16,797   35,626 

Amortization of core deposit intangibles

  172   169   517   493   281   172   626   517 

Acquisition and integration costs

  3,277   -   3,277   - 

Other operating expense

  4,275   3,069   10,681   9,750   3,215   4,275   11,307   10,681 

Total non-interest expense

  50,737   57,471   171,187   149,187   61,248   50,737   169,792   171,187 
                            

Income before income tax expense

  61,898   50,581   177,840   162,863   84,909   61,898   221,201   177,840 

Income tax expense

  15,808   12,098   50,756   43,200   35,163   15,808   71,099   50,756 

Net income

 $46,090  $38,483  $127,084  $119,663  $49,746  $46,090  $150,102  $127,084 
                                

Other comprehensive income, net of tax

                                

Unrealized holding gain on securities available-for-sale

  938   2,733   15,748   2,837   1,060   938   3,338   15,748 

Less: reclassification adjustments for gains/(losses) included in net income

  981   (10)  1,821   (1,953)  14   981   (254)  1,821 

Unrealized holding gain/(loss) on cash flow hedge derivatives

  804   (2,558)  (3,598)  (1,818)  157   804   (94)  (3,598)

Total other comprehensive gain, net of tax

  761   185   10,329   2,972   1,203   761   3,498   10,329 

Total comprehensive income

 $46,851  $38,668  $137,413  $122,635 
                            

Total other comprehensive income

 $50,949  $46,851  $153,600  $137,413 

Net income per common share:

                                

Basic

 $0.58  $0.47  $1.61  $1.49  $0.62  $0.58  $1.87  $1.61 

Diluted

 $0.58  $0.47  $1.59  $1.48  $0.61  $0.58  $1.86  $1.59 

Cash dividends paid per common share

 $0.18  $0.14  $0.54  $0.38  $0.21  $0.18  $0.63  $0.54 

Average common shares outstanding

                                

Basic

  78,865,860   81,475,288   79,147,839   80,422,711   80,665,398   78,865,860   80,073,249   79,147,839 

Diluted

  79,697,069   82,285,478   79,902,846   81,105,190   81,404,854   79,697,069   80,797,179   79,902,846 

 

See accompanying notes to unaudited condensed consolidated financial statements

See accompanying notes to unaudited condensed consolidated financial statements.

 

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CATHAY GENERAL BANCORP AND SUBSIDIARIESSUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

Nine months ended September 30

  

Nine months ended September 30

 
 

2016

  

2015

  

2017

  

2016

 
 

(In thousands)

  

(In thousands)

 

Cash Flows from Operating Activities

                

Net income

 $127,084  $119,663  $150,102  $127,084 

Adjustments to reconcile net income to net cash provided by/(used in) operating activities:

                

Credit for loan losses

  (15,650)  (8,400)

Reversal for loan losses

  (2,500)  (15,650)

Provision for losses on other real estate owned

  176   547   889   176 

Deferred tax liability

  22,483   14,327   10,319   22,483 

Depreciation and amortization

  5,684   5,745   5,416   5,684 

Net gains on sale and transfer of other real estate owned

  (476)  (2,006)  (394)  (476)

Net gains on sale of loans

  (285)  (845)  -   (285)

Proceeds from sales of loans

  13,525   28,507   7,500   13,525 

Originations of loans held-for-sale

  (12,665)  (26,689)  -   (12,665)

Amortization on alternative energy partnerships, venture capital and other investments

  27,282   16,993   2,778   27,282 

Net gain on sales and calls of securities

  (3,347)  (506)

Net loss/(gain) on sales and calls of securities

  438   (3,347)

Amortization/accretion of security premiums/discounts, net

  5,193   3,542   990   5,193 

Loss on sales or disposal of fixed assets

  19   138   -   19 

Write-down on impaired securities

  206   3,875   -   206 

Excess tax short-fall from share-based payment arrangements

  -   5,602 

Stock based compensation and stock issued to officers as compensation

  3,804   3,923   4,449   3,804 

Net change in accrued interest receivable and other assets

  2,101   (30,929)  (51,776)  2,101 
Gain on acquisition (5,440) - 

Net change in other liabilities

  (4,537)  (9,432)  828   (4,537)

Net cash provided by operating activities

  170,597   124,055   123,599   170,597 
                

Cash Flows from Investing Activities

                

Decrease/(increase) in short-term investments

  (254,877)  119,785   516,008   (254,877)

Purchase of investment securities available-for-sale

  (690,966)  (1,323,149)  (450,745)  (690,966)

Proceeds from sale of investment securities available-for-sale

  415,543   1,033,195   99,541   415,543 

Proceeds from repayments, maturities and calls of investment securities available-for-sale

  585,285   232,253   389,829   585,285 

Purchase of Federal Home Loan Bank stock

  (1,650)  -   -   (1,650)

Redemptions of Federal Home Loan Bank stock

  -   13,535   6,459   - 

Net increase in loans

  (853,453)  (702,595)  (686,225)  (853,453)

Purchase of premises and equipment

  (3,166)  (2,628)  (976)  (3,166)

Proceeds from sales of premises and equipment

  11   -   -   11 

Proceeds from sales of other real estate owned

  6,713   10,524   2,186   6,713 

Investment in affordable housing and alternative energy partnerships

  (59,844)  (46,349)

Net increase in investment in affordable housing and alternative energy partnerships

  (20,867)  (59,844)

Acquisition, net of cash acquired

  -   6,572   (14,309)  - 

Net cash used in investing activities

  (856,404)  (658,857)

Net cash used for investing activities

  (159,099)  (856,404)
                

Cash Flows from Financing Activities

                
        

Net increase in deposits

  429,976   1,034,442 

Net (decrease)/increase in deposits

  73,120   429,976 

Net decrease in federal funds purchased and securities sold under agreements to repurchase

  (50,000)  (50,000)  (250,000)  (50,000)

Advances from Federal Home Loan Bank

  2,730,000   4,842,000   2,608,000   2,730,000 

Repayment of Federal Home Loan Bank borrowings

  (2,305,000)  (5,192,000)  (2,393,000)  (2,305,000)

Cash dividends paid

  (42,570)  (30,690)  (50,491)  (42,570)

Purchases of treasury stock

  (54,441)  (50,701)  -   (54,441)

Proceeds from shares issued under Dividend Reinvestment Plan

  1,643   3,636   1,849   1,643 

Proceeds from exercise of stock options

  49   3,433   1,018   49 

Taxes paid related to net share settlement of RSUs

  (103)  (204)  (5,127)  (103)

Excess tax short-fall from share-based payment arrangements

  -   (5,602)

Net cash provided by financing activities

  709,554   554,314 
        

Increase in cash and cash equivalents

  23,747   19,512 

Net cash (used in) provided by financing activities

  (14,631)  709,554 

(Decrease)/increase in cash and cash equivalents

  (50,131)  23,747 

Cash and cash equivalents, beginning of the period

  180,130   176,830   218,017   180,130 
        

Cash and cash equivalents, end of the period

 $203,877  $196,342  $167,886  $203,877 
        
             

Supplemental disclosure of cash flow information

                

Cash paid during the period:

                

Interest

 $61,212  $52,614  $58,416  $61,212 

Income taxes paid

 $31,717  $67,776  $62,296  $31,717 

Non-cash investing and financing activities:

                

Net change in unrealized holding gain on securities available-for-sale, net of tax

 $13,927  $4,790  $3,592  $13,927 

Net change in unrealized holding loss on cash flow hedge derivatives

 $(3,598) $(1,818) $(94) $(3,598)

Transfers of investment securities to available-for-sale from other assets

 $-  $520 

Transfers to other real estate owned from loans held for investment

 $2,698  $3,914  $726  $2,698 

Loans transferred from held for sale to held for investment, net

 $1,351  $-  $-  $1,351 

Loans to facilitate the sale of other real estate owned

 $2,616  $-  $-  $2,616 

Issuance of stock related to acquisition

 $-  $82,857  $-  $- 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

5


Table of Contents

 

CATHAY GENERAL BANCORP AND SUBSIDIARIESSUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)

 

1. Business

 

Cathay General Bancorp (“(Bancorp”) is the holding company for Cathay Bank (the “Bank” and, together, with Bancorp, the “Company”), sixseven limited partnerships investing in affordable housing investments in which thewhich the Bank is the sole limited partner, Asia Realty Corp. and GBC Venture Capital, Inc. Bancorp also owns 100% of the common stock of five statutory business trusts created for the purpose of issuing capital securities. The Bank was founded in 1962 and offers a wide range of financial services. As of September 30, 2016,2017, the Bank operatedoperates 22 branches in Southern California, 12 branches in Northern California, 12 branches in New York State, three branches in Illinois, three branches in Washington State, two branches in Texas, one branch in Massachusetts, one branch in New Jersey, one branch in Maryland, one branch in Nevada, one branch in Hong Kong, and a representative office in Shanghai and in Taipei. Deposit accounts at the Hong Kong branch are not insured by the Federal Deposit Insurance Corporation (the “FDIC”).

 

2. Business Combinations

On July 14, 2017, the Company completed the acquisition of SinoPac Bancorp, the parent of Far East National Bank (FENB), pursuant to a Stock Purchase Agreement, dated as of July 8, 2016, by and between the Company and Bank SinoPac Co. Ltd. Under the terms of the Stock Purchase Agreement, the Company purchased all of the issued and outstanding share capital of SinoPac Bancorp for an aggregate purchase price of $351.6 million plus additional post closing payments based on the realization of certain assets of FENB. The Company issued 926,192 shares of common stock as consideration and the remainder of the consideration is payable in cash. Pursuant to the Stock Purchase Agreement, (i) $100 million of the purchase price was deferred and will be released within one year based on the timing of the contemplated merger of FENB into Cathay Bank and (ii) 10% of the purchase price was held back and will be released over a period of three years following the closing of the acquisition, subject to any indemnity claims. Founded in 1974, FENB offers a wide range of financial services. The acquisition allowed the Company to expand its number of branches in  California. As of July 14, 2017, FENB operated nine branches in California, and a representative office in Beijing. The acquisition will be accounted for as a business combination, subject to the provisions of ASC 805-10-50, Business Combinations.

The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of the July 14, 2017 acquisition date. The assets acquired and liabilities assumed have been accounted for under the acquisition method of accounting. We have included the financial results of the business combinations in the condensed consolidated statement of income beginning on the acquisition date. The purchase accounting adjustments are preliminary and subject to finalization during the one-year measurement period from the date of the acquisition.

6

The fair value of the assets and the liabilities acquired as of July 14, 2017 are shown below:

  

SinoPac Bancorp

 

Assets acquired:

    

Cash and cash equivalents

 $166,932 

Short-term investments

  122,000 

Securities available-for-sale

  107,934 

Loans

  703,787 

Premises and equipment

  6,198 

Cash surrender value of life insurance

  46,083 

Deferred tax assets, net

  40,136 

Core deposit intangible

  7,144 

Accrued interest receivable and other assets

  9,134 

Total assets acquired

  1,209,348 
     

Liabilities assumed:

    

Deposits

  813,888 

Long-term debt

  30,000 

Accrued interest payable and other liabilities

  5,608 

Total liabilities assumed

  849,496 

Net assets acquired

 $359,852 
     
     

Cash paid

 $181,241 

Fair value of common stock issued

  34,862 

Total consideration paid

 $216,103 
     

Purchase price payable to SinoPac

  138,309 

Total consideration

 $354,412 

Gains on bargain purchase

 $5,440 

3

2.. Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordanceaccordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.2017. For further information, refer to the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.2016.

 

The preparation of the condensed consolidated financial statements in accordance with GAAP requires management of the Company to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. The Company expects that the most significant estimates subject to change are the allowance for loan losses, goodwill impairment, and other-than-temporary impairment.

 

 

4

3.. Recent Accounting Pronouncements

Accounting Standards adopted in 2017

In March 2016, the FASB issued ASU 2016-09, “Compensation Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” ASU 2016-09 changes aspects of the accounting for share-based payment award transactions, including: (1) accounting for income taxes; (2) classification of excess tax benefits on the statement of cash flows; (3) forfeitures; (4) minimum statutory tax withholding requirements; and (5) classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes. ASU 2016-09 became effective for interim and annual periods beginning on January 1, 2017. The method of adoption differs for each of the topics covered by the ASU. The Company elected to apply all topics covered by the ASU on a prospective basis and has elected to continue to estimate forfeitures expected to occur in determining the amount of compensation cost to be recognized each period.

Under ASU 2016-09, all excess tax benefits and tax deficiencies from share based payments are recognized as income tax expense or benefit in the income statement instead of the previous accounting which credited excess tax benefits to additional paid-in capital and tax deficiencies as a charge to income tax expense or as an offset to accumulated excess tax benefits, if any. Excess tax benefits or deficiencies are included in income tax expense as discrete items in the period in which they occur. For diluted earnings per share calculations, excess tax benefits are no longer included in assumed proceeds when determining average diluted shares outstanding under the treasury stock method. ASU 2016-09 resulted in a $2.6 million tax benefit from the distribution of restricted stock units in the nine months ended September 30, 2017.

Other Accounting Standards

In May 2014, the FASB issued ASU 2014-09,Revenue from Contracts with Customers (Topic 606).The new guidance replaces existing revenue recognition guidance for contracts to provide goods or services to customers and amends existing guidance related to recognition of gains and losses on the sale of certain nonfinancial assets such as real estate. ASU 2014-09 clarifies the principles for recognizing revenue and replaces nearly all existing revenue recognition guidance in U.S. GAAP. Quantitative and qualitative disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers are also required. ASU 2014-09 as amended by ASU 2015-14, ASU 2016-08, ASU 2016-10 and ASU 2016-12, is effective for interim and annual periods beginning after December 15, 2017 and is applied on either a modified retrospective or full retrospective basis. Early adoptionOur revenue is permitted for interimprimarily comprised of net interest income on financial assets and annual periods beginning after December 15, 2016. Adoptionfinancial liabilities, which is explicitly excluded from the scope of ASU 2014-09, and its subsequent amendments isnon-interest income. The Company has completed the assessment phase of implementing this new standard. In the assessment phase, the Company determined which revenue streams are within the scope and those that are excluded from the scope of the new standard. Based on this assessment, the Company concluded that substantially all of the Company's revenues are excluded from the scope of the new standard. For the revenues within the scope of the new standard, the Company concluded that there will not expected to havebe a significantmaterial impact onunder the Company’s Consolidated Financial Statements.new standard.

 

In January 2016, the FASB issued ASU 2016-01, “Financial InstrumentsOverall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” This update requires an entity to measure equity investments with readily determinable fair values at fair value with changes in fair value recognized in net income. Equity investment without readily determinable fair values will be measured at fair value either upon the occurrence of an observable price change or upon identification of an impairment and any amount by which the carrying value exceeding the fair value will be recognized as an impairment in net income. This update also requires an entity to disclose fair value of financial instruments measured at amortized cost on the balance sheet to measure that fair value using the exit price option. In addition, this update requires separate presentation in comprehensive income for changes in the fair value of a liability and in the balance sheet by measurement category and form of financial asset. ASU 2016-01 becomes effective for interim and annual periods beginning after December 15, 2017.  Adoption of ASU 2016-01The Company is not expected to have a significantcurrently evaluating the impact on the Company’sits consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02,Leases (Topic 842),which is intended to increase transparency and comparability in the accounting for lease transactions. ASU 2016-02 requires lessees to recognize all leases longer than twelve months on the Consolidated Balance Sheetconsolidated balance sheet as lease assets and lease liabilities and quantitative and qualitative disclosures regarding key information about leasing arrangements. Lessor accounting is largely unchanged. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years with an option to early adopt. ASU 2016-02 mandates a modified retrospective transition method for all entities. The Company is currently evaluating the impact onof ASU 2016-02 and has determined that the majority of our leases are operating leases. We expect, upon adoption, the Company will record a liability for the remaining obligation under the lease agreements and a corresponding right-of-use asset in its Consolidated Financial Statements.

In March 2016, the FASB issuedconsolidated financial statements. ASU 2016-06, “Derivatives and Hedging(Topic 815):Contingent Put and Call Options in Debt Instruments.” This update requires an entity to perform a four-step decision sequence when assessing whether contingent call or put options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. The four-step decision sequence is: the payoff is adjusted based on changes in an index; the payoff is indexed to an underlying other than interest rates or credit risk; the debt involves a substantial premium or discount; and the call or put option is contingently exercisable. ASU 2016-06 becomes2016-02 will be effective for interimus on January 1, 2019 and annual periodswill require transition using a modified retrospective approach for leases existing at, or entered into after, the beginning after December 15, 2016.  Adoption of ASU 2016-06 is not expected to have a significant impact on the Company’s consolidatedearliest comparative period presented in the financial statements.

 


In March 2016, the FASB issued ASU 2016-07, “Investments Equity Method and Joint Ventures(Topic323):Simplifying the Transition to the Equity Method of Accounting.” This update eliminates the requirement to retroactively adopt the equity method of accounting. It requires that an equity method investor add the cost of acquiring the additional interest to the current basis of the previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. The retroactive adjustment of the investment is no longer required. ASU 2016-07 becomes effective for interim and annual periods beginning after December 15, 2016.  Adoption of ASU 2016-07 is not expected to have a significant impact on the Company’s consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, “Compensation Stock Compensation(Topic718):Improvements to Employee Share-Based Payment Accounting.” This update simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 becomes effective for interim and annual periods beginning after December 15, 2016.  Adoption of ASU 2016-09 is not expected to have a significant impact on the Company’s consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses(Topic326) (Topic 326):Measurement of Credit Losses on Financial Instruments.”This update requires an entity to use a broader range of reasonable and supportable forecasts, in addition to historical experience and current conditions, to develop an expected credit loss estimate for financial assets and net investments that are not accounted for at fair value through net income. Credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses to the amount by which fair value is below amortized cost. ASU 2016-13 becomes effective for interim and annual periods beginning after December 15, 2019.  The Company is currently evaluatinghas designated a management team to evaluate ASU 2016-13 and develop an implementation strategy. The Company has not yet determined the effect of ASU 2016-13 on its accounting policies or the impact on the Company’s consolidated financial statements.

 

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments.”This update provides guidance on eight cash flow issues with the objective of reducing the existing diversity in practice related to debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, distributions received from equity method investees, beneficial interest in securitization transactions, separately identifiable cash flows and application of the predominance principle. The amendments reduce current and potential future diversity in practice. The amendments in this update apply to all entities that are required to present a statement of cash flows under Topic 230. ASU 2016-15 becomes effective for interim and annual periods beginning after December 15, 2017.The Company is currently evaluating the impact on its consolidated financial statements.

In October 2016, the FASB issued ASU 2016-16, “Income Taxes – Intra-Entity Transfers of Assets Other Than Inventory.” This update will allow the income tax consequences of intra-entity transfers of assets other than inventory when the transfer occurs. The amendments in this update are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. The Company is currently evaluating the impact on its consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows – Restricted Cash.” This update requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this update do not provide a definition of restricted cash or restricted cash equivalents. The amendments in this update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Adoption of ASU 2016-18 is not expected to have a significant impact on the Company’s consolidated financial statements.

 

In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805) – Clarifying the Definition of a Business.” This update clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. Under the current implementation guidance in Topic 805, there are three elements of a business—inputs, processes, and outputs. While an integrated set of assets and activities (collectively referred to as a “set”) that is a business usually has outputs, outputs are not required to be present. In addition, all the inputs and processes that a seller uses in operating a set are not required if market participants can acquire the set and continue to produce outputs, for example, by integrating the acquired set with their own inputs and processes. The amendments in this update also provide a screen to determine when a set is not a business. The amendments in this update affect all reporting entities that must determine whether they have acquired or sold a business. The amendments in this update are to be applied to annual periods beginning after December 15, 2017. Adoption of ASU 2017-01 is not expected to have a significant impact on the Company’s consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” This update simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Adoption of this update is on a prospective basis and the amendments in this update are to be applied to annual periods beginning after December 15, 2019. Adoption of ASU 2017-04 is not expected to have a significant impact on the Company’s consolidated financial statements.

In February 2017, the FASB issued ASU 2017-05, "Other Income—Gains and Losses from theDerecognition of Nonfinancial Assets (Subtopic 610-20):Clarifying the Scope of Asset Derecognition Guidanceand Accounting for Partial Sales of Nonfinancial Assets.” This update clarifies that a financial asset is within the scope of Subtopic 610-20 if it meets the definition of an in substance nonfinancial asset. The amendments define the term “in substance nonfinancial asset”, in part, as a financial asset promised to a counterparty in a contract if substantially all of the fair value of the assets (recognized and unrecognized) that are promised to the counterparty in the contract is concentrated in nonfinancial assets, then all of the financial assets promised to the counterparty are in substance nonfinancial assets with the scope of Subtopic 610-20. The amendments in this update clarify that an entity should identify each distinct nonfinancial asset or in substance nonfinancial asset promised to a counterparty and derecognize each asset when a counterparty obtains control of it. The amendments also clarify that an entity should allocate consideration to each distinct asset by applying the guidance in Topic 606 on allocating the transaction price to performance obligations. The amendments are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Adoption of ASU 2017-05 is not expected to have a significant impact on the Company’s consolidated financial statements.

 

In March 2017, the FASB issued ASU 2017-08, “Receivables- Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities.” This update amends the amortization period for certain purchased callable debt securities held at a premium. The amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. This update affects all entities that hold investments in callable debt securities that have an amortized cost basis in excess of the amount that is repayable by the issuer at the earliest call date. This update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently evaluating the impact on its consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, “Compensation Stock Compensation (Topic 718): Modification Accounting.The amendments in this update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The amendments in this update affect any entity that changes the terms or conditions of a share-based payment award. The amendments should be applied prospectively to an award modified on or after the adoption date. The amendments in this update are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Adoption of ASU 2017-09 is not expected to have a significant impact on the Company’s consolidated financial statements.

In July 2017, the FASB issued ASU 2017-11, “Earnings per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815)." There are two parts to this update. Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments that result in the strike price being reduced on the basis of the pricing of future equity offerings. Part II of this update addresses the difficulty in navigating topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests. The amendments in this update are effective for fiscal years beginning after December 15, 2020. Early adoption is permitted for all entities, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments in part I of this update should be applied in either of the following ways: (i) Retrospectively to outstanding financial instruments with a down round feature by means of a cumulative-effect adjustment to the statement of financial position as of the beginning of the first fiscal year and interim periods in which the pending content that links to this paragraph is effective; or (ii) Retrospectively to outstanding financial instruments with a down round feature for each prior reporting period presented in accordance with the guidance on accounting changes in paragraphs 250-10-45-5 through 45-10. The amendments to Part II of this update do not require any transition guidance because those amendments do not have an accounting effect. The Company is currently evaluating the impact on its consolidated financial statements.

In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815)”, targeted improvements to accounting for hedging activities. The amendments in this update better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. To meet that objective, the amendments expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early application is permitted in any interim period after issuance of the update. The Company is currently evaluating the impact on its consolidated financial statements.

54. Earnings per Share

 

Basic earnings per share excludesexcludes dilution and is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock and resulted in the issuance of common stock that then shared in earnings. Outstanding stock options with anti-dilutive effect were not included in the computation of diluted earnings per share. The following table sets forth earnings per common share calculations:

 

 

  

Three months ended September 30,

  

Nine months ended September 30,

 

(Dollars in thousands, except share and per share data)

 

2016

  

2015

  

2016

  

2015

 

Net income

 $46,090  $38,483  $127,084  $119,663 
                 

Weighted-average shares:

                

Basic weighted-average number of common shares outstanding

  78,865,860   81,475,288   79,147,839   80,422,711 

Dilutive effect of weighted-average outstanding common share equivalents

                

Warrants

  569,949   606,803   520,686   507,002 

Options

  95,850   123,910   90,461   124,135 

Restricted stock units

  165,410   79,477   143,860   51,343 

Diluted weighted-average number of common shares outstanding

  79,697,069   82,285,478   79,902,846   81,105,191 
                 

Average stock options and warrants with anti-dilutive effect

  207,183   760,291   247,974   1,082,400 

Earnings per common share:

                

Basic

 $0.58  $0.47  $1.61  $1.49 

Diluted

 $0.58  $0.47  $1.59  $1.48 

  

Three months ended September 30,

  

Nine months ended September 30,

 

(Dollars in thousands, except share and per share data)

 

2017

  

2016

  

2017

  

2016

 

Net income

 $49,746  $46,090  $150,102  $127,084 
                 

Weighted-average shares:

                

Basic weighted-average number of common shares outstanding

  80,665,398   78,865,860   80,073,249   79,147,839 

Dilutive effect of weighted-average outstanding common share equivalents

                

Warrants

  399,957   569,949   409,019   520,686 

Options

  19,221   95,850   25,706   90,461 

Restricted stock units

  320,278   165,410   289,205   143,860 

Diluted weighted-average number of common shares outstanding

  81,404,854   79,697,069   80,797,179   79,902,846 
                 

Average stock options and warrants with anti-dilutive effect

  0   207,183   6,561   247,974 

Earnings per common share:

                

Basic

 $0.62  $0.58  $1.87  $1.61 

Diluted

 $0.61  $0.58  $1.86  $1.59 

 

6

5. Stock-Based Compensation

 

Under the Company’s equity incentive plans, directors and eligible employees may be granted incentive or non-statutory stock options and/or restricted stock units, or awarded non-vested stock.As of September 30, 2016,2017, the only options granted by the Company were non-statutory stock options to selected Bank officers and non-employee directors at exercise prices equal to the fair market value of a share of the Company’s common stock on the date of grant. Such options have a maximum ten-year term and vest in 20% annual increments (subject to early termination in certain events) except certain options granted to the Chief Executive Officer of the Company in 2005 and 2008.. There were no options granted during the first nine months of 20162017 or 2015.2016.

 

Option compensation expense was zero for the three months and for the nine months ended September 30, 2016,2017, and September 30, 2015.2016. Stock-based compensation was fully recognized over the requisite service period for all awards. There were 2,11043,540 and 147,3502,110 stock option shares exercised in the nine months ended September 30, 20162017 and 2015,2016, respectively. The Company received $49,000 with$1.0 million from the exercise of stock options which had an aggregate intrinsic value of $9,000 from the exercise of stock options$607,000 during the nine months ended September 30, 20162017 compared to $3.4 million with$49,000 from the exercise of stock options which had an aggregate intrinsic value of $1.3 million$9,000 during the nine months ended September 30, 2015.2016. The table below summarizes stock option activity for the periods indicated:

 

  

Shares

  

Weighted-average

Exercise Price

  

Weighted-average

Remaining Contractual

Life (in years)

  

Aggregate

Intrinsic

Value (in thousands)

 
                 

Balance, December 31, 2015

  1,031,170  $31.27   0.9  $3,268 

Exercised

  (2,110)  23.37         

Forfeited

  (608,670)  36.46         

Balance, March 31, 2016

  420,390  $23.80   1.8  $2,026 

Forfeited

  (12,000)  38.26         

Balance, June 30, 2016

  408,390  $23.37   1.6  $1,973 

Exercised

  -   -         

Forfeited

  -   -         

Balance, September 30, 2016

  408,390  $23.37   1.4  $3,026 
                 

Exercisable, September 30, 2016

  408,390  $23.37   1.4  $3,026 


          

Weighted-average

  

Aggregate

 
      

Weighted-average

  

Remaining Contractual

  

Intrinsic

 
  

Shares

  

Exercise Price

  

Life (in years)

  

Value (in thousands)

 
                 

Balance, December 31, 2016

  82,670  $23.37   1.1  $1,211 

Exercised

  (18,040)  23.37         

Balance, March 31, 2017

  64,630  $23.37   0.9  $925 

Exercised

  (19,500)  23.37         

Balance, June 30, 2017

  45,130  $23.37   0.7  $658 

Exercised

  (6,000)  23.37         

Balance, September 30, 2017

  39,130  $23.37   0.4  $659 
                 

Exercisable, September 30, 2017

  39,130  $23.37   0.4  $659 

 

In addition to stock options, the Company also grants restricted stock units to eligible employees that vest subject to continued employment at the vesting dates.

 

The Company granted restricted stock units for 87,781 shares at an average closing price of $38.59 per share in the first nine months of 2017. The Company granted restricted stock units for 88,693 shares at an average closing price of $30.37 per share in the first nine months of 2016. The Company granted restricted stock units for 72,900 shares at an average closing price for $28.11 per share in the first nine months of 2015.

 

InStarting in December 2013, the Company granted performance share unit awards in which the number of units earned is calculated based on the relative total shareholder return (TSR) of the Company’s common stock as compared to the TSR of the KBW Regional Banking Index. In addition, the Company granted performance share unit awards in which the number of units earned is determined by comparison to the targeted earnings per share (EPS) as defined in the award for the 2014 to 2016 period. In December 2016, in addition to TSR and EPS awards, the Company granted performance share unit awards in which the number of units earned is determined by comparison to the targeted return of assets ROA as defined in the award for December 2016. Performance TSR, performance EPS, and performance ROA units awarded are scheduled to vest on December 31 of the third full year from the grant date. The Company granted performance TSR restricted stock units for 119,84030,319 shares in 2016, 61,209 shares in 2015 and 60,456 shares in 2014, performance EPS restricted stock units for 116,18658,241 shares were granted to eight executive officers in 2013. In December2016, 57,409 shares in 2015 and 57,642 shares in 2014, the Company granted additionaland performance TSRROA restricted stock units for 60,45629,119 shares and performance EPS restricted stock units for 57,642 sharesin 2016, to its seven executive officers. In February 2017, after approval by the Company’s Compensation Committee, 297,171 shares of the Company’s stock were distributed under the TSR and EPS grants awarded in December 2015,2013 under the Companyterms of the awards, including 76,623 shares granted additionaland distributed based on higher than target actual performance TSR restricted stock unitsand for 61,209 shares and performance EPS restricted stock units for 57,409 shares to seven executive officers. Bothcash dividends during the performance TSR and performance EPS units awarded are scheduled to vest three years from grant date.period.

 

The following table presents restricted stock unit activity during the nine months ended September 30, 2016:2017:

 

  

Units

 

Balance at December 31, 20152016

  542,375727,419 

Granted

  88,693164,404 

VestedDistributed

  (13,780297,905)

Forfeited

  (3,29010,424)

Balance at September 30, 20162017

  613,998583,494 

 

 

The compensationcompensation expense recorded for restricted stock units was $1.2$1.3 million for the three months ended September 30, 2016,2017, compared to $1.2 million in the same period a year ago. For the nine months ended September 30, 20162017 and 2015,2016, compensation expense recorded related to the restricted stock units was $3.3$3.9 million and $3.4$3.3 million, respectively. Unrecognized stock-based compensation expense related to restricted stock units was $6.9$9.1 million as of September 30, 2016,2017, and is expected to be recognized over the next 2.12.0 years.

 

As of September 30, 2016, 3,716,3792017, 3,465,411 shares were available under the Company’s 2005 Incentive Plan (as Amended and Restated) for future grants.

 

The following table summarizes the taxTax benefit (short-fall) from share-based payment arrangements:

  

Three months ended September 30,

  

Nine months ended September 30,

 

(Dollars in thousands)

 

2016

  

2015

  

2016

  

2015

 

Tax benefit/(short-fall) of tax deductions in excess of grant-date fair value

 $-  $17  $(3,366) $(5,602)

Benefit of tax deductions on grant-date fair value

  -   275   3,370   6,421 

Total benefit of tax deductions

 $-  $292  $4  $819 

The short-fall amount from share-based payment arrangements of $2.6 million reduced income tax expense in the first nine months of 2017 compared to a tax short-fall of $3.4 million that was charged againstto income tax expense. In addition, asexpense in the first nine months of September 30, 2016, $140,000 was offset against additional paid-in capital that resulted from previously realized excess tax benefits.2016.

 


7

6. Investment Securities

 

Investment securities were $1.30$1.4 billion as of September 30, 2016,2017, compared to $1.59$1.3 billion as of December 31, 2015.2016. The following tables reflect the amortized cost, gross unrealized gains, gross unrealized losses, and fair value of investment securities as of September 30, 2016,2017, and December 31, 2015:2016:

 

  

September 30, 2017

 
      

Gross

  

Gross

     
  

Amortized

  

Unrealized

  

Unrealized

     
  

Cost

  

Gains

  

Losses

  

Fair Value

 
  

(In thousands)

 

Securities Available-for-Sale

                

U.S. treasury securities

 $399,741  $-  $305  $399,436 

U.S. government agency entities

  9,679   27   6   9,700 

U.S. government sponsored entities

  400,000   -   6,278   393,722 

State and municipal securities

  1,943   -   12   1,931 

Mortgage-backed securities

  447,959   468   2,362   446,065 

Collateralized mortgage obligations

  1,715   -   5   1,710 

Corporate debt securities

  80,007   904   5   80,906 

Mutual funds

  6,500   -   229   6,271 

Preferred stock of government sponsored entities

  4,117   3,970   -   8,087 

Other equity securities

  13,294   7,463   98   20,659 

Total

 $1,364,955  $12,832  $9,300  $1,368,487 

 

  

September 30, 2016

 
      

Gross

  

Gross

     
  

Amortized

  

Unrealized

  

Unrealized

     
  

Cost

  

Gains

  

Losses

  

Fair Value

 
  

(In thousands)

 

Securities Available-for-Sale

                

U.S. treasury securities

 $389,921  $112  $24  $390,009 

U.S. government sponsored entities

  250,000   79   69   250,010 

Mortgage-backed securities

  556,454   7,186   2   563,638 

Collateralized mortgage obligations

  52   -   22   30 

Corporate debt securities

  74,962   444   937   74,469 

Mutual funds

  6,000   -   74   5,926 

Preferred stock of government sponsored entities

  2,811   565   188   3,188 

Other equity securities

  3,608   7,591   -   11,199 
                 

Total

 $1,283,808  $15,977  $1,316  $1,298,469 

 

December 31, 2015

  

December 31, 2016

 
     

Gross

  

Gross

          

Gross

  

Gross

     
 

Amortized

  

Unrealized

  

Unrealized

      

Amortized

  

Unrealized

  

Unrealized

     
 

Cost

  

Gains

  

Losses

  

Fair Value

  

Cost

  

Gains

  

Losses

  

Fair Value

 
 

(In thousands)

  

(In thousands)

 

Securities Available-for-Sale

                                

U.S. treasury securities

 $284,678  $5  $395  $284,288  $489,839  $35  $857  $489,017 

U.S. government sponsored entities

  150,000   -   1,840   148,160   400,000   -   9,669   390,331 

Mortgage-backed securities

  1,073,108   560   11,399   1,062,269   339,241   309   3,290   336,260 

Collateralized mortgage obligations

  63   -   27   36   48   -   20   28 

Corporate debt securities

  74,955   425   1,525   73,855   74,965   247   862   74,350 

Mutual funds

  6,000   -   167   5,833   6,500   -   270   6,230 

Preferred stock of government sponsored entities

  2,811   633   228   3,216   2,811   4,497   -   7,308 

Other equity securities

  4,108   4,929   342   8,695   3,608   7,213   -   10,821 

Total

 $1,595,723  $6,552  $15,923  $1,586,352  $1,317,012  $12,301  $14,968  $1,314,345 

 

 

The amortized cost and fair value of investment securities asas of September 30, 2016,2017, by contractual maturities, are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or repay obligations with or without call or repayment penalties.  

  

Securities Available-For-Sale

 
  

Amortized cost

  

Fair value

 
  

(In thousands)

 

Due in one year or less

 $415,782  $415,555 

Due after one year through five years

  465,328   459,924 

Due after five years through ten years

  8,658   8,647 

Due after ten years (1)

  475,187   484,361 

Total

 $1,364,955  $1,368,487 

 

 

  

Securities Available-For-Sale

 
  

Amortized cost

  

Fair value

 
  

(In thousands)

 

Due in one year or less

 $289,859  $289,923 

Due after one year through five years

  353,931   353,682 

Due after five years through ten years

  75,117   75,076 

Due after ten years(1)

  564,901   579,788 

Total

 $1,283,808  $1,298,469 

(1) Equity securities are reported in this category

 

There were no sales transactions of mortgage-backed  (1) Equity securities are reported in this category

during the first nine months of 2017. Proceeds of $415.3 million were received from the sales transactions of mortgage-backed securities during the first nine months of 2016. Proceeds of $648.0 million were received from the sale of mortgage-backed securities during the first nine months of 2015. Proceeds from repayments, maturities and calls of mortgage-backed securities were $125.3$48.5 million and $67.3$125.3 million for the nine months ended September 30, 2017 and 2016, and 2015, respectively. Proceeds of $99.5 million were received from the sale of other investment securities during the nine months ended September 30, 2017. There were no sales transactions of other investment securities during the nine months ended September 30, 2016. Proceeds of $385.2 million were received from the sale of other investment securities during the nine months ended September 30, 2015. Proceeds from maturities and calls of other investment securities were $460.0$341.3 million during the nine months ended September 30, 20162017 compared to $165.0$460.0 million during the same period a year ago. GainsDuring the nine months ended September 30, 2017, $439,000 of $3.3 million and zero losses were realized on sales of investment securities in addition to a permanentsecurities. Other than temporary impairment write-downwrite-downs of zero and $206,000 that waswere recorded during the first nine months ended September 30,of 2017 and 2016, compared to gains of $2.4 million and losses of $1.9 million realized during the same period a year ago.respectively.


 

The tablestables below show the fair value and unrealized losses of the temporarily impaired securities in our investment securities portfolio as of September 30, 2016,2017, and December 31, 2015:2016:

 

  

September 30, 2017

 
  

Temporarily impaired securities

 
    
  

Less than 12 months

  

12 months or longer

  

Total

 
  

Fair

  

Unrealized

  

Fair

  

Unrealized

  

Fair

  

Unrealized

 
  

Value

  

Losses

  

Value

  

Losses

  

Value

  

Losses

 
  

(In thousands)

 
                         

Securities Available-for-Sale

                        

U.S. treasury securities

 $339,707  $46  $49,729  $259  $389,436  $305 

U.S. government sponsored entities

  395,774   6,284   -   -   395,774   6,284 

State and municipal securities

  1,931   12   -   -   1,931   12 

Mortgage-backed securities

  359,112   2,359   122   3   359,234   2,362 

Collateralized mortgage obligations

  1,710   5   -   -   1,710   5 

Corporate debt securities

  5,029   5   -   -   5,029   5 

Mutual funds

  -   -   6,271   229   6,271   229 

Other equity securities

  4,680   98   -   -   4,680   98 

Total

 $1,107,943  $8,809  $56,122  $491  $1,164,065  $9,300 

 

  

September 30, 2016

 
  

Temporarily impaired securities

 
                         
  

Less than 12 months

  

12 months or longer

  

Total

 
  

Fair

  

Unrealized

  

Fair

  

Unrealized

  

Fair

  

Unrealized

 
  

Value

  

Losses

  

Value

  

Losses

  

Value

  

Losses

 
  

(in thousands)

 
                         

Securities Available-for-Sale

                        

U.S. treasury securities

 $149,983  $24  $-  $-  $149,983  $24 

U.S. government sponsored entities

  149,931   69   -   -   149,931   69 

Mortgage-backed securities

  44   1   265   1   309   2 

Collateralized mortgage obligations

  -   -   30   22   30   22 

Corporate debt securities

  -   -   54,063   937   54,063   937 

Mutual funds

  -   -   5,926   74   5,926   74 

Preferred stock of government sponsored entities

  2,528   188   -   -   2,528   188 
                         

Total

 $302,486  $282  $60,284  $1,034  $362,770  $1,316 
15

 


 

December 31, 2015

  

December 31, 2016

 
 

Temporarily impaired securities

  

Temporarily impaired securities

 
                           
 

Less than 12 months

  

12 months or longer

  

Total

  

Less than 12 months

  

12 months or longer

  

Total

 
 

Fair

  

Unrealized

  

Fair

  

Unrealized

  

Fair

  

Unrealized

  

Fair

  

Unrealized

  

Fair

  

Unrealized

  

Fair

  

Unrealized

 
 

Value

  

Losses

  

Value

  

Losses

  

Value

  

Losses

  

Value

  

Losses

  

Value

  

Losses

  

Value

  

Losses

 
 

(in thousands)

  

(In thousands)

 
                                                

Securities Available-for-Sale

                                                

U.S. treasury securities

 $224,289  $395  $-  $-  $224,289  $395  $299,088  $857  $-  $-  $299,088  $857 

U.S. government sponsored entities

  148,160   1,840   -   -   148,160   1,840   390,331   9,669   -   -   390,331   9,669 

Mortgage-backed securities

  1,025,342   11,398   6   1   1,025,348   11,399   328,236   3,288   62   2   328,298   3,290 

Collateralized mortgage obligations

  -   -   36   27   36   27   -   -   28   20   28   20 

Corporate debt securities

  9,950   50   43,525   1,475   53,475   1,525   -   -   29,138   862   29,138   862 

Mutual funds

  -   -   5,833   167   5,833   167   -   -   6,230   270   6,230   270 

Preferred stock of government sponsored entities

  2,488   228   -   -   2,488   228 

Other equity securities

  158   342   -   -   158   342 

Total

 $1,410,387  $14,253  $49,400  $1,670  $1,459,787  $15,923  $1,017,655  $13,814  $35,458  $1,154  $1,053,113  $14,968 

 

AsAs of September 30, 2016,2017, the Company had unrealized losses on available-for-sale securities of $1.3$9.3 million. The unrealized losses on these securities were primarily attributed to yield curve movement, together with the widened liquidity spreadspreads and credit spread.spreads. The issuers have not, to the Company’s knowledge, established any cause for default on these securities. Management believes the impairment was temporary and, accordingly, no impairment loss on these securities has been recognized in our condensed consolidated statements of operations. The Company expects to recover the amortized cost basis of its debt securities, and has no intent to sell and will not be required to sell available-for-sale debt securities that have declined below their cost before their anticipated recovery.

 

Investment securities having a carrying value of $505.9$291.4 million as of September 30, 2016,2017, and $449.6$649.1 million as of December 31, 2015,2016, were pledged to secure public deposits, other borrowings, treasury tax and loan, and securities sold under agreements to repurchase. 

 

 

8.

7. Loans

 

Most of the Company’sCompany’s business activity isactivities are with Asian customers located in the predominately Asian-populated areas of Southern and Northern California; New York City, New York; HoustonDallas and Dallas,Houston, Texas; Seattle, Washington; Boston, Massachusetts; Chicago, Illinois; Edison, New Jersey; Rockville, Maryland; Las Vegas, Nevada, and Hong Kong. The Company has no specific industry concentration, and generally its loans are secured by real property or other collateral of the borrowers. Loans are generally expected to be paid off from the operating profits of the borrowers, from refinancing by other lenders, or through sale by the borrowers of the secured collateral.

 

The types of loans in the Company’s condensed consolidated balance sheets as of September 30, 2016,2017, and December 31, 2015,2016, were as follows:

 

 

September 30, 2016

  

December 31, 2015

  

September 30, 2017

  

December 31, 2016

 
 

(in thousands)

  

(In thousands)

 

Commercial loans

 $2,248,996  $2,316,863  $2,419,891  $2,248,187 

Residential mortgage loans

  2,329,402   1,932,355   2,922,537   2,444,048 

Commercial mortgage loans

  5,743,991   5,301,218   6,377,047   5,785,248 

Real estate construction loans

  515,236   441,543   691,486   548,088 

Equity lines

  170,022   168,980   181,751   171,711 

Installment & other loans

  2,810   2,493   4,722   3,993 

Gross loans

 $11,010,457  $10,163,452  $12,597,434  $11,201,275 

Allowance for loan losses

  (117,942)  (138,963)  (121,535)  (118,966)

Unamortized deferred loan fees

  (5,519)  (8,262)  (3,424)  (4,994)

Total loans, net

 $10,886,996  $10,016,227  $12,472,475  $11,077,315 

Loans held for sale

 $4,750  $6,676  $-  $7,500 

 

 

AsAs of September 30, 2016,2017, recorded investment in impaired loans totaled $130.9$127.7 million and was comprised of non-accrual loans, excluding loans held for sale, of $44.4$65.3 million and accruing troubled debt restructured loans (TDRs) of $86.6$62.4 million. As of December 31, 2015,2016, recorded investment in impaired loans totaled $133.8$115.1 million and was comprised of non-accrual loans, excluding loans held for sale, of $52.1$49.7 million and accruing TDRs of $81.7$65.4 million. For impaired loans, the amounts previously charged off represent 7.7%7.1% as of September 30, 2016,2017, and 22.4%8.4% as of December 31, 2015,2016, of the contractual balances for impaired loans.

 

The following table presents the average balance and interest income recognized related to impaired loans for the periods indicated:

 

 

Impaired Loans

  

Impaired Loans

 
 

Average Recorded Investment

  

Interest Income Recognized

  

Average Recorded Investment

  

Interest Income Recognized

 
 

Three months ended

  

Nine months ended

  

Three months ended

  

Nine months ended

  

Three months ended

  

Nine months ended

  

Three months ended

  

Nine months ended

 
 

September 30,

  

September 30,

  

September 30,

  

September 30,

  

September 30,

  

September 30,

  

September 30,

  

September 30,

 
 

2016

  

2015

  

2016

  

2015

  

2016

  

2015

  

2016

  

2015

  

2017

  

2016

  

2017

  

2016

  

2017

  

2016

  

2017

  

2016

 
 (In thousands)          (In thousands)         

Commercial loans

 $28,091  $23,894  $18,602  $24,974  $170  $170  $488  $519  $24,987  $28,091  $22,572  $18,602  $678  $170  $760  $488 

Real estate construction loans

  5,869   22,392   12,005   22,056   66   66   196   196   29,780   5,869   29,868   12,005   99   66   287   196 

Commercial mortgage loans

  81,005   97,557   86,456   104,508   776   777   2,124   2,126   58,555   81,005   60,074   86,456   391   776   1,015   2,124 

Residential mortgage loans and equity lines

  18,256   16,506   17,456   16,934   148   139   401   380   13,937   18,256   15,208   17,456   96   148   287   401 

Total impaired loans

 $133,221  $160,349  $134,519  $168,472  $1,160  $1,152  $3,209  $3,221  $127,259  $133,221  $127,722  $134,519  $1,264  $1,160  $2,349  $3,209 

 

 

The following table presentspresents impaired loans and the related allowance for loan losses as of the dates indicated:

 

 

Impaired Loans

 
 

Impaired Loans

  

September 30, 2017

  

December 31, 2016

 
 

September 30, 2016

  December 31, 2015              
 

Unpaid

Principal

Balance

  

Recorded

Investment

  

Allowance

  

Unpaid

Principal

Balance

  

Recorded

Investment

  

Allowance

  

Unpaid

Principal

Balance

  

Recorded Investment

  

Allowance

  

Unpaid

Principal

Balance

  

Recorded Investment

  

Allowance

 
 

(In thousands)

  

(In thousands)

 
                                                

With no allocated allowance

                                                

Commercial loans

 $29,794  $29,414  $-  $15,493  $6,721  $-  $23,953  $23,373  $-  $24,037  $23,121  $- 

Real estate construction loans

  5,776   5,507   -   51,290   22,002   -   22,309   21,748   -   5,776   5,458   - 

Commercial mortgage loans

  72,319   64,298   -   59,954   54,625   -   39,154   32,370   -   60,522   54,453   - 

Residential mortgage loans and equity lines

  4,832   4,675   -   3,233   3,026   -   2,264   2,264   -   5,472   5,310   - 

Subtotal

 $112,721  $103,894  $-  $129,970  $86,374  $-  $87,680  $79,755  $-  $95,807  $88,342  $- 

With allocated allowance

                                                

Commercial loans

 $3,315  $3,217  $1,320  $7,757  $6,847  $530  $14,082  $13,985  $1,461  $5,216  $4,640  $1,827 

Commercial mortgage loans

  10,425   10,289   1,248   28,258   27,152   6,792   23,061   22,820   823   10,158   10,017   573 

Residential mortgage loans and equity lines

  14,637   13,514   375   14,383   13,437   427   12,461   11,111   322   13,263   12,075   396 

Subtotal

 $28,377  $27,020  $2,943  $50,398  $47,436  $7,749  $49,604  $47,916  $2,606  $28,637  $26,732  $2,796 

Total impaired loans

 $141,098  $130,914  $2,943  $180,368  $133,810  $7,749  $137,284  $127,671  $2,606  $124,444  $115,074  $2,796 

 

 

The following tablestables present the aging of the loan portfolio by type as of September 30, 2016,2017, and as of December 31, 2015:2016:

 

  

September 30, 2017

 
  

30-59 Days

Past Due

  

60-89 Days

Past Due

  

90 Days or More Past

Due

  

Non-accrual Loans

  

Total

Past Due

  

Loans Not

Past Due

  

Total

 

Type of Loans:

 

(In thousands)

 

Commercial loans

 $8,412  $14,855  $3,900  $15,942  $43,109  $2,376,782  $2,419,891 

Real estate construction loans

  -   -   -   14,267   14,267   677,219   691,486 

Commercial mortgage loans

  -   -   -   28,379   28,379   6,348,668   6,377,047 

Residential mortgage loans and equity lines

  -   89   -   6,725   6,814   3,097,474   3,104,288 

Installment and other loans

  -   -   -   -   -   4,722   4,722 

Total loans

 $8,412  $14,944  $3,900  $65,313  $92,569  $12,504,865  $12,597,434 

 

  

September 30, 2016

 
  

30-59 Days

Past Due

  

60-89 Days

Past Due

  

90 Days or

More Past

Due

  

Non-accrual

Loans

  

Total PastDue

  

Loans Not Past

Due

  

Total

 
  

(In thousands)

 
    
Type of Loans:                            

Commercial loans

 $45,409  $6,807  $-  $9,251  $61,467  $2,187,529  $2,248,996 

Real estate construction loans

  -   -   -   5,507   5,507   509,729   515,236 

Commercial mortgage loans

  12,949   12,205   -   21,077   46,231   5,697,760   5,743,991 

Residential mortgage loans and equity lines

  -   477   -   8,524   9,001   2,490,423   2,499,424 

Installment and other loans

  -   -   -   -   -   2,810   2,810 

Total loans

 $58,358  $19,489  $-  $44,359  $122,206  $10,888,251  $11,010,457 

  

December 31, 2015

 
  

30-59 Days

Past Due

  

60-89 Days

Past Due

  

90 Days or More

Past Due

  

Non-accrual

Loans

  

Total PastDue

  

Loans Not Past

Due

  

Total

 
  

(In thousands)

 
    
Type of Loans:                            

Commercial loans

 $8,367  $221  $-  $3,545  $12,133  $2,304,730  $2,316,863 

Real estate construction loans

  7,285   -   -   16,306   23,591   417,952   441,543 

Commercial mortgage loans

  2,243   2,223   -   25,231   29,697   5,271,521   5,301,218 

Residential mortgage loans and equity lines

  4,959   1,038   -   7,048   13,045   2,088,290   2,101,335 

Installment and other loans

  -   -   -   -   -   2,493   2,493 

Total loans

 $22,854  $3,482  $-  $52,130  $78,466  $10,084,986  $10,163,452 

  

December 31, 2016

 
  

30-59 Days

Past Due

  

60-89 Days

Past Due

  

90 Days or More Past

Due

  

Non-accrual Loans

  

Total

Past Due

  

Loans Not

Past Due

  

Total

 

Type of Loans:

 

(In thousands)

 

Commercial loans

 $22,753  $27,190  $-  $15,710  $65,653  $2,182,534  $2,248,187 

Real estate construction loans

  10,390   5,835   -   5,458   21,683   526,405   548,088 

Commercial mortgage loans

  5,886   700   -   20,078   26,664   5,758,584   5,785,248 

Residential mortgage loans and equity lines

  4,390   -   -   8,436   12,826   2,602,933   2,615,759 

Installment and other loans

  -   -   -   -   -   3,993   3,993 

Total loans

 $43,419  $33,725  $-  $49,682  $126,826  $11,074,449  $11,201,275 

 

The determination of the amount of the allowance for loan losses for impaired loans 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 loan losses. The nature of the process by which the Bank determines the appropriate allowance for loan losses requires the exercise of considerable judgment. This allowance evaluation process is also applied to troubled debt restructurings since they are considered to be impaired loans.

 

 

A troubled debt restructuring is a formal modification of the terms of a loan when the lender, for economiceconomic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower it would not otherwise consider.borrower. The concessions may be granted in various forms, including a change in the stated interest rate, a reduction in the loan balance or accrued interest, or an extension of the maturity date that causes significant delay in payment.

 

TDRsTDRs on accrual status are comprised of the loans that have, pursuant to the Bank’s policy, performed under the restructured terms and have demonstrated sustained performance under the modified terms for six months 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.

 

As of September 30, 2016,2017, accruing TDRs were $86.6$62.4 million and non-accrual TDRs were $20.9$33.7 million compared to accruing TDRs of $81.7$65.4 million and non-accrual TDRs of $39.9$29.7 million as of December 31, 2015.2016. The Company allocated specific reserves of $1.3$1.1 million to accruing TDRs and $0.3 million$143,000 to non-accrual TDRs as of September 30, 2016,2017, and $2.0$1.3 million to accruing TDRs and $5.4$1.1 million to non-accrual TDRs as of December 31, 2015.The2016. The following tables present TDRs that were modified during the three and nine months ended September 30, 20162017 and 2015,2016, their specific reserves as of September 30, 2017 and 2016, and 2015 and charge-offsforthecharge-offs for the three and nine months ended September 30, 20162017 and 2015:2016:

  

Three months ended September 30, 2017

  

September 30, 2017

 
  

No. of Contracts

  

Pre-Modification Outstanding Recorded Investment

  

Post-Modification Outstanding Recorded Investment

  

Charge-offs

  

Specific Reserve

 
  

(Dollars in thousands)

 
                     

Commercial loans

  8  $18,873  $18,873  $-  $636 

Commercial mortgage loans

  5   4,123   3,818   305   10 

Residential mortgage loans and equity lines

  1   483   483   -   32 

Total

  14  $23,479  $23,174  $305  $678 

  

Three months ended September 30, 2016

  

September 30, 2016

 
  

No. of Contracts

  

Pre-Modification Outstanding Recorded Investment

  

Post-Modification Outstanding Recorded Investment

  

Charge-offs

  

Specific Reserve

 
  

(Dollars in thousands)

 
                     

Commercial loans

  7  $18,258  $18,258  $-  $208 

Commercial mortgage loans

  1   738   738   -   - 

Total

  8  $18,996  $18,996  $-  $208 

  

Nine months ended September 30, 2017

  

September 30, 2017

 
  

No. of Contracts

  

Pre-Modification Outstanding Recorded Investment

  

Post-Modification Outstanding Recorded Investment

  

Charge-offs

  

Specific Reserve

 
  

(Dollars in thousands)

 
                     

Commercial loans

  13  $19,543  $19,543  $-  $641 

Real estate construction loans

  2   28,489   28,489   -   - 

Commercial mortgage loans

  5   4,123   3,818   305   10 

Residential mortgage loans and equity lines

  1   483   483   -   32 

Total

  21  $52,638  $52,333  $305  $683 

 

 

  

Three months ended September 30, 2016

  

September 30, 2016

 
  

No. of

Contracts

  

Pre-Modification

OutstandingRecorded

Investment

  

Post-Modification

Outstanding Recorded

Investment

  

Charge-offs

  

Specific Reserve

 
  

(Dollars in thousands)

     
                     

Commercial loans

  7  $18,258  $18,258  $-  $208 

Commercial mortgage loans

  1   738   738   -   - 

Total

  8  $18,996  $18,996  $-  $208 

  

Three months ended September 30, 2015

  

September 30, 2015

 
  

No. of Contracts

  

Pre-Modification

Outstanding Recorded

Investment

  

Post-Modification

Outstanding Recorded

Investment

  

Charge-offs

  

Specific Reserve

 
  

(Dollars in thousands)

     
                     

Commercial loans

  2  $306  $306  $-  $1 

Commercial mortgage loans

  15   1,918   1,918   -   - 

Total

  17  $2,224  $2,224  $-  $1 


  

Nine months ended September 30, 2016

  

September 30, 2016

 
  

No. of Contracts

  

Pre-Modification

Outstanding Recorded

Investment

  

Post-Modification

Outstanding Recorded

Investment

  

Charge-offs

  

Specific Reserve

 
  

(Dollars in thousands)

     
                     

Commercial loans

  11  $23,102  $23,102  $-  $222 

Commercial mortgage loans

  1   738   738   -   - 

Residential mortgage loans and equity lines

  2   367   367   -   - 

Total

  14  $24,207  $24,207  $-  $222 

 

Nine months ended September 30, 2015

  

September 30, 2015

  

Nine months ended September 30, 2016

  

September 30, 2016

 
 

No. ofContracts

  

Pre-Modification

Outstanding Recorded

Investment

  

Post-Modification

Outstanding Recorded

Investment

  

Charge-offs

  

Specific Reserve

  

No. of Contracts

  

Pre-Modification Outstanding Recorded Investment

  

Post-Modification Outstanding Recorded Investment

  

Charge-offs

  

Specific Reserve

 
 

(Dollars in thousands)

      

(Dollars in thousands)

 
                                        

Commercial loans

  3  $1,156  $1,156  $-  $1   11  $23,102  $23,102  $-  $222 

Commercial mortgage loans

  19   16,329   16,329   -   38   1   738   738   -   - 

Residential mortgage loans and equity lines

  5   1,522   1,374   148   45   2   367   367   -   - 

Total

  27  $19,007  $18,859  $148  $84   14  $24,207  $24,207  $-  $222 

 

Modifications of the loan terms during the first nine months of 20162017 were in the form of changes in the stated interest rate, extensions of maturity dates, and/or reductions in monthly payment amounts.dates. The length of time for which modifications involving a reductionextensions of the stated interest rate or changes in payment terms that were documentedmaturity dates ranged from three to tentwelve months from the modification date. 

 

We expect that the TDRsTDRs on accruing status as of September 30, 2016,2017, which were all performing in accordance with their restructured terms, will continue to comply with the restructured terms because of the reduced principal or interest payments on these loans.  A summary of TDRs by type of concession and by type of loan, as of September 30, 2016,2017, and December 31, 2015,2016, is shown below:

 

  

September 30, 2016

 

Accruing TDRs

 

Payment

Deferral

  

Rate

Reduction

  

Rate Reduction

and Payment

Deferral

  

Total

 
  

(In thousands)

     

Commercial loans

 $22,019  $-  $1,360  $23,379 

Commercial mortgage loans

  26,835   5,986   20,690   53,511 

Residential mortgage loans

  5,048   989   3,628   9,665 

Total accruing TDRs

 $53,902  $6,975  $25,678  $86,555 

 


  

September 30, 2016

 
          
          

Non-accrual TDRs

 

Payment

Deferral

  

Rate Reduction

and Payment

Deferral

  

Total

 
  

(In thousands)

 

Commercial loans

 $3,477  $90  $3,567 

Commercial mortgage loans

  1,508   15,260   16,768 

Residential mortgage loans

  364   171   535 

Total non-accrual TDRs

 $5,349  $15,521  $20,870 

 

December 31, 2015

 
            
             

September 30, 2017

 

Accruing TDRs

 

Payment

Deferral

  

Rate

Reduction

  

Rate Reduction

and Payment

Deferral

  

Total

  

Payment

Deferral

  

Rate

Reduction

  

 

Rate Reduction

and Payment Deferral

  

Total

 
 (In thousands)  

(In thousands)

 

Commercial loans

 $8,298  $-  $1,726  $10,024  $21,416  $-  $-  $21,416 

Real estate construction loans

  -   -   5,696   5,696   7,480   -   -   7,480 

Commercial mortgage loans

  16,701   6,045   33,800   56,546   16,130   5,895   4,787   26,812 

Residential mortgage loans

  5,201   999   3,214   9,414   3,516   337   2,797   6,650 

Total accruing TDRs

 $30,200  $7,044  $44,436  $81,680  $48,542  $6,232  $7,584  $62,358 

 

 

 

December 31, 2015

 
         
          

September 30, 2017

 

Non-accrual TDRs

 

Payment

Deferral

  

Rate Reductionand

PaymentDeferral

  

Total

  

Payment

Deferral

  

Rate

Reduction

  

 

Rate Reduction

and Payment

Deferral

  

Total

 
 

(In thousands)

  

(In thousands)

 

Commercial loans

 $1,033  $90  $1,123  $13,259  $-  $-  $13,259 

Real estate construction loans

  9,981   5,825   15,806 

Commercial mortgage loans

  1,544   20,362   21,906   1,347   1,706   16,508   19,561 

Residential mortgage loans

  388   700   1,088   714   -   157   871 

Total non-accrual TDRs

 $12,946  $26,977  $39,923  $15,320  $1,706  $16,665  $33,691 

 

  

December 31, 2016

 

Accruing TDRs

 

Payment

Deferral

  

Rate

Reduction

  

 

Rate Reduction

and Payment Deferral

  

Total

 
  

(In thousands)

 

Commercial loans

 $7,971  $-  $4,081  $12,052 

Commercial mortgage loans

  25,979   5,961   12,452   44,392 

Residential mortgage loans

  5,104   789   3,056   8,949 

Total accruing TDRs

 $39,054  $6,750  $19,589  $65,393 

  

December 31, 2016

 

Non-accrual TDRs

 

Payment

Deferral

  

Rate

Reduction

  

 

Rate Reduction

and Payment

Deferral

  

Total

 
  

(In thousands)

 

Commercial loans

 $14,565  $-  $-  $14,565 

Commercial mortgage loans

  2,510   1,795   10,328   14,633 

Residential mortgage loans

  356   -   168   524 

Total non-accrual TDRs

 $17,431  $1,795  $10,496  $29,722 

 

The activity within our TDRsTDRs for the periods indicated areis shown below:

 

 

 

Three months ended September 30,

  

Nine months ended September 30,

  

Three months ended September 30,

  

Nine months ended September 30,

 

Accruing TDRs

 

2016

  

2015

  

2016

  

2015

  

2017

  

2016

  

2017

  

2016

 
 

(In thousands)

  

(In thousands)

 

Beginning balance

 $74,708  $100,011  $81,680  $104,355  $79,819  $74,708  $65,393  $81,680 

New restructurings

  18,347   427   20,412   16,853   21,790   18,347   49,973   20,412 

Restructured loans restored to accrual status

  -   723   10,303   723   -   -   -   10,303 

Charge-offs

  -   -   -   (148)

Payments

  (6,500)  (11,280)  (9,816)  (21,714)  (35,677)  (6,500)  (41,372)  (9,816)

Restructured loans placed on non-accrual status

  -   -   (1,138)  (10,188)  (3,574)  -   (9,396)  (1,138)

Expiration of loan concession upon renewal

  -   -   (14,886)  -   -   -   (2,240)  (14,886)

Ending balance

 $86,555  $89,881  $86,555  $89,881  $62,358  $86,555  $62,358  $86,555 

  

Three months ended September 30,

  

Nine months ended September 30,

 

Non-accrual TDRs

 

2017

  

2016

  

2017

  

2016

 
  

(In thousands)

 

Beginning balance

 $30,045  $25,442  $29,722  $39,923 

New restructurings

  2,360   649   2,360   3,794 

Restructured loans placed on non-accrual status

  3,574   -   9,396   1,138 

Charge-offs

  (355)  (3,407)  (1,901)  (4,352)

Payments

  (1,933)  (1,814)  (5,160)  (9,330)

Foreclosures

  -   -   (726)  - 

Restructured loans restored to accrual status

  -   -   -   (10,303)

Ending balance

 $33,691  $20,870  $33,691  $20,870 

 

  

Three months ended September 30,

  

Nine months ended September 30,

 

Non-accrual TDRs

 

2016

  

2015

  

2016

  

2015

 
  

(In thousands)

 

Beginning balance

 $25,442  $42,595  $39,923  $41,618 

New restructurings

  649   1,796   3,794   2,006 

Restructured loans placed on non-accrual status

  -   -   1,138   10,188 

Charge-offs

  (3,407)  (3)  (4,352)  (3,246)

Payments

  (1,814)  (1,859)  (9,330)  (8,037)

Restructured loans restored to accrual status

  -   (723)  (10,303)  (723)

Ending balance

 $20,870  $41,806  $20,870  $41,806 

AThe Company considers a loan is considered to be in payment default once it is 60 to 90 days contractually past due under the modified terms.  The Company did not have any loans that were modified as a TDR duringOne commercial loan of $50,000 with charge-offs of $2.1 million had payment defaults within the previous twelve months and which subsequently defaulted as ofended September 30, 2016.2017.

 

Under the Company’sCompany’s internal underwriting policy, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification in order to determine whether a borrower is experiencing financial difficulty.

 

As of September 30, 2016,2017, 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.

 

As part of the on-going monitoring of the credit quality of our loan portfolio, the Company utilizes a risk grading matrix to assign a risk grade to each loan. The risk rating categories can be generally described by the following grouping for non-homogeneous loans: 

 

Pass/Watch – These loans range from minimal credit risk to lower than average, but still acceptable, credit risk.

 

Special Mention Borrower is fundamentally sound and loan is currently protected but adverse trends are apparent that, if not corrected, may affect ability to repay. Primary source of loan repayment remains viable but there is increasing reliance on collateral or guarantor support.

 

Substandard These loans are inadequately protected by current sound net worth, paying capacity, or collateral. Well-defined weaknesses exist that could jeopardize repayment of debt. Loss may not be imminent, but if weaknesses are not corrected, there is a good possibility of some loss.

 


Doubtful –The possibility of loss is extremely high, but due to identifiable and important pending events (which may strengthen the loan), a loss classification is deferred until the situation is better defined.

 

Loss –These loans are considered uncollectible and of such little value that to continue to carry the loan as an active asset is no longer warranted.

 

The following tablestables present the loan portfolio by risk rating as of September 30, 2016,2017, and as of December 31, 2015:2016:

  

September 30, 2017

 
  

Pass/Watch

  

Special Mention

  

Substandard

  

Doubtful

  

Total

 
  

(In thousands)

 

Commercial loans

 $2,216,816  $146,479  $56,565  $31  $2,419,891 

Real estate construction loans

  604,363   65,375   21,748   -   691,486 

Commercial mortgage loans

  5,904,023   305,927   167,097   -   6,377,047 

Residential mortgage loans and equity lines

  3,064,118   31,858   8,312   -   3,104,288 

Installment and other loans

  4,722   -   -   -   4,722 

Total gross loans

 $11,794,042  $549,639  $253,722  $31  $12,597,434 
                     

Loans held for sale

 $-  $-  $-  $-  $- 

 

 

  

September 30, 2016

 
  

Pass/Watch

  

Special Mention

  

Substandard

  

Doubtful

  

Total

 
  (In thousands) 

Commercial loans

 $2,027,815  $133,858  $86,806  $517  $2,248,996 

Real estate construction loans

  489,473   20,256   5,507   -   515,236 

Commercial mortgage loans

  5,391,701   219,081   133,209   -   5,743,991 

Residential mortgage loans and equity lines

  2,488,495   391   10,538   -   2,499,424 

Installment and other loans

  2,810   -   -   -   2,810 

Total gross loans

 $10,400,294  $373,586  $236,060  $517  $11,010,457 
                     

Loans held for sale

 $-  $-  $-  $4,750  $4,750 

 

December 31, 2015

  

December 31, 2016

 
 

Pass/Watch

  

Special Mention

  

Substandard

  

Doubtful

  

Total

  

Pass/Watch

  

Special Mention

  

Substandard

  

Doubtful

  

Total

 
 (In thousands)  

(In thousands)

 

Commercial loans

 $2,143,270  $110,338  $61,297  $1,958  $2,316,863  $2,023,114  $140,682  $84,293  $98  $2,248,187 

Real estate construction loans

  413,765   5,776   21,502   500   441,543   469,909   44,129   34,050   -   548,088 

Commercial mortgage loans

  5,018,199   155,553   118,196   9,270   5,301,218   5,410,623   250,221   124,404   -   5,785,248 

Residential mortgage loans and equity lines

  2,091,434   399   9,502   -   2,101,335   2,605,834   -   9,925   -   2,615,759 

Installment and other loans

  2,493   -   -   -   2,493   3,993   -   -   -   3,993 

Total gross loans

 $9,669,161  $272,066  $210,497  $11,728  $10,163,452  $10,513,473  $435,032  $252,672  $98  $11,201,275 
                                        

Loans held for sale

 $732  $-  $5,944  $-  $6,676  $-  $-  $7,500  $-  $7,500 

 

 

The allowance for loan losses and the reserve for off-balance sheet credit commitments are significant estimates that can and do change based on management’smanagement’s process in analyzing the loan portfolio and on management’s assumptions about specific borrowers, underlying collateral, and applicable economic and environmental conditions, among other factors.

 

The following table presents the balance in the allowance for loan losses by portfolio segment and based on impairment method as of September 30, 2016,2017, and as of December 31, 2015:2016:

 

 

Commercial

Loans

  

Real Estate

Construction

Loans

  

Commercial

Mortgage

Loans

  

Residential

Mortgage Loans and Equity Lines

  

Installment and

Other Loans

  

Total

      

Real Estate

  

Commercial

  

Residential

         
 

(In thousands)

  

Commercial

  

Construction

  

Mortgage

  

Mortgage Loans

  

Installment and

     

September 30, 2016

                        
 

Loans

  

Loans

  

Loans

  

and Equity Lines

  

Other Loans

  

Total

 
 

(In thousands)

 

September 30, 2017

                        

Loans individually evaluated for impairment

                                                

Allowance

 $1,320  $-  $1,248  $375  $-  $2,943  $1,461  $-  $823  $322  $-  $2,606 

Balance

 $32,631  $5,507  $74,587  $18,189  $-  $130,914  $37,358  $21,748  $55,190  $13,376  $-  $127,672 
                                                

Loans collectively evaluated for impairment

                                                

Allowance

 $52,379  $9,245  $43,685  $9,682  $8  $114,999  $49,578  $22,008  $36,579  $10,740  $24  $118,929 

Balance

 $2,216,365  $509,729  $5,669,404  $2,481,235  $2,810  $10,879,543  $2,382,533  $669,738  $6,321,857  $3,090,912  $4,722  $12,469,762 
                                                

Total allowance

 $53,699  $9,245  $44,933  $10,057  $8  $117,942  $51,039  $22,008  $37,402  $11,062  $24  $121,535 

Total balance

 $2,248,996  $515,236  $5,743,991  $2,499,424  $2,810  $11,010,457  $2,419,891  $691,486  $6,377,047  $3,104,288  $4,722  $12,597,434 
                                                

December 31, 2015

                        

December 31, 2016

                        

Loans individually evaluated for impairment

                                                

Allowance

 $530  $-  $6,792  $427  $-  $7,749  $1,827  $-  $573  $396  $-  $2,796 

Balance

 $13,568  $22,002  $81,776  $16,464  $-  $133,810  $27,761  $5,458  $64,470  $17,385  $-  $115,074 
                                                

Loans collectively evaluated for impairment

                                                

Allowance

 $55,669  $22,170  $42,648  $10,718  $9  $131,214  $47,376  $23,268  $34,291  $11,224  $11  $116,170 

Balance

 $2,303,295  $419,541  $5,219,442  $2,084,871  $2,493  $10,029,642  $2,220,426  $542,630  $5,720,778  $2,598,374  $3,993  $11,086,201 
                                                

Total allowance

 $56,199  $22,170  $49,440  $11,145  $9  $138,963  $49,203  $23,268  $34,864  $11,620  $11  $118,966 

Total balance

 $2,316,863  $441,543  $5,301,218  $2,101,335  $2,493  $10,163,452  $2,248,187  $548,088  $5,785,248  $2,615,759  $3,993  $11,201,275 

 

 

The following tablestables detail activity in the allowance for loan losses by portfolio segment for the three months and nine months ended September 30, 2016,2017, and September 30, 2015.2016. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

 

 

Three months ended September 30, 2016 and 2015 

Three months ended September 30, 2017 and 2016

Three months ended September 30, 2017 and 2016

               
     

Real Estate

  

Commercial

  

Residential

  

Installment

          

Real Estate

  

Commercial

  

Residential

  

Installment

     
 

Commercial

  

Construction

  

Mortgage

  

Mortgage Loans

  

and Other

      

Commercial

  

Construction

  

Mortgage

  

Mortgage Loans

  

and Other

     
 

Loans

  

Loans

  

Loans

  

and Equity Lines

  

Loans

  

Total

  

Loans

  

Loans

  

Loans

  

and Equity Lines

  

Loans

  

Total

 
 

(In thousands)

  

(In thousands)

 
                        

June 30, 2017 Ending Balance

 $46,744  $17,844  $36,840  $14,364  $17   115,809 

Provision/(credit) for possible credit losses

  3,800   4,117   (4,615)  (3,309)  7   - 

Charge-offs

  (80)  -   (305)  -   -   (385)

Recoveries

  575   47   5,482   7   -   6,111 

Net (charge-offs)/recoveries

  495   47   5,177   7   -   5,726 

September 30, 2017 Ending Balance

 $51,039  $22,008  $37,402  $11,062  $24  $121,535 
                                                

June 30, 2016 Ending Balance

 $50,590  $10,753  $46,090  $15,503  $12   122,948  $50,590  $10,753  $46,090  $15,503  $12  $122,948 

Provision/(credit) for possible credit losses

  4,380   (2,056)  3,132   (5,452)  (4)  -   4,380   (2,056)  3,132   (5,452)  (4)  - 

Charge-offs

  (3,277)  -   (4,626)  -   -   (7,903)  (3,277)  -   (4,626)  -   -   (7,903)

Recoveries

  2,006   548   337   6   -   2,897   2,006   548   337   6   -   2,897 

Net (charge-offs)/recoveries

  (1,271)  548   (4,289)  6   -   (5,006)  (1,271)  548   (4,289)  6   -   (5,006)

September 30, 2016 Ending Balance

 $53,699  $9,245  $44,933  $10,057  $8  $117,942  $53,699  $9,245  $44,933  $10,057  $8  $117,942 
                        

June 30, 2015 Ending Balance

 $47,540  $26,304  $67,245  $12,323  $25  $153,437 

Provision/(credit) for possible credit losses

  10,040   121   (11,762)  353   (2)  (1,250)

Charge-offs

  (3,310)  -   (97)  -   -   (3,407)

Recoveries

  607   41   647   1   -   1,296 

Net (charge-offs)/recoveries

  (2,703)  41   550   1   -   (2,111)

September 30, 2015 Ending Balance

 $54,877  $26,466  $56,033  $12,677  $23  $150,076 

 

 

Nine months ended September 30, 2016 and 2015 

Nine months ended September 30, 2017 and 2016

Nine months ended September 30, 2017 and 2016

                
     

Real Estate

  

Commercial

  

Residential

  

Installment

          

Real Estate

  

Commercial

  

Residential

  

Installment

     
 

Commercial

  

Construction

  

Mortgage

  

Mortgage Loans

  

and Other

      

Commercial

  

Construction

  

Mortgage

  

Mortgage Loans

  

and Other

     
 

Loans

  

Loans

  

Loans

  

and Equity Lines

  

Loans

  

Total

  

Loans

  

Loans

  

Loans

  

and Equity Lines

  

Loans

  

Total

 
 

(In thousands)

  

(In thousands)

 
                                                

2017 Beginning Balance

 $49,203  $23,268  $34,864  $11,620  $11  $118,966 

Provision/(credit) for possible credit losses

  2,245   (1,403)  (2,775)  (580)  13   (2,500)

Charge-offs

  (1,810)  -   (860)  -   -   (2,670)

Recoveries

  1,401   143   6,173   22   -   7,739 

Net (charge-offs)/recoveries

  (409)  143   5,313   22   -   5,069 
                        

September 30, 2017 Ending Balance

 $51,039  $22,008  $37,402  $11,062  $24  $121,535 

Reserve for impaired loans

 $1,461  $-  $823  $322  $-  $2,606 

Reserve for non-impaired loans

 $49,578  $22,008  $36,579  $10,740  $24  $118,929 

Reserve for off-balance sheet credit commitments

 $2,760  $1,206  $109  $175  $4  $4,254 
                        

2016 Beginning Balance

 $56,199  $22,170  $49,440  $11,145  $9  $138,963  $56,199  $22,170  $49,440  $11,145  $9  $138,963 
                        

Provision/(credit) for possible credit losses

  5,815   (20,796)  295   (963)  (1)  (15,650)  5,815   (20,796)  295   (963)  (1)  (15,650)
                        

Charge-offs

  (12,035)  -   (5,681)  (149)  -   (17,865)  (12,035)  -   (5,681)  (149)  -   (17,865)

Recoveries

  3,720   7,871   879   24       12,494   3,720   7,871   879   24   -   12,494 

Net (charge-offs)/recoveries

  (8,315)  7,871   (4,802)  (125)  -   (5,371)  (8,315)  7,871   (4,802)  (125)  -   (5,371)
                                                

September 30, 2016 Ending Balance

 $53,699  $9,245  $44,933  $10,057  $8  $117,942  $53,699  $9,245  $44,933  $10,057  $8  $117,942 

Reserve for impaired loans

 $1,320  $-  $1,248  $375  $-  $2,943  $1,320  $-  $1,248  $375  $-  $2,943 

Reserve for non-impaired loans

 $52,379  $9,245  $43,685  $9,682  $8  $114,999  $52,379  $9,245  $43,685  $9,682  $8  $114,999 

Reserve for off-balance sheetcredit commitments

 $2,112  $-  $35  $80  $2  $2,229 
                        

2015 Beginning Balance

 $47,501  $27,652  $74,673  $11,578  $16  $161,420 
                        

Provision/(credit) for possible credit losses

  11,045   (1,349)  (19,342)  1,239   7   (8,400)
                        

Charge-offs

  (6,754)  -   (3,613)  (161)  -   (10,528)

Recoveries

  3,085   163   4,315   21   -   7,584 

Net (charge-offs)/recoveries

  (3,669)  163   702   (140)  -   (2,944)
                        

September 30, 2015 Ending Balance

 $54,877  $26,466  $56,033  $12,677  $23  $150,076 

Reserve for impaired loans

 $7,561  $-  $6,389  $373  $-  $14,323 

Reserve for non-impaired loans

 $47,316  $26,466  $49,644  $12,304  $23  $135,753 

Reserve for off-balance sheetcredit commitments

 $703  $477  $202  $37  $1  $1,420 

Reserve for off-balance sheet credit commitments

 $2,112  $-  $35  $80  $2  $2,229 

 

24

 

9

.8. Commitments and Contingencies

 

The Company is involved in various litigation concerning transactions entered into in the normal course of business. Management, after consultation with legal counsel, does not believe that the resolution of such litigation will have a material effect upon its consolidated financial condition, results of operations, or liquidity taken as a whole. Although the Company establishes accruals for legal proceedings when information related to the loss contingencies represented by those matters indicates both that a loss is probable and that the amount of loss can be reasonably estimated, the Company does not have accruals for all legal proceedings where there is a risk of loss. In addition, amounts accrued may not represent the ultimate loss to the Company from the legal proceedings in question. Thus, ultimate losses may be higher or lower, and possibly significantly so, than the amounts accrued for legal loss contingencies.

 

In the normal course of business, the Company becomes a party to financial instruments with off-balance sheet risk to meet the financing needs of its customers. These financial instruments include commitments to extend credit in the form of loans, or through commercial or standby letters of credit and financial guarantees. These instruments represent varying degrees of exposure to risk in excess of the amounts included in the accompanying condensed consolidated balance sheets. The contractual or notional amount of these instruments indicates a level of activity associated with a particular class of financial instrument and is not a reflection of the level of expected losses, if any.

9. Borrowed Funds

 

10. Borrowed Funds

Securities Sold Under Agreements to Repurchase.Securities sold under agreements to repurchase were $100 million with a weighted average rate of 2.86% as of September 30, 2017, compared to $350 million with a weighted average rate of 4.06% as of September 30, 2016, compared to $400 million with a weighted average rate of 3.89% as of December 31, 2015. As of September 30, 2016, four floating-to-fixed rate agreements totaling $200 million with a weighted average rate of 5.0% and final2016. Final maturity in January 2017 had initial floating rates for one year, with floating rates of the three-month LIBOR rate minus 340 basis points. Thereafter, the rates are fixed for the remainder of the term, with interest rates ranging from 4.89% to 5.07%. As of September 30, 2016, threetwo fixed rate non-callable securities sold under agreements to repurchase totaled $150 million with a weighted average rate of 2.81%, compared to four fixed rate non-callable securities sold under agreements to repurchase totaling $200 million with a weighted average rate of 2.78% as of December 31, 2015. Final maturity for the three fixed rate non-callable securities sold under agreements to repurchase was $50.0 million in July 2017, $50.0 million in June 2018 and $50.0 million in July 2018.

 

These transactions are accounted for as collateralized financing transactions and recorded at the amounts at which the securities were sold. The Company may have to provide additional collateral for the repurchaserepurchase agreements, as necessary. The underlying collateral pledged for the repurchase agreements consists of U.S. Treasury securities and mortgage-backed securities with a fair value of $383$108 million as of September 30, 2016,2017, and $430$372 million as of December 31, 2015.2016.

 

Borrowing from the FHLB. As of September 30, 2016,2017, over-night borrowings from the FHLB were $300$450 million at a rate of 0.38%1.16% compared to $250$275 million at a rate of 0.27%0.55% as of December 31, 2015.2016. As of September 30, 2016,2017, the advances from the FHLB were $400$145 million at a rate of 0.47% compared to $25 million at a rate of 1.13% as of December 31, 2015.1.35%. As of September 30, 2016,2017, FHLB advances of $375$490 million will mature in October 20162017, $55 million in 2018 and $25$50 million will mature in March 2018.December 2019.

 

25

 

110.1. Income Taxes

 

IncomeThe effective tax expense totaled $50.8 million, or anrate for the third quarter of 2017 was 41.4% compared to 25.5% for the third quarter of 2016. The third quarter 2017 effective tax rate of 28.5%, for the nine months ended September 30, 2016, compared to an income41.4% reflected additional tax expense of $43.2 million, or anto increase the full year effective tax rate of 26.5%, forto 34% compared to the same period in 2015. The29% effective tax rate includesforecasted at June 30, 2017. This adjustment in the impactthird quarter was the result of the utilization of low income housinglower tax credits from the utilizationslow deployment of alternative energy investments. Income tax credits, and the write-off of deferred tax assets related to stock options that expired unexercised duringexpense for the first quarter of 2016.    2017 was also reduced by $2.6 million in benefits from the distribution of restricted stock units and exercises of stock options.

 

As of September 30, 2017 and December 31, 2015,2016, the Company had income tax refunds receivable of $28.9 million.$19.4 million and $14.6 million, respectively. These income tax receivables are included in other assets in the accompanying condensed consolidated balance sheets.

 

The Company’sCompany’s tax returns are open for audit by the Internal Revenue Service back to 20122014 and by the California Franchise Tax Board back to 2008.2012. As the Company is presently under audit by a number of tax authorities, it is reasonably possible that unrecognized tax benefits could change significantly over the next twelve months. The Company does not expect that any such changes would have a material impact on its annual effective tax rate.

 

12

11. Fair Value MeasurementsMeasurements

 

The Company adopted ASC Topic 820 on January 1, 2008, and determined the fair values of our financial instruments based on the following:

 

Level 1 - Quoted prices in active markets for identical assets or liabilities.

Level 2 - Observable prices in active markets for similar assets or liabilities; prices for identical or similar assets or liabilities in markets that are not active; directly observable market inputs for substantially the full term of the asset and liability; market inputs that are not directly observable but are derived from or corroborated by observable market data.

Level 3 – Unobservable inputs based on the Company’s own judgment about the assumptions that a market participant would use.

Level 1 - Quoted prices in active markets for identical assets or liabilities.

Level 2 - Observable prices in active markets for similar assets or liabilities; prices for identical or similar assets or liabilities in markets that are not active; directly observable market inputs for substantially the full term of the asset and liability; market inputs that are not directly observable but are derived from or corroborated by observable market data.

Level 3 – Unobservable inputs based on the Company’s own judgment about the assumptions that a market participant would use.

 

The Company uses the following methodologies to measure the fair value of its financial assets and liabilities on a recurring basis:

 

Securities Available for Sale. For certain actively traded agency preferred stock, mutual funds, and U.S. Treasury securities, and other equity securities, the Company measures the fair value based on quoted market prices in active exchange markets at the reporting date, a Level 1 measurement. The Company also measures securities by using quoted market prices for similar securities or dealer quotes, a Level 2 measurement. This category generally includes U.S. Government agency securities, state and municipal securities, mortgage-backed securities (“MBS”), commercial MBS, collateralized mortgage obligations, asset-backed securities, corporate bonds and trust preferred securities.

 

Warrants. The Company measures the fair value of warrants based on unobservable inputs based on assumptions and management judgment, a Level 3 measurement.

 

Foreign Exchange Contracts. The Company measures the fair value of foreign exchange contracts based on dealer quotes, a Level 2 measurement.

 

 

Interest Rate Swaps. Fair value of interest rate swaps is derived from third party models with observable market data, a Level 2 measurement.

 

The valuation techniques for the assets and liabilities valued on a nonrecurring basis are as follows:

 

Impaired Loans. The Company does not record loans at fair value on a recurring basis. However, from time to time, nonrecurring fair value adjustments to collateral dependent impaired loans are recorded based on either the current appraised value of the collateral, a Level 2 measurement, or management’s judgment and estimation of value reported on older appraisals that are then adjusted based on recent market trends, a Level 3 measurement.

 

Goodwill.The Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in ASC Topic 350. The two-step impairment testing process, if needed, begins by assigning net assets and goodwill to the two reporting unitsunits—Commercial Lending and Retail Banking.  The Company then completes “step one” of the impairment test by comparing the fair value of each reporting unit (as determined based on the discussion below) with the recorded book value (or “carrying amount”) of its net assets, with goodwill included in the computation of the carrying amount.  If the fair value of a reporting unit exceeds its carrying amount, goodwill of that reporting unit is not considered impaired, and “step two” of the impairment test is not necessary.  If the carrying amount of a reporting unit exceeds its fair value, step two of the impairment test is performed to determine the amount of impairment.  Step two of the impairment test compares the carrying amount of the reporting unit’s goodwill to the “implied fair value” of that goodwill.  The implied fair value of goodwill is computed by assuming that all assets and liabilities of the reporting unit would be adjusted to the current fair value, with the offset as an adjustment to goodwill.  This adjusted goodwill balance is the implied fair value used in step two.  An impairment charge is recognized for the amount by which the carrying amount of goodwill exceeds its implied fair value. In connection with the determination of fair value, certain data and information is utilized, including earnings forecasts at the reporting unit level for the next four years.  Other key assumptions include terminal values based on future growth rates and discount rates for valuing the cash flows, which have inputs for the risk-free rate, market risk premium, and adjustments to reflect inherent risk and required market returns. Because of the significance of unobservable inputs in the valuation of goodwill impairment, goodwill subject to nonrecurring fair value adjustments is classified as a Level 3 measurement.

 

Core Deposit Intangibles. Core deposit intangibles is initially recorded at fair value based on a valuation of the core deposits acquired and is amortized over its estimated useful life, which range from 4 to 10 years, to its residual value in proportion to the economic benefits consumed. The Company assesses the recoverability of this intangible asset on a nonrecurring basis using the core deposits remaining at the assessment date and the fair value of cash flows expected to be generated from the core deposits, a Level 3 measurement.

 

Other Real Estate Owned. Real estate acquired in the settlement of loans is initially recorded at fair value based on the appraised value of the property on the date of transfer, less estimated costs to sell, a Level 2 measurement. From time to time, nonrecurring fair value adjustments are made to other real estate owned based on the current updated appraised value of the property, also a Level 2 measurement, or management’s judgment and estimation of value reported on older appraisals that are then adjusted based on recent market trends, a Level 3 measurement.

 

 

Investments in Venture Capital.The Company periodically reviews its investments in venture capital for other-than-temporary impairment on a nonrecurring basis. Investments in venture capital were written down to their fair value based on available financial reports from venture capital partnerships and management’s judgment and estimation, a Level 3 measurement.

 

Equity Investments. The Company records equity investments at fair value on a nonrecurring basis based on quoted market prices in active exchange markets at the reporting date, a Level 1 measurement.

 

The following tablestables present the Company’s hierarchy for its assets and liabilities measured at fair value on a recurring basis as of September 30, 2016,2017, and December 31, 2015:2016:

 

September 30, 2016

 

Fair Value Measurements Using

  

Total at

 
  

Level 1

  

Level 2

  

Level 3

  

Fair Value

 

 

 

(In thousands)

 
Assets                

Securities available-for-sale

                

U.S. Treasury securities

 $390,009  $-  $-  $390,009 

U.S. government sponsored entities

  -   250,010   -   250,010 

Mortgage-backed securities

  -   563,638   -   563,638 

Collateralized mortgage obligations

  -   30   -   30 

Corporate debt securities

  -   74,469   -   74,469 

Mutual funds

  5,926   -   -   5,926 

Preferred stock of government sponsored entities

  -   3,188   -   3,188 

Other equity securities

  -   11,199   -   11,199 

Total securities available-for-sale

  395,935   902,534   -   1,298,469 

Warrants

  -   -   75   75 

Foreign exchange contracts

  -   1,711   -   1,711 

Total assets

 $395,935  $904,245  $75  $1,300,255 
                 

Liabilities

                
                 

Interest rate swaps

 $-  $15,186  $-  $15,186 

Foreign exchange contracts

  -   712   -   712 

Total liabilities

 $-  $15,898  $-  $15,898 

December 31, 2015

 

Fair Value Measurements Using

  

Total at

 

September 30, 2017

 

Fair Value Measurements Using

  

Total at

 
 

Level 1

  

Level 2

  

Level 3

  

Fair Value

  

Level 1

  

Level 2

  

Level 3

  

Fair Value

 

 

(In thousands)

  

(In thousands)

 
Assets                                
 

Securities available-for-sale

                                

U.S. Treasury securities

 $284,288  $-  $-  $284,288  $399,436  $-  $-  $399,436 

U.S. government agencies

  -   9,700   -   9,700 

U.S. government sponsored entities

  -   148,160   -   148,160   -   393,722   -   393,722 

State and municipal securities

  -   1,931   -   1,931 

Mortgage-backed securities

  -   1,062,269   -   1,062,269   -   446,065   -   446,065 

Collateralized mortgage obligations

  -   36   -   36   -   1,710   -   1,710 

Corporate debt securities

  -   73,855   -   73,855   -   80,906   -   80,906 

Mutual funds

  5,833   -   -   5,833   6,271   -   -   6,271 

Preferred stock of government sponsored entities

  -   3,216   -   3,216   8,087   -   -   8,087 

Other equity securities

  -   8,695   -   8,695   20,659   -   -   20,659 

Total securities available-for-sale

  290,121   1,296,231   -   1,586,352   434,453   934,034   -   1,368,487 

Warrants

  -   -   62   62   -   -   97   97 

Foreign exchange contracts

  -   3,339   -   3,339   -   1,725   -   1,725 

Interest rate swaps

  -   2,314   -   2,314 

Total assets

 $290,121  $1,299,570  $62  $1,589,753  $434,453  $938,073  $97  $1,372,623 
                                

Liabilities

                                
                                

Option contracts

 $-  $28  $-  $28  $-  $234  $-  $234 

Foreign exchange contracts

  -   1,083   -   1,083 

Interest rate swaps

  -   6,496   -   6,496   -   5,049   -   5,049 

Foreign exchange contracts

  -   4,124   -   4,124 

Total liabilities

 $-  $10,648  $-  $10,648  $-  $6,366  $-  $6,366 

 

December 31, 2016

 

Fair Value Measurements Using

  

Total at

 
  

Level 1

  

Level 2

  

Level 3

  

Fair Value

 
  

(In thousands)

 
Assets                
                 

Securities available-for-sale

                

U.S. Treasury securities

 $489,017  $-  $-  $489,017 

U.S. government sponsored entities

  -   390,331   -   390,331 

Mortgage-backed securities

  -   336,260   -   336,260 

Collateralized mortgage obligations

  -   28   -   28 

Corporate debt securities

  -   74,350   -   74,350 

Mutual funds

  6,230   -   -   6,230 

Preferred stock of government sponsored entities

  7,308   -   -   7,308 

Other equity securities

  10,821   -   -   10,821 

Total securities available-for-sale

  513,376   800,969   -   1,314,345 

Warrants

  -   -   79   79 

Interest rate swaps

  -   938   -   938 

Foreign exchange contracts

  -   1,302   -   1,302 

Total assets

 $513,376  $803,209  $79  $1,316,664 
                 

Liabilities

                
                 

Option contracts

 $-  $121  $-  $121 

Interest rate swaps

  -   3,744   -   3,744 

Foreign exchange contracts

  -   3,132   -   3,132 

Total liabilities

 $-  $6,997  $-  $6,997 

 

The Company measured the fair value of its warrants on a recurring basis using significant unobservable inputs. The fair value of warrants was $75,000$97,000 as of September 30, 2016,2017, compared to $62,000$79,000 as of December 31, 2015.2016. The fair value adjustment of warrants was included in other operating income in the third quarter of 2016.2017. The significant unobservable inputs in the Black-Scholes option pricing model for the fair value of warrants are their expected life ranging from 1 to 76 years, risk-free interest rate from 0.73%1.51% to 1.38%2.28%, and stock volatility from 12.4%5.05% to 15.1%12.6%.

 

For financial assets measured at fair value on a nonrecurring basis that were still reflected in the condensed consolidated balance sheetssheet as of September 30, 2016,2017, the following tables provide the level of valuation assumptions used to determine each adjustment, the carrying value of the related individual assets as of September 30, 2016,2017, and December 31, 2015,2016, and the total losses for the periods indicated:

 

 

September 30, 2016

  

Total (Gains)/Losses

  

September 30, 2017

      

Total (Gains)/Losses

 
 

Fair Value Measurements Using

  

 

  

Three Months Ended

  

Nine Months Ended

  

Fair Value Measurements Using

  

Total at

  

Three Months Ended

  

Nine Months Ended

 
 

Level 1

  

Level 2

  

Level 3

  

Total at

Fair Value

  

September 30,

2016

  

September 30,

2015

  

September 30,

2016

  

September 30,

2015

  

Level 1

  

Level 2

  

Level 3

  

Fair Value

  

September 30, 2017

  

September 30, 2016

  

September 30, 2017

  

September 30, 2016

 

 

(In thousands)

  

(In thousands)

 
Assets                                                                
                                

Impaired loans by type:

                                                                

Commercial loans

 $-  $-  $1,897  $1,897  $-  $575  $-  $3,380  $-  $-  $12,525  $12,525  $-  $-  $25  $- 

Commercial mortgage loans

  -   -   9,041   9,041   -   -   -   654   -   -   21,997   21,997   -   -   -   - 

Residential mortgage loans and equity lines

  -   -   13,139   13,139   -   -   -   146   -   -   10,790   10,790   -   -   -   - 

Total impaired loans

  -   -   24,077   24,077   -   575   -   4,180   -   -   45,312   45,312   -   -   25   - 

Other real estate owned(1)

  -   3,095   4,372   7,467   (206)  179   9   404   -   6,317   4,322   10,639   405   (206)  654   9 

Investments in venture capital and private company stock

  -   -   4,291   4,291   187   81   419   408   -   -   3,023   3,023   12   187   365   419 

Total assets

 $-  $3,095  $32,740  $35,835  $(19) $835  $428  $4,992  $-  $6,317  $52,657  $58,974  $417  $(19) $1,044  $428 

 

(1) Other real estate owned balance of $21.0$18.1 million in the condensed consolidated balance sheet is net of estimated disposal costs.

 

 

 

December 31, 2015

  

Total Losses

  

December 31, 2016

  

Total Losses

 
 

Fair Value Measurements Using

  

 

  

Twelve Months Ended

  

Fair Value Measurements Using

  

Total at

  

Twelve Months Ended

 
 

Level 1

  

Level 2

  

Level 3

  

Total at

Fair Value

  

December 31,

2015

  

December 31,

2014

  

Level 1

  

Level 2

  

Level 3

  

Fair Value

  

December 31, 2016

  

December 31, 2015

 

 

(In thousands)

  

(In thousands)

 
Assets                                                
                                     

Impaired loans by type:

                                                

Commercial loans

 $-  $-  $6,317  $6,317  $806  $17  $-  $-  $2,813  $2,813  $322  $806 

Commercial mortgage loans

  -   -   20,359   20,359   598   3,914   -   -   9,444   9,444   -   598 

Residential mortgage loans and equity lines

  -   -   13,009   13,009   146   27   -   -   11,679   11,679   -   146 

Total impaired loans

  -   -   39,685   39,685   1,550   3,958   -   -   23,936   23,936   322   1,550 

Other real estate owned(1)

  -   10,047   4,235   14,282   404   202   -   6,006   4,372   10,378   9   404 

Investments in venture capital and private company stock

  -   -   4,922   4,922   553   436   -   -   3,667   3,667   976   553 

Total assets

 $-  $10,047  $48,842  $58,889  $2,507  $4,596  $-  $6,006  $31,975  $37,981  $1,307  $2,507 

 

(1) Other real estate owned balance of $24.7$20.1 million in the condensed consolidated balance sheet is net of estimated disposal costs.

 

The significant unobservable (Level 3) inputs used in the fair value measurement of collateral for collateral-dependentcollateral-dependent impaired loans was primarily based on the appraised value of collateral adjusted by estimated sales cost and commissions. The Company generally obtains new appraisal reports every nine months. As the Company’s primary objective in the event of default would be to monetize the collateral to settle the outstanding balance of the loan, less marketable collateral would receive a larger discount. During the reported periods, collateral discounts ranged from 55% in the case of accounts receivable collateral to 65% in the case of inventory collateral.

 

The significant unobservable inputs used in the fair value measurement of loans held for sale was primarily based on the quoted price or sale price adjusted by estimated sales cost and commissions.

The significantsignificant unobservable inputs used in the fair value measurement of other real estate owned (“OREO”) was primarily based on the appraised value of OREO adjusted by estimated sales cost and commissions.

The Company applies estimated sales cost and commissions ranging from 3% to 6% toof the collateral value of impaired loans, quoted price, or loan sale price of loans held for sale, and appraised value of OREO.

 


13

12. Fair Value of Financial Instruments

 

The Company uses the following methods and assumptions were used to estimate the fair value of each class of financial instruments.

 

Cash and Cash Equivalents.For cash and cash equivalents, the carrying amount was assumed to be a reasonable estimate of fair value, a Level 1 measurement.

 

Short-term Investments.For short-term investments, the carrying amount was assumed to be a reasonable estimate of fair value, a Level 1 measurement.

 

Securities Purchased under Agreements to Resell.Resell. The fair value of securities purchased under agreements to resell is based on dealer quotes, a Level 2 measurement.

 

Securities.For securities, including securities held-to-maturity, available-for-sale, and for trading, fair values were based on quoted market prices at the reporting date. If a quoted market price was not available, fair value was estimated using quoted market prices for similar securities or dealer quotes. For certain actively traded agency preferred stock, and U.S. Treasury securities, and other equity securities, the Company measures the fair value based on quoted market prices in active exchange markets at the reporting date, a Level 1 measurement. The Company also measures securities by using quoted market prices for similar securities or dealer quotes, a Level 2 measurement. This category generally includes U.S. Government agency securities, state and municipal securities, mortgage-backed securities (“MBS”), commercial MBS, collateralized mortgage obligations, asset-backed securities, and corporate bonds.

 

Loans HeldHeld for Sale Sale. The Company records loans held for sale at fair value based on quoted prices from third party sources, or appraisal reports adjusted by sales commission assumptions.assumptions.

 

Loans.Fair values were estimated for portfolios of loans with similar financial characteristics. Each loan category was further segmented into fixed and adjustable rate interest terms and by performing and non-performing categories.

 

The fair value of performing loans was calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan, a Level 3 measurement.

 

The fair value of impaired loans was calculated based on the net realizable fair value of the collateral or the observable market price of the most recent sale or quoted price from loans held for sale. The Company does not record loans at fair value on a recurring basis. Nonrecurring fair value adjustments to collateral dependent impaired loans are recorded based on the current appraised value or adjusted appraised value of the collateral, a Level 2 or Level 3 measurement.

 

Deposit Liabilities.The fair value of demand deposits, savings accounts, and certain money market deposits was assumed to be the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit was estimated using the rates currently offered for deposits with similar remaining maturities, a Level 3 measurement.

 

Securities Sold under Agreements to Repurchase.The fair value of securities sold under agreements to repurchase is based on dealer quotes, a Level 2 measurement.

 

Advances from Federal Home Loan Bank(“FHLB”).The fair value of the advances is based on quotes from the FHLB to settle the advances, a Level 2 measurement.

 

Other Borrowings.This category includes borrowings from other financial institutions.  The fair value of other borrowings is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk, a Level 3 measurement. 

 

Long-term Debt.Debt. The fair value of long-term debt is estimated based on the quoted market prices or dealer quotes, a Level 2 measurement.

 

Currency Option and Foreign Exchange Contracts. The Company measures the fair value of currency option and foreign exchange contracts based on dealer quotes, a Level 2 measurement.

 

Interest Rate Swaps. Fair value of interest rate swaps is derived from third party models with observable market data, a Level 2 measurement.

 

 

Off-Balance-Sheet Financial Instruments.The fair value of commitments to extend credit, standby letters of credit, and financial guarantees written were estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. The fair value of guarantees and letters of credit was based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. The fair value of off-balance-sheet financial instruments was based on the assumptions that a market participant would use, a Level 3 measurement.

 

Fair value was estimated in accordance with ASC Topic 825. Fair value estimates were made at specific points in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Bank’sBank’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Bank’s financial instruments, fair value estimates were based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates were subjective in nature and involved uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

 

The following table presents the carrying and notional amounts and estimated fair value of financial instruments as of September 30, 2016,2017, and as of December 31, 2015:2016:

 

 

September 30, 2016

  

December 31, 2015

  

September 30, 2017

  

December 31, 2016

 
 

Carrying

      

Carrying

      

Carrying

      

Carrying

     
 

Amount

  

Fair Value

  

Amount

  

Fair Value

  

Amount

  

Fair Value

  

Amount

  

Fair Value

 
 

(In thousands)

  

(In thousands)

 

Financial Assets

                                

Cash and due from banks

 $203,877  $203,877  $180,130  $180,130  $167,886  $167,886  $218,017  $218,017 

Short-term investments

  791,757   791,757   536,880   536,880   573,059   573,059   967,067   967,067 

Securities available-for-sale

  1,298,469   1,298,469   1,586,352   1,586,352   1,368,487   1,368,487   1,314,345   1,314,345 

Loans held for sale

  4,750   4,750   6,676   6,676   -   -   7,500   7,500 

Loans, net

  10,886,996   10,825,059   10,016,227   9,938,810   12,472,475   12,403,100   11,077,315   11,006,344 

Investment in Federal Home Loan Bank stock

  18,900   18,900   17,250   17,250   21,948   21,948   17,250   17,250 

Investment in Federal Reserve Bank stock

  8,733   8,733   -   - 

Warrants

  75   75   62   62   97   97   79   79 

 

  

Notional

      

Notional

     
  

Amount

  

Fair Value

  

Amount

  

Fair Value

 

Foreign exchange contracts.

 $107,064  $1,711  $100,602  $3,339 
  

Notional

      

Notional

     
  

Amount

  

Fair Value

  

Amount

  

Fair Value

 

Foreign exchange contracts

 $69,278  $1,725  $82,439  $1,302 

Interest rate swaps

  155,671   2,314   361,526   938 

 

 

Carrying

      

Carrying

      

Carrying

      

Carrying

     
 

Amount

  

Fair Value

  

Amount

  

Fair Value

  

Amount

  

Fair Value

  

Amount

  

Fair Value

 

Financial Liabilities

                                

Deposits

 $10,938,696  $10,946,853  $10,509,087  $10,509,879  $12,561,695  $12,573,127  $11,674,726  $11,680,017 

Securities sold under agreements to repurchase

  350,000   355,422   400,000   413,417   100,000   100,549   350,000   351,989 

Advances from Federal Home Loan Bank

  700,000   700,130   275,000   274,488   595,000   595,037   350,000   350,062 

Other borrowings

  17,705   15,903   18,593   16,684   153,574   151,643   17,662   15,944 

Long-term debt

  119,136   62,628   119,136   58,420   119,136   68,056   119,136   63,169 

 

 

Notional

      

Notional

      

Notional

      

Notional

     
 

Amount

  

Fair Value

  

Amount

  

Fair Value

  

Amount

  

Fair Value

  

Amount

  

Fair Value

 

Option contracts

 $-  $-  $9,396  $28  $12,307  $234  $12,117  $121 

Foreign exchange contracts

  44,985   712   115,418   4,124   86,625   1,083   89,545   3,132 

Interest rate swaps

  477,479   15,186   459,416   6,496   510,841   5,049   119,136   3,744 

 

 

Notional

      

Notional

      

Notional

      

Notional

     
 

Amount

  

Fair Value

  

Amount

  

Fair Value

  

Amount

  

Fair Value

  

Amount

  

Fair Value

 

Off-Balance Sheet Financial Instruments

                                

Commitments to extend credit

 $1,950,756  $(5,844) $1,971,848  $(5,570) $2,287,498  $(6,924) $2,062,241  $(6,025)

Standby letters of credit

  74,612   (839)  49,081   (194)  140,682   (1,699)  75,396   (668)

Other letters of credit

  31,331   (69)  38,131   (22)  41,868   (218)  37,283   (16)

Bill of lading guarantees

  -   -   454   (1)  24   -   75   - 

 

 

The following tablestables present the level in the fair value hierarchy for the estimated fair values of financial instruments as of September 30, 2016,2017, and December 31, 2015.2016.

 

 

September 30, 2016

  

September 30, 2017

 
 

Estimated

              

Estimated

             
 

Fair Value

              

Fair Value

             
 

Measurements

  

Level 1

  

Level 2

  

Level 3

  

Measurements

  

Level 1

  

Level 2

  

Level 3

 
 

(In thousands)

  

(In thousands)

 

Financial Assets

                                

Cash and due from banks

 $203,877  $203,877  $-  $-  $167,886  $167,886  $-  $- 

Short-term investments

  791,757   791,757   -   -   573,059   573,059   -   - 

Securities available-for-sale

  1,298,469   395,935   902,534   -   1,368,487   434,453   934,034   - 

Loans held-for-sale

  4,750   -   -   4,750   -   -   -   - 

Loans, net

  10,825,059   -   -   10,825,059   12,403,100   -   -   12,403,100 

Investment in Federal Home Loan Bank stock

  18,900   -   18,900   -   21,948   -   21,948   - 

Investment in Federal Reserve Bank stock

  8,733   -   8,733   - 

Warrants

  75   -   -   75   97   -   -   97 

Financial Liabilities

                                

Deposits

  10,946,853   -   -   10,946,853   12,573,127   -   -   12,573,127 

Securities sold under agreements to repurchase

  355,422   -   355,422   -   100,549   -   100,549   - 

Advances from Federal Home Loan Bank

  700,130   -   700,130   -   595,037   -   595,037   - 

Other borrowings .

  15,903   -   -   15,903 

Other borrowings

  151,643   -   -   151,643 

Long-term debt

  62,628   -   62,628   -   68,056   -   68,056   - 

 

  

December 31, 2016

 
  

Estimated

             
  

Fair Value

             
  

Measurements

  

Level 1

  

Level 2

  

Level 3

 
  

(In thousands)

 

Financial Assets

                

Cash and due from banks

 $218,017  $218,017  $-  $- 

Short-term investments

  967,067   967,067   -   - 

Securities available-for-sale

  1,314,345   513,376   800,969   - 

Loans held-for-sale

  7,500   -   -   7,500 

Loans, net

  11,006,344   -   -   11,006,344 

Investment in Federal Home Loan Bank stock

  17,250   -   17,250   - 

Warrants

  79   -   -   79 

Financial Liabilities

                

Deposits

  11,680,017   -   -   11,680,017 

Securities sold under agreements to repurchase

  351,989   -   351,989   - 

Advances from Federal Home Loan Bank

  350,062   -   350,062   - 

Other borrowings

  15,944   -   -   15,944 

Long-term debt

  63,169   -   63,169   - 

  

December 31, 2015

 
  

Estimated

             
  

Fair Value

             
  

Measurements

  

Level 1

  

Level 2

  

Level 3

 
  

(In thousands)

 

Financial Assets

                

Cash and due from banks

 $180,130  $180,130  $-  $- 

Short-term investments

  536,880   536,880   -   - 

Securities available-for-sale

  1,586,352   290,121   1,296,231   - 

Loans held-for-sale

  6,676   -   -   6,676 

Loans, net

  9,938,810   -   -   9,938,810 

Investment in Federal Home Loan Bank stock

  17,250   -   17,250   - 

Warrants

  62   -   -   62 

Financial Liabilities

                

Deposits

  10,509,879   -   -   10,509,879 

Securities sold under agreements to repurchase

  413,417   -   413,417   - 

Advances from Federal Home Loan Bank

  274,488   -   -   274,488 

Other borrowings

  16,684   -   -   16,684 

Long-term debt

  58,420   -   58,420   - 

 

14

13. Goodwill and Goodwill Impairment

 

The Company’sCompany’s policy is to assess goodwill for impairment at the reporting unit level on an annual basis or between annual assessments if a triggering event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.  Impairment is the condition that exists when the carrying amount of goodwill exceeds its implied fair value.  

 

 

The Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in ASC Topic 350. The two-step impairment testing process, if needed, begins by assigning net assets and goodwill to our two reporting units—Commercial Lending and Retail Banking.  The Company then completes “step one” of the impairment test by comparing the fair value of each reporting unit (as determined based on the discussion below) with the recorded book value (or “carrying amount”) of its net assets, with goodwill included in the computation of the carrying amount.  If the fair value of a reporting unit exceeds its carrying amount, goodwill of that reporting unit is not considered impaired, and “step two” of the impairment test is not necessary.  If the carrying amount of a reporting unit exceeds its fair value, step two of the impairment test is performed to determine the amount of impairment.  Step two of the impairment test compares the carrying amount of the reporting unit’s goodwill to the “implied fair value” of that goodwill.  The implied fair value of goodwill is computed by assuming that all assets and liabilities of the reporting unit would be adjusted to the current fair value, with the offset as an adjustment to goodwill.  This adjusted goodwill balance is the implied fair value used in step two.  An impairment charge is recognized for the amount by which the carrying amount of goodwill exceeds its implied fair value.

 

AsAs of September 30, 2016,2017, the Company’s market capitalization was above book value and there was no triggering event that required the Company to assess goodwill for impairment as of an interim date.

 

145. Financial Derivatives

 

It is the policy of the Company not to speculate on the future direction of interest rates. However, the Company enters into financial derivatives in order to seek mitigation of exposure to interest rate risks relatedrelated 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 the Company’s assets or liabilities and against risk in specific transactions. In such instances, the Company 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 sheet 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.

 

InIn May 2014, 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 on Bancorp’s $119.1 million of Junior Subordinated Debentures that had been issued to five trusts, with the quarterly interest payments 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. Bancorp pays a weighted average fixed interest rate of 2.61% and receives a variable interest rate of the three-month LIBOR at a weighted average rate of 0.85%1.32%. As of September 30, 2016,2017, the notional amount of cash flow interest rate swaps was $119.1 million and their unrealized loss of $6.6$2.3 million, net of taxes, was included in other comprehensive income. The amount of periodic net settlement of interest rate swaps included in interest expense was $588,000$407,000 for the three months ended September 30, 20162017 compared to $706,000$588,000 for the same quarter a year ago. For the nine months ended September 30, 2016,2017, the periodic net settlement of interest rate swaps included in interest expense was $1.8$1.3 million compared to $2.1$1.8 million for the same period in 2015.2016.

 

 

As of September 30, 2016,2017, the Bank has entered into interest rate swap contracts with various terms from four to eight years. These interest rate swap contracts 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 loan 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. The Bank pays a weighted average fixed rate of 4.63%4.55% and receives a variable rate at the one month LIBOR rate plus a weighted average spread of 318293 basis points, or at a weighted average rate of 3.70%4.16%. As of September 30, 2016,2017, the notional amount of fair value interest rate swaps was $358.3$510.6 million and their unrealized lossgain of $3.8$1.9 million was included in other non-interest income. The amount of periodic net settlement of interest rate swaps reducing interest income was $879,000$514,000 for the three months ended September 30, 2016,2017, compared to $831,000$879,000 for the same quarter a year ago. The amount of periodic net settlement of interest rate swaps reducing interest income was $2.8$1.9 million for the nine months ended September 30, 2016,2017, compared to $2.2$2.8 million for the same period a year ago. As of September 30, 2016,2017, the ineffective portion of these interest rate swaps was not significant.

 

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 $14.8$6.3 million as of September 30, 2016.2017.

 

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 condensed consolidated balance sheets. Changes in the fair value of these contracts as well as the related foreign exchange certificates of deposit and foreign exchange contracts are recognized immediately in net income as a component of non-interest income. Period end gross positive fair values are recorded in other assets and gross negative fair values are recorded in other liabilities. As of September 30, 2016, there were no2017, the notional amount of option contracts outstanding.totaled $12.3 million with a net negative fair value of $234,000. As of September 30, 2016,2017, spot, forward, and swap contracts with a total notional amount of $107.1$69.3 million had a positive fair value of $1.7 million. Spot, forward, and swap contracts with a total notional amount of $45.0$86.6 million had a negative fair value of $712,000$1.1 million as of September 30, 2016.2017. As of December 31, 2015,2016, the notional amount of option contracts totaled $9.4$12.1 million with a net negative fair value of $28,000.$121,000. As of December 31, 2015,2016, spot, forward, and swap contracts with a total notional amount of $100.6$82.4 million had a positive fair value of $3.3$1.3 million. Spot, forward, and swap contracts with a total notional amount of $115.4$89.5 million had a negative fair value of $4.1$3.1 million as of December 31, 2015.2016.

 

36

 

156. Balance Sheet Offsetting

 

Certain financial instruments, including resell and repurchase agreements, securities lending arrangements and derivatives, may be eligible for offset in the condensed consolidated balance sheets and/or subject to master netting arrangements or similar agreements. The Company’s securities sold with agreements to repurchase and derivative transactions with upstream financial institution counterparties are generally executed under International Swaps and Derivative Association master agreements whichthat include “right of set-off” provisions. In such cases, there is generally a legally enforceable right to offset recognized amounts and there may be an intention to settle such amounts on a net basis. Nonetheless, the Company does not generally offset such financial instruments for financial reporting purposes.

 

Financial instruments that are eligible for offset in the condensed consolidated balance sheets, as of September 30, 2016,2017, and December 31, 2015,2016, are presented in the following table:

 

              

Gross Amounts Not Offset in the Balance Sheet

 
  

Gross Amounts Recognized

  

Gross Amounts

Offset in the

Balance Sheet

  

Net Amounts

Presented in

the Balance

Sheet

  

Financial

Instruments

  

Collateral

Posted

  

Net Amount

 

September 30, 2017

 

(In thousands)

 
                         

Assets:

                        

Derivatives

 $2,314  $-  $2,314  $-  $-  $2,314 

Liabilities:

                        

Securities sold under agreements to repurchase

 $100,000  $-  $100,000  $-  $(100,000) $- 

Derivatives

 $5,049  $-  $5,049  $-  $(5,049) $- 
                         

December 31, 2016

                        
                         

Assets:

                        

Derivatives

 $938  $-  $938  $-  $-  $938 
                         

Liabilities:

                        

Securities sold under agreements to repurchase

 $350,000  $-  $350,000  $-  $(350,000) $- 

Derivatives

 $3,744  $-  $3,744  $-  $(3,744) $- 

              

Gross Amounts Not Offset in the Balance Sheet

 
  

Gross Amounts Recognized

  

Gross Amounts Offset in the Balance Sheet

  

Net Amounts Presented in the Balance Sheet

  

Financial Instruments

  

Collateral Posted

  

Net Amount

 
  (In thousands) 

September 30, 2016

 

 

                     
                         

Liabilities:

                        

Securities sold under agreements to repurchase

 $350,000  $-  $350,000  $-  $(350,000) $- 

Derivatives

 $15,186  $-  $15,186  $-  $(15,186) $- 
                         

December 31, 2015

                        
                         

Liabilities:

                        

Securities sold under agreements to repurchase

 $400,000  $-  $400,000  $-  $(400,000) $- 

Derivatives

 $6,496  $-  $6,496  $-  $(6,496) $- 
37

 

167. Stockholders’ Equity

 

Total equity was $1.79$2.0 billion as of September 30, 2016,2017, an increase of $45.7$140.2 million, from $1.75$1.8 billion as of December 31, 2015,2016, primarily due to net income of $127.1$150.1 million and other comprehensive incomeequity consideration for the acquisition of $10.3SinoPac Bancorp of $34.9 million partially offset by purchases of treasury stock of $54.4 million and common stock cash dividends of $42.6$50.5 million and shares withheld related to net share settlement of RSUs of $5.1 million.

 


The U.S. Treasury received warrants to purchase common stock of 1,846,374 shares at an exercise price of $20.96 as part of the Company’s participation in the U.S. Treasury Troubled Asset Relief Program Capital Purchase Program. As a result of the anti-dilution adjustments under the warrant, the exercise price at December 31, 2016 has been adjusted to $20.65 and the number of warrants increased by 1.5%. At September 30, 2017, 932,461 warrants remain exercisable compared to 943,345 warrants at December 31, 2016.

 

Activity in accumulated other comprehensive income, net of tax, and reclassification out of accumulated other comprehensive income for the three months and nine months ended September 30, 2016,2017, and September 30, 2015,2016, was as follows:

 

  

Three months ended September 30, 2017

  

Three months ended September 30, 2016

 
  

Pre-tax

  

Tax expense/ (benefit)

  

Net-of-tax

  

Pre-tax

  

Tax expense/ (benefit)

  

Net-of-tax

 

 

 

(In thousands)

 

Beginning balance, loss, net of tax

                        

Securities available-for-sale

         $1,001          $8,539 

Cash flow hedge derivatives

          (2,421)          (7,397)

Total

         $(1,420)         $1,142 

Net unrealized (losses)/gains arising during the period

                        

Securities available-for-sale

 $1,829  $769  $1,060  $1,618  $680  $938 

Cash flow hedge derivatives

  271   114   157   1,387   583   804 

Total

  2,100   883   1,217   3,005   1,263  $1,742 

Reclassification adjustment for net losses in net income

                        

Securities available-for-sale

  (24)  (10)  (14)  (1,692)  (711)  (981)

Cash flow hedge derivatives

  -   -   -   -   -   - 

Total

  (24)  (10)  (14)  (1,692)  (711)  (981)

Total other comprehensive (loss)/income

                        

Securities available-for-sale

  1,805   759   1,046   (74)  (31)  (43)

Cash flow hedge derivatives

  271   114   157   1,387   583   804 

Total

 $2,076  $873  $1,203  $1,313  $552  $761 

Ending balance, (loss)/gain, net of tax

                        

Securities available-for-sale

         $2,047          $8,496 

Cash flow hedge derivatives

          (2,264)          (6,593)

Total

         $(217)         $1,903 

  

Three months ended September 30, 2016

  

Three months ended September 30, 2015

 
  

Pre-tax

  

Tax expense/

(benefit)

  

Net-of-tax

  

Pre-tax

  

Tax expense/

(benefit)

  

Net-of-tax

 
  (In thousands) 

Beginning balance, gain/(loss), net of tax

 

 

 

Securities available-for-sale

         $8,539          $(1,125)

Cash flow hedge derivatives

          (7,397)          (1,657)

Total

         $1,142          $(2,782)

Net unrealized gains/(losses) arising during the period

                        

Securities available-for-sale

 $1,618  $680  $938  $4,717  $1,984  $2,733 

Cash flow hedge derivatives

  1,387   583   804   (4,413)  (1,855)  (2,558)

Total

  3,005   1,263   1,742   304   129  $175 

Reclassification adjustment for net (gains)/losses in net income

                        

Securities available-for-sale

  (1,692)  (711)  (981)  16   6   10 

Cash flow hedge derivatives

  -   -   -   -   -   - 

Total

  (1,692)  (711)  (981)  16   6   10 

Total other comprehensive income/(loss)

                        

Securities available-for-sale

  (74)  (31)  (43)  4,733   1,990   2,743 

Cash flow hedge derivatives

  1,387   583   804   (4,413)  (1,855)  (2,558)

Total

 $1,313  $552  $761  $320  $135  $185 

Ending balance, gain/(loss), net of tax

                        

Securities available-for-sale

         $8,496          $1,618 

Cash flow hedge derivatives

          (6,593)          (4,215)

Total

         $1,903          $(2,597)
38

  

Nine months ended September 30, 2017

  

Nine months ended September 30, 2016

 
  

Pre-tax

  

Tax expense/ (benefit)

  

Net-of-tax

  

Pre-tax

  

Tax expense/ (benefit)

  

Net-of-tax

 

 

 

(In thousands)

 

Beginning balance, loss, net of tax

                        

Securities available-for sale

         $(1,545)         $(5,431)

Cash flow hedge derivatives

          (2,170)          (2,995)

Total

         $(3,715)         $(8,426)

Net unrealized gains/(losses) arising during the period

                        

Securities available-for sale

 $5,759  $2,421  $3,338  $27,170  $11,422  $15,748 

Cash flow hedge derivatives

  (162)  (68)  (94)  (6,208)  (2,610)  (3,598)

Total

  5,597   2,353   3,244   20,962   8,812  $12,150 

Reclassification adjustment for net (gains)/losses in net income

                        

Securities available-for sale

  439   185   254   (3,141)  (1,320)  (1,821)

Cash flow hedge derivatives

  -   -   -   -   -   - 

Total

  439   185   254   (3,141)  (1,320)  (1,821)

Total other comprehensive income/(loss)

                        

Securities available-for sale

  6,198   2,606   3,592   24,029   10,102   13,927 

Cash flow hedge derivatives

  (162)  (68)  (94)  (6,208)  (2,610)  (3,598)

Total

 $6,036  $2,538  $3,498  $17,821  $7,492  $10,329 

Ending balance, gain/(loss), net of tax

                        

Securities available-for sale

         $2,047          $8,496 

Cash flow hedge derivatives

          (2,264)          (6,593)

Total

         $(217)         $1,903 

 

 

  

Nine months ended September 30, 2016

  

Nine months ended September 30, 2015

 
  

Pre-tax

  

Tax expense/

(benefit)

  

Net-of-tax

  

Pre-tax

  

Tax expense/

(benefit)

  

Net-of-tax

 
  (In thousands) 

Beginning balance, loss, net of tax

 

 

 

Securities available-for sale

         $(5,431)         $(3,172)

Cash flow hedge derivatives

          (2,995)          (2,397)

Total

         $(8,426)         $(5,569)

Net unrealized gains/(losses) arising during the period

                        

Securities available-for sale

 $27,170  $11,422  $15,748  $4,895  $2,058  $2,837 

Cash flow hedge derivatives

  (6,208)  (2,610)  (3,598)  (3,137)  (1,319)  (1,818)

Total

  20,962   8,812   12,150   1,758   739  $1,019 

Reclassification adjustment for net (gains)/losses in net income

                        

Securities available-for sale

  (3,141)  (1,320)  (1,821)  3,369   1,416   1,953 

Cash flow hedge derivatives

  -   -   -   -   -   - 

Total

  (3,141)  (1,320)  (1,821)  3,369   1,416   1,953 

Total other comprehensive income/(loss)

                        

Securities available-for sale

  24,029   10,102   13,927   8,264   3,474   4,790 

Cash flow hedge derivatives

  (6,208)  (2,610)  (3,598)  (3,137)  (1,319)  (1,818)

Total

 $17,821  $7,492  $10,329  $5,127  $2,155  $2,972 

Ending balance, gain/(loss), net of tax

                        

Securities available-for sale

         $8,496          $1,618 

Cash flow hedge derivatives

          (6,593)          (4,215)

Total

         $1,903          $(2,597)


117.8. Stock Repurchase Program

In February 2016, the Company completed the repurchase of the remaining 633,250 shares of its common stock under the August 2015 repurchase program, for $17.0 million, or a $26.82 average price per share.

 

On February 1, 2016, the Company’s Board of Directors of the Company adoptedapproved a new stock repurchase program to repurchasebuy back up to $45.0 million of the Company’sour common stock. In February 2016, the Company repurchased 1,380,578 shares of its common stock for $37.5 million, or a $27.13 average price per share under the February 2016 repurchase program. As of September 30, 2016, $7.5 million of the Company’s common stock could be purchased in the futureThe Company did not repurchase any shares under the February 2016 repurchase program for the nine months ended September 30, 2017. As of September 30, 2017 and December 31, 2016, the Company may repurchase up to $7.5 million of its common stock under the February 2016 repurchase program.

 

19. Subsequent Events

The Company has evaluated the effect of the following events that have occurred subsequent to the quarter ended September 30, 2017 through the date of issuance of the accompanying condensed consolidated financial statements.

The Bank received final regulatory approval and the merger of Far East National Bank into Cathay Bank was completed on October 27, 2017.  Each of the nine former FENB branches in California and its representative office in Beijing became a branch and representative office of Cathay Bank as a result of the merger.  As of the filing date of this report, Cathay Bank operates 43 branches in California, 12 branches in New York State, three in the Chicago, Illinois area, three in Washington State, two in Texas, one in Maryland, one in Massachusetts, one in Nevada, one in New Jersey, one in Hong Kong, and a representative office in Taipei, Shanghai, and Beijing.

Item 2. MANAGEMENT’SMANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.OPERATIONS.

 

The following discussion is based on the assumption that the reader has access to and has read the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.2016.

 

Critical Accounting Policies

 

The discussion and analysis of the Company’s financial condition and results of operations are based upon its unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these condensed 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 financial statements. Actual results may differ from these estimates under different assumptions or conditions.

 

Management of the Company considers the following to be critical accounting policies:

 

Accounting for the allowance for loan losses involves significant judgments and assumptions by management, which have a material impact on the carrying value of net loans. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances as described in “Allowance for Credit Losses” under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.2016.

 

Accounting for investment securities involves significant judgments and assumptions by management, which have a material impact on the carrying value of securities and the recognition of any “other-than-temporary” impairment to our investment securities. The judgments and assumptions used by managementmanagement are described in “Investment Securities” under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.2016.

 

Accounting for income taxes involves significant judgments and assumptions by management, which have a material impact on the amount of taxes currently payable and the income tax expense recorded in the financial statements. The judgments and assumptions used by management are described in “Income Taxes” under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.2016.

 


Accounting for goodwill and goodwill impairment involves significant judgments and assumptions by management, which have a material impact on the amount of goodwill and noninterest expense recorded in the financial statements. The judgments and assumptions used by management are described in “Goodwill and Goodwill Impairment” under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.2016.

 

 

HHighlightsighlights

 

 

Diluted earnings per share increased 23.4% to $0.58 per shareCompleted the acquisition of SinoPac Bancorp, the holding company for Far East National Bank, (“FENB”) on July 14, 2017.

Total loans during the third quarter of 2016 comparedincreased by $1.0 billion to $0.47 per share for the same quarter a year ago.$12.6 billion.

 

Total loansNet interest margin increased $487.4 million forto 3.75% in the third quarter or 18.5% annualized, to $11.0 billion compared to $10.5 billion at June 30, 2016.3.63% in the second quarter of 2017.

 

Quarterly Statement of Operations Review

 

Net Income

 

Net income for the quarter ended September 30, 2016,2017, was $46.1$49.7 million, an increase of $7.6$3.6 million, or 19.8%7.8%, compared to net income of $38.5$46.1 million for the same quarter a year ago. Diluted earnings per share for the quarter ended September 30, 2016,2017, was $0.58$0.61 compared to $0.47$0.58 for the same quarter a year ago.

 

Return on average stockholders’stockholders equity was 10.30%9.77% and return on average assets was 1.38%1.29% for the quarter ended September 30, 2016,2017, compared to a return on average stockholders’ equity of 8.80%10.30% and a return on average assets of 1.23%1.38% for the same quarter a year ago. The increase is primarily due to the $11.7 million decrease in amortization of investments in alternative energy partnerships.

 

FFinancialinancial Performance

 

 

Three months ended September 30,

  

Three months ended

 
 

2016

  

2015

  

September 30, 2017

  

September 30, 2016

 

Net income (million)

 $46.1  $38.5 

Net income

 $49.7 million  $46.1 million 

Basic earnings per common share

 $0.58  $0.47  $0.62  $0.58 

Diluted earnings per common share

 $0.58  $0.47  $0.61  $0.58 

Return on average assets

  1.38%  1.23%  1.29%  1.38%

Return on average total stockholders' equity

  10.30%  8.80%  9.77%  10.30%

Efficiency ratio

  45.05%  53.81%  41.91%  45.05%

 

 

Net Interest Income Before Provision for Credit Losses

 

NetNet interest income before provision for credit losses increased $6.2$29.4 million, or 6.3%28.3%, to $103.8$133.2 million during the third quarter of 20162017 compared to $97.6$103.8 million during the same quarter a year ago. The increase was due primarily to an increase in interest income from loans partially offset by an increaseand a decrease in interest expense from time and other deposits.securities sold under agreements to repurchase.

 

The net interest margin was 3.75% for the third quarter of 2017 compared to 3.36% for the third quarter of 2016 and 3.37%3.63% for the third quarter of 2015. The decrease in the net interest margin for the third quarter of 2016 from 3.38% in the second quarter of 2016,2017. The increase from the second quarter of 2017 was primarily due to lowerthe result of interest recoveries and prepayment penalties during the third quarter of 2016.$5.6 million.

 

For the third quarter of 2017, the yield on average interest-earning assets was 4.34%, the cost of funds on average interest-bearing liabilities was 0.81%, and the cost of interest-bearing deposits was 0.68%. In comparison, for the third quarter of 2016,the yield on average interest-earning assets was 4.02%, the cost of funds on average interest-bearing liabilities was 0.89%, and the cost of average interest-bearing deposits was 0.70%. In comparison, for the third quarter of 2015,The increase in the yield on average interest-earninginterest earning assets was 4.03%, the costa result of funds on average interest-bearing liabilities was 0.87%,higher interest rates, interest income collected from nonaccrual loans and the cost of interest-bearing deposits was 0.67%.loan prepayment penalties. The net interest spread, defined as the difference between the yield on average interest-earning assets and the cost of funds on average interest-bearing liabilities, was 3.13%3.53% for the quarter ended September 30, 2016,2017, compared to 3.16%3.13% for the same quarter a year ago.

 

The following table sets forth information concerning average interest-earning assets, average interest-bearing liabilities, and the average yields and rates paid on those assets and liabilities for the three months ended September 30, 2017, and 2016. Average outstanding amounts included in the table are daily averages.

Interest-Earning Assets and Interest-Bearing Liabilities

 
  

Three months ended September 30,

 
  

2017

  

2016

 
      

Interest

  

Average

      

Interest

  

Average

 
  

Average

  

Income/

  

Yield/

  

Average

  

Income/

  

Yield/

 

(Dollars in thousands)

 

Balance

  

Expense

  

Rate (1)(2)

  

Balance

  

Expense

  

Rate (1)(2)

 

Interest earning assets:

                        

Total loans and leases (1)

 $12,317,721  $146,383   4.71%  10,670,253   118,500   4.42 

Investment securities

  1,396,859   5,692   1.62   1,303,598   4,850   1.48 

Federal Home Loan Bank and FRB stock

  32,369   607   7.44   17,268   393   9.05 

Interest bearing deposits

  292,595   1,288   1.75   294,292   412   0.56 

Federal funds sold and securities purchased under agreements to resell

  35,707   108   1.20           - 

Total interest-earning assets

  14,075,251   154,078   4.34   12,285,411   124,155   4.02 

Non-interest earning assets:

                        

Cash and due from banks

  294,466           223,925         

Other non-earning assets

  1,094,648           884,006         

Total non-interest earning assets

  1,389,114           1,107,931         

Less:   Allowance for loan losses

  (105,390)          (123,609)        

Deferred loan fees

  (4,852)          (6,348)        

Total assets

 $15,354,123          $13,263,385         
                         

Interest bearing liabilities:

                        

Interest bearing demand accounts

 $1,349,508  $588   0.17  $1,060,065  $441   0.17 

Money market accounts

  2,496,548   3,944   0.63   2,117,831   3,511   0.66 

Savings accounts

  942,452   569   0.24   627,912   260   0.16 

Time deposits

  4,939,189   11,678   0.94   4,651,593   10,701   0.92 

Total interest-bearing deposits

  9,727,697   16,779   0.68   8,457,401   14,913   0.70 
                         

Securities sold under agreements to repurchase

  109,239   874   3.17   378,261   3,828   4.03 

Other borrowings

  324,581   1,773   2.17   107,203   134   0.50 

Long-term debt

  119,136   1,456   4.85   119,136   1,456   4.86 

Total interest-bearing liabilities

  10,280,653   20,882   0.81   9,062,001   20,331   0.89 

Non-interest bearing liabilities:

                        

Demand deposits

  2,714,244           2,254,123         

Other liabilities

  339,001           167,409         

Total equity

  2,020,224           1,779,852         

Total liabilities and equity

 $15,354,122          $13,263,385         

Net interest spread

          3.53%          3.13%

Net interest income

     $133,196          $103,824     

Net interest margin

          3.75%          3.36%

(1) Yields and amounts of interest earned include loan fees. Non-accrual loans are included in the average balance.

(2) Calculated by dividing net interest income by average outstanding interest-earning assets.

The following table summarizes the changes in interest income and interest expense attributable to changes in volume and changes in interest rates:

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

Three months ended September 30,

 
  

2017-2016

 
  

Increase (Decrease) in

 
  

Net Interest Income Due to:

 

(In thousands)

 

Changes in

Volume

  

Changes in

Rate

  

Total

Change

 
             

Interest-earning assets:

            

Loans and leases

 $19,431  $8,452  $27,883 

Investment securities

  368   474   842 

Federal Home Loan Bank and FRB stock

  294   (80)  214 

Deposits with other banks

  (2)  878   876 

Federal funds sold and securities purchased under agreements to resell

  108   -   108 

Total changes in interest income

  20,199   9,724   29,923 
             

Interest-bearing liabilities:

            

Interest bearing demand accounts

  126   21   147 

Money market accounts

  610   (177)  433 

Savings accounts

  162   147   309 

Time deposits

  696   281   977 

Securities sold under agreements to repurchase

  (2,277)  (677)  (2,954)

Other borrowed funds

  617   1,022   1,639 

Long-term debt

  -   -   - 

Total changes in interest expense

  (66)  617   551 

Changes in net interest income

 $20,265  $9,107  $29,372 

(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/(Reversal) for Credit Losses

The provision for credit losses was zero for the third quarter of 2017 and 2016. The provision/(reversal) for credit losses was based on a review of the appropriateness of the allowance for loan losses at September 30, 2017. The following table summarizes the charge-offs and recoveries for the periods indicated:

  

Three months ended

  

Nine months ended September 30,

 
  

September 30, 2017

  

September 30, 2016

  

2017

  

2016

 
  

(In thousands)

 

Charge-offs:

                

Commercial loans

 $80  $3,278  $1,810  $12,035 

Real estate loans (1)

  305   4,626   860   5,830 

Total charge-offs

  385   7,904   2,670   17,865 

Recoveries:

                

Commercial loans

  575   2,006   1,401   3,720 

Construction loans

  47   548   143   7,871 

Real estate loans (1)

  5,489   343   6,195   903 

Total recoveries

  6,111   2,897   7,739   12,494 

Net (recoveries)/charge-offs

 $(5,726) $5,007  $(5,069) $5,371 

(1)

Real estate loans include commercial mortgage loans, residential mortgage loans, and equity lines.

Non-Interest Income

Non-interest income, which includes revenues from depository service fees, letters of credit commissions, securities gains (losses), wire transfer fees, and other sources of fee income, was $13.0 million for the third quarter of 2017, an increase of $4.2 million, or 47.1%, compared to $8.8 million for the third quarter of 2016. The increase was primarily due to the gain of $5.4 million on the acquisition of SinoPac Bancorp and was offset by a decrease in securities gains of $1.7 million from the quarter a year ago.

Non-Interest Expense

Non-interest expense increased $10.5 million, or 20.7%, to $61.2 million in the third quarter of 2017 compared to $50.7 million in the same quarter a year ago. The increase in non-interest expense in the third quarter of 2017 was primarily due to a $5.0 million increase in salary and employee benefit expenses and a $3.3 million increase in acquisition related expense when compared to the same quarter a year ago. Acquisition related expenses during the third quarter totaled approximately, $3.3 million, including $2.8 million in legal and investment banking fees and $0.5 million in severance and retention expenses. The efficiency ratio was 41.9% in the third quarter of 2017 compared to 45.1% for the same quarter a year ago.

Income Taxes

The effective tax rate for the third quarter of 2017 was 41.4% compared to 25.5% for the third quarter of 2016. The third quarter 2017 effective tax rate of 41.4% reflected additional tax expense to increase the full year effective tax rate to 34% compared to the 29% effective tax rate forecasted at June 30, 2017. This adjustment in the third quarter was the result of lower tax credits from the slow deployment of alternative energy investments. Income tax expense for the first quarter of 2017 was also reduced by $2.6 million in benefits from the distribution of restricted stock units and exercises of stock options.

Year-to-Date Statement of Operations Review

Net income for the nine months ended September 30, 2017, was $150.1 million, an increase of $23.0 million, or 18.1%, compared to net income of $127.1 million for the same period a year ago. Diluted earnings per share was $1.86 compared to $1.59 per share for the same period a year ago. The net interest margin for the nine months ended September 30, 2017, was 3.63% compared to 3.39% for the same period a year ago.

Return on average stockholders’ equity was 10.46% and return on average assets was 1.39% for the nine months ended September 30, 2017, compared to a return on average stockholders’ equity of 9.66% and a return on average assets of 1.29% for the same period of 2016. The efficiency ratio for the nine months ended September 30, 2017, was 43.71% compared to 51.35% for the same period a year ago.

 

The following table sets forth information concerning average interest-earning assets, average interest-bearing liabilities, and the average yields and rates paid on those assetsassets and liabilities for the threenine months ended September 30, 2016,2017, and 2015.2016. Average outstanding amounts included in the table are daily averages.

 

Interest-Earning Assets and Interest-Bearing LiabilitiesInterest-Earning Assets and Interest-Bearing Liabilities 

Interest-Earning Assets and Interest-Bearing Liabilities

 
 Three months ended September 30,  

Nine months ended September 30,

 
 

2016

  

2015

  

2017

  

2016

 
     

Interest

  

Average

      

Interest

  

Average

      

Interest

  

Average

      

Interest

  

Average

 
 

Average

  

Income/

  

Yield/

  

Average

  

Income/

  

Yield/

  

Average

  

Income/

  

Yield/

  

Average

  

Income/

  

Yield/

 

(Dollars in thousands)

 

Balance

  

Expense

  

Rate(1)(2)

  

Balance

  

Expense

  

Rate(1)(2)

  

Balance

  

Expense

  

Rate (1)(2)

  

Balance

  

Expense

  

Rate (1)(2)

 

Interest earning assets:

                                                

Commercial loans

 $2,203,278  $21,277   3.84% $2,411,560  $22,651   3.73%

Residential mortgage loans

  2,381,931   26,038   4.37   1,936,100   21,835   4.51 

Commercial mortgage loans

  5,579,186   63,888   4.56   5,110,278   59,652   4.63 

Real estate construction loans

  502,943   7,279   5.76   392,579   5,779   5.84 

Other loans and leases

  2,915   18   2.46   4,933   26   2.09 

Total loans and leases(1)

  10,670,253   118,500   4.42   9,855,450   109,943   4.43  $11,668,814  $401,129   4.60   10,468,328   349,212   4.46 

Taxable securities

  1,303,598   4,850   1.48   1,488,655   6,142   1.64 

Federal Home Loan Bank stock

  17,268   393   9.05   17,250   524   12.05 

Investment securities

  1,297,789   14,817   1.53   1,384,019   16,974   1.64 

Federal Home Loan Bank and FRB stock

  22,345   1,317   7.88   17,256   1,122   8.69 

Interest bearing deposits

  294,292   412   0.56   149,153   258   0.69   359,580   3,140   1.17   272,690   1,094   0.54 

Federal funds sold and securities purchased under agreements to resell

  12,033   108   1.20   -   -   - 

Total interest-earning assets

  12,285,411   124,155   4.02   11,510,508   116,867   4.03   13,360,561   420,511   4.21   12,142,293   368,402   4.05 

Non-interest earning assets:

                                                

Cash and due from banks

  223,925           223,295           235,097           215,415         

Other non-earning assets

  884,006           866,217           965,906           891,974         

Total non-interest earning assets

  1,107,931           1,089,512           1,201,003           1,107,389         

Less: Allowance for loan losses

  (123,609)          (153,762)          (113,299)          (133,232)        

Deferred loan fees

  (6,348)          (9,977)          (4,531)          (7,225)        

Total assets

 $13,263,385          $12,436,281          $14,443,734          $13,109,225         
                                                

Interest bearing liabilities:

                                                

Interest bearing demand accounts

 $1,060,065  $441   0.17  $880,209  $367   0.17  $1,282,904  $1,639   0.17  $1,013,129  $1,256   0.17 

Money market accounts

  2,117,831   3,511   0.66   1,721,394   2,616   0.60   2,359,871   11,362   0.64   2,020,725   9,768   0.65 

Savings accounts

  627,912   260   0.16   632,466   235   0.15   817,540   1,244   0.20   626,200   759   0.16 

Time deposits

  4,651,593   10,701   0.92   4,868,908   10,406   0.85   4,840,293   33,429   0.92   4,752,938   32,177   0.90 

Total interest-bearing deposits

  8,457,401   14,913   0.70   8,102,977   13,624   0.67   9,300,608   47,674   0.69   8,412,992   43,960   0.70 
                                                

Securities sold under agreements to repurchase

  378,261   3,828   4.03   400,000   3,977   3.94   149,267   3,489   3.13   392,701   11,696   3.98 

Other borrowings

  107,203   134   0.50   114,998   164   0.57   177,372   2,366   1.78   119,348   442   0.49 

Long-term debt

  119,136   1,456   4.86   119,136   1,456   4.85   119,136   4,320   4.85   119,136   4,336   4.86 

Total interest-bearing liabilities

  9,062,001   20,331   0.89   8,737,111   19,221   0.87   9,746,383   57,849   0.79   9,044,177   60,434   0.89 

Non-interest bearing liabilities:

                                                

Demand deposits

  2,254,123           1,795,938           2,542,754           2,131,742         

Other liabilities

  167,409           168,083           236,332           175,714         

Total equity

  1,779,852           1,735,149           1,918,265           1,757,592         

Total liabilities and equity

 $13,263,385          $12,436,281          $14,443,734          $13,109,225         

Net interest spread

          3.13%          3.16%          3.42%          3.16%

Net interest income

     $103,824          $97,646          $362,662          $307,968     

Net interest margin

          3.36%          3.37%          3.63%          3.39%

 

(1) Yields and amounts of interest earned include loan fees. Non-accrual loans are included in the average balance.

(2) Calculated by dividing net interest income by average outstanding interest-earning assets.

 

 

The following table summarizes the changes in interest income and interest expense attributable to changes in volume and changes in interest rates:

 

 

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

Taxable-Equivalent Net Interest Income — Changes Due to Volumn and Rate(1)

Taxable-Equivalent Net Interest Income — Changes Due to Volumn and Rate(1)

 
 Three months ended September 30,  

Nine months ended September 30,

 
 2016-2015  

2017-2016

 
 Increase (Decrease) in  

Increase (Decrease) in

 
 Net Interest Income Due to:  

Net Interest Income Due to:

 

(In thousands)

 

Changes in

Volume

  

Changes in

Rate

  

Total

Change

 

(Dollars in thousands)

 

Changes in

Volume

  

Changes in

Rate

  

Total

Change

 
                        

Interest-earning assets:

                        

Loans and leases

 $8,753  $(196) $8,557  $40,745  $11,172  $51,917 

Taxable securities

  (730)  (562)  (1,292)

Federal Home Loan Bank stock

  1   (132)  (131)

Investment securities

  (1,030)  (1,127)  (2,157)

Federal Home Loan Bank and FRB stock

  307   (112)  195 

Deposits with other banks

  210   (56)  154   435   1,611   2,046 

Federal funds sold and securities purchased under agreements to resell

  108   -   108 

Total changes in interest income

  8,234   (946)  7,288   40,565   11,544   52,109 
                        

Interest-bearing liabilities:

                        

Interest bearing demand accounts

  74   -   74   343   40   383 

Money market accounts.

  636   259   895 

Money market accounts

  1,624   (30)  1,594 

Savings accounts

  (2)  27   25   264   221   485 

Time deposits

  (483)  778   295   583   669   1,252 

Securities sold under agreements to repurchase

  (226)  77   (149)  (6,097)  (2,110)  (8,207)

Other borrowed funds

  (11)  (19)  (30)  303   1,621   1,924 

Long-term debt

  -   (16)  (16)

Total changes in interest expense

  (12)  1,122   1,110   (2,980)  395   (2,585)

Changes in net interest income

 $8,246  $(2,068) $6,178  $43,545  $11,149  $54,694 

 

(1)

(1)Changes in interest income and interest expense attributable to changes in both volume and rate have beenallocated proportionately to changes due to volume and changes due to rate.

 

 

Reversal for Credit Losses

Reversal for credit losses was zero for the third quarter of 2016 compared to $1.3 million for the third quarter of 2015. This was based on a review of the appropriateness of the allowance for loan losses at September 30, 2016. A provision or reversal for credit losses represents a charge against or benefit toward current earnings that is determined by management, through a credit review process, as the amount needed to establish an allowance that management believes to be sufficient to absorb credit losses inherent in the Company’s loan portfolio, including unfunded commitments. The following table summarizes the charge-offs and recoveries for the periods indicated:

  

Three months ended September 30,

  

Nine months ended September 30,

 
  

2016

  

2015

  

2016

  

2015

 
  

(In thousands)

 

Charge-offs:

                

Commercial loans

 $3,278  $3,310  $12,035  $6,754 

Real estate loans(1)

  4,626   97   5,830   3,774 

Total charge-offs

  7,904   3,407   17,865   10,528 

Recoveries:

                

Commercial loans

 $2,006   606   3,720   3,084 

Construction loans

  548   41   7,871   163 

Real estate loans (1)

  343   648   903   4,336 

Total recoveries

  2,897   1,295   12,494   7,583 

Net charge-offs

 $5,007  $2,112  $5,371  $2,945 

(1) Real estate loans include commercial mortgage loans, residential mortgage loans, and equity lines.


Non-Interest Income

Non-interest income, which includes revenues from depository service fees, letters of credit commissions, securities gains (losses), gains (losses) on loan sales, wire transfer fees, and other sources of fee income, was $8.8 million for the third quarter of 2016, a decrease of $400,000, or 3.8%, compared to $9.2 million for the third quarter of 2015.

Non-Interest Expense

Non-interest expense decreased $6.8 million, or 11.7%, to $50.7 million in the third quarter of 2016 compared to $57.5 million in the same quarter a year ago. The decrease in non-interest expense in the third quarter of 2016 was primarily due to decreases of $11.7 million in amortization of investments in alternative energy partnerships. The efficiency ratio was 45.05% in the third quarter of 2016 compared to 53.81% for the same quarter a year ago.

Income Taxes

The effective tax rate for the third quarter of 2016 was 25.5% compared to 23.9% for the third quarter of 2015. The effective tax rate includes the impact of the utilization of low income housing tax credits and alternative energy tax credits.

Year-to-Date Statement of Operations Review

Net income for the nine months ended September 30, 2016, was $127.1 million, an increase of $7.4 million, or 6.2%, compared to net income of $119.7 million for the same period a year ago. Diluted earnings per share was $1.59 compared to $1.48 per share for the same period a year ago. The net interest margin for the nine months ended September 30, 2016, was 3.39% compared to 3.43% for the same period a year ago.

Return on average stockholders’ equity was 9.66% and return on average assets was 1.29% for the nine months ended September 30, 2016, compared to a return on average stockholders’ equity of 9.56% and a return on average assets of 1.36% for the same period of 2015. The efficiency ratio for the nine months ended September 30, 2016, was 51.35% compared to 49.13% for the same period a year ago.


The following table sets forth information concerning average interest-earning assets, average interest-bearing liabilities, and the average yields and rates paid on those assets and liabilities for the nine months ended September 30, 2016, and 2015. Average outstanding amounts included in the table are daily averages.

Interest-Earning Assets and Interest-Bearing Liabilities 
  Nine months ended September 30, 
  

2016

  

2015

 
      

Interest

  

Average

      

Interest

  

Average

 
  

Average

  

Income/

  

Yield/

  

Average

  

Income/

  

Yield/

 

(Dollars in thousands)

 

Balance

  

Expense

  

Rate(1)(2)

  

Balance

  

Expense

  

Rate(1)(2)

 

Interest earning assets:

                        

Commercial loans

 $2,248,025  $65,244   3.88% $2,417,306  $68,969   3.81%

Residential mortgage loans

  2,260,806   75,128   4.43   1,837,912   62,731   4.55 

Commercial mortgage loans

  5,477,646   186,567   4.55   4,810,426   167,646   4.66 

Real estate construction loans

  479,235   22,227   6.20   355,520   15,619   5.87 

Other loans and leases

  2,616   46   2.35   4,541   73   2.15 

Total loans and leases(1)

  10,468,328   349,212   4.46   9,425,705   315,038   4.47 

Taxable securities

  1,384,019   16,974   1.64   1,337,791   15,262   1.53 

Federal Home Loan Bank stock

  17,256   1,122   8.69   22,905   2,782   16.24 

Interest bearing deposits

  272,690   1,094   0.54   147,206   1,105   1.00 

Total interest-earning assets

  12,142,293   368,402   4.05   10,933,607   334,187   4.09 

Non-interest earning assets:

                        

Cash and due from banks

  215,415           202,080         

Other non-earning assets

  891,974           798,587         

Total non-interest earning assets

  1,107,389           1,000,667         

Less: Allowance for loan losses

  (133,232)          (157,939)        

Deferred loan fees

  (7,225)          (10,736)        

Total assets

 $13,109,225          $11,765,599         
                         

Interest bearing liabilities:

                        

Interest bearing demand accounts

 $1,013,129  $1,256   0.17  $838,976  $1,025   0.16 

Money market accounts

  2,020,725   9,768   0.65   1,634,848   7,340   0.60 

Savings accounts

  626,200   759   0.16   582,632   646   0.15 

Time deposits

  4,752,938   32,177   0.90   4,541,376   28,320   0.83 

Total interest-bearing deposits

  8,412,992   43,960   0.70   7,597,832   37,331   0.66 
                         

Securities sold under agreements to repurchase

  392,701   11,696   3.98   401,099   11,836   3.95 

Other borrowings

  119,348   442   0.49   118,091   374   0.42 

Long-term debt

  119,136   4,336   4.86   119,136   4,320   4.85 

Total interest-bearing liabilities

  9,044,177   60,434   0.89   8,236,158   53,861   0.87 

Non-interest bearing liabilities:

                        

Demand deposits

  2,131,742           1,710,823         

Other liabilities

  175,714           144,664         

Total equity

  1,757,592           1,673,954         

Total liabilities and equity

 $13,109,225          $11,765,599         

Net interest spread

          3.16%          3.22%

Net interest income

     $307,968          $280,326     

Net interest margin

          3.39%          3.43%

(1) Yields and amounts of interest earned include loan fees. Non-accrual loans are included in the average balance.
(2) Calculated by dividing net interest income by average outstanding interest-earning assets.


The following table summarizes the changes in interest income and interest expense attributable to changes in volume and changes in interest rates:

Taxable-Equivalent Net Interest Income — Changes Due to Volumn and Rate(1)

 
  

Nine months ended September 30,

 
  2016-2015  
  

Increase (Decrease) in

 
  

Net Interest Income Due to:

 

(Dollars in thousands)

 

Changes in

Volume

  

Changes in

Rate

  

Total

Change

 
             

Interest-earning assets:

            

Loans and leases

 35,069  (895) 34,174 

Taxable securities

  545   1,167   1,712 

Federal Home Loan Bank stock

  (575)  (1,085)  (1,660)

Deposits with other banks

  661   (672)  (11)

Total changes in interest income

  35,700   (1,485)  34,215 
             

Interest-bearing liabilities:

            

Interest bearing demand accounts

  217   14   231 

Money market accounts

  1,839   589   2,428 

Savings accounts

  51   62   113 

Time deposits

  1,369   2,488   3,857 

Securities sold under agreements to repurchase

  (242)  102   (140)

Other borrowed funds

  4   64   68 

Long-term debt

  -   16   16 

Total changes in interest expense

  3,238   3,335   6,573 

Changes in net interest income

 $32,462  $(4,820) $27,642 

(1) Changes in interest income and interest expense attributable to changes in both volume and rate have beenallocated proportionately to changes due to volume and changes due to rate.

Balance Sheet Review

 

Assets

 

Total assets were $14.10$15.7 billion as of September 30, 2016,2017, an increase of $844.7 million,$1.2 billion, or 6.4%8.3%, from $13.25$14.5 billion as of December 31, 2015,2016, primarily due to a $847.0 million increase in loans and a $254.9 million increase in short-term investments and interest bearing deposits offset by a $287.9 million decrease in securities available-for-sale.

Investment Securitiesthe acquisition of SinoPac Bancorp which had total assets of $1.2 billion.

 

Investment Securities

Investment securities represented 9.2%8.7% of total assets as of September 30, 2016,2017, compared to 12.0%9.1% of total assets as of December 31, 2015.2016. The carrying value of investment securities as of September 30, 2016,2017, was $1.30$1.4 billion compared to $1.59$1.3 billion as of December 31, 2015.2016. Securities available-for-sale are carried at fair value and had a net unrealized gain, net of tax, of $8.5$2.0 million as of September 30, 2016,2017, compared to a net unrealized loss, net of tax, of $5.4$1.5 million as of December 31, 2015.2016.

 

 

The following tables reflect the amortized cost, gross unrealized gains, gross unrealized losses, and fair value of investment securities as of September 30, 2016,2017, and December 31, 2015:2016:

  

September 30, 2017

 
      

Gross

  

Gross

     
  

Amortized

  

Unrealized

  

Unrealized

     
  

Cost

  

Gains

  

Losses

  

Fair Value

 
  

(In thousands)

 
                 

Securities Available-for-Sale

                

U.S. treasury securities

 $399,741  $-  $305  $399,436 

U.S. government agency entities

  9,679   27   6   9,700 

U.S. government sponsored entities

  400,000   -   6,278   393,722 

State and municipal securities

  1,943       12   1,931 

Mortgage-backed securities

  447,959   468   2,362   446,065 

Collateralized mortgage obligations

  1,715   -   5   1,710 

Corporate debt securities

  80,007   904   5   80,906 

Mutual funds

  6,500   -   229   6,271 

Preferred stock of government sponsored entities

  4,117   3,970   -   8,087 

Other equity securities

  13,294   7,463   98   20,659 

Total

 $1,364,955  $12,832  $9,300  $1,368,487 

 

 

 

September 30, 2016

  

December 31, 2016

 
     

Gross

  

Gross

          

Gross

  

Gross

     
 

Amortized

  

Unrealized

  

Unrealized

      

Amortized

  

Unrealized

  

Unrealized

     
 

Cost

  

Gains

  

Losses

  

Fair Value

  

Cost

  

Gains

  

Losses

  

Fair Value

 
 

(In thousands)

  

(In thousands)

 
                                

Securities Available-for-Sale

                                

U.S. treasury securities

 $389,921  $112  $24  $390,009  $489,839  $35  $857  $489,017 

U.S. government sponsored entities

  250,000   79   69   250,010   400,000   -   9,669   390,331 

Mortgage-backed securities

  556,454   7,186   2   563,638   339,241   309   3,290   336,260 

Collateralized mortgage obligations

  52   -   22   30   48   -   20   28 

Corporate debt securities

  74,962   444   937   74,469   74,965   247   862   74,350 

Mutual funds

  6,000   -   74   5,926   6,500   -   270   6,230 

Preferred stock of government sponsored entities

  2,811   565   188   3,188   2,811   4,497   -   7,308 

Other equity securities

  3,608   7,591   -   11,199   3,608   7,213   -   10,821 
                

Total

 $1,283,808  $15,977  $1,316  $1,298,469  $1,317,012  $12,301  $14,968  $1,314,345 

 

  

December 31, 2015

 
      

Gross

  

Gross

     
  

Amortized

  

Unrealized

  

Unrealized

     
  

Cost

  

Gains

  

Losses

  

Fair Value

 
  

(In thousands)

 
                 

Securities Available-for-Sale

                

U.S. treasury securities

 $284,678  $5  $395  $284,288 

U.S. government sponsored entities

  150,000   -   1,840   148,160 

Mortgage-backed securities

  1,073,108   560   11,399   1,062,269 

Collateralized mortgage obligations

  63   -   27   36 

Corporate debt securities

  74,955   425   1,525   73,855 

Mutual funds

  6,000   -   167   5,833 

Preferred stock of government sponsored entities

  2,811   633   228   3,216 

Other equity securities

  4,108   4,929   342   8,695 
                 

Total

 $1,595,723  $6,552  $15,923  $1,586,352 

 

For additional information, see Note 67 to the Company’s unaudited condensed consolidated financial statements presented elsewhere in this report.statements.

 

Investment securities having a carrying value of $505.9$291.4 million as of September 30, 2016,2017, and $449.6$649.1 million as of December 31, 2015,2016, were pledged to secure public deposits, other borrowings, treasury tax and loan and securities sold under agreements to repurchase. 

 

 

Loans

 

Gross loans, excluding loans held for sale, were $11.0$12.6 billion at September 30, 2016,2017, an increase of $847.0 million,$1.4 billion, or 8.3%12.5%, from $10.2$11.2 billion at December 31, 2015,2016. The increase was primarily due to increases of $442.8$591.8 million, or 8.4%10.2%, in commercial mortgage loans, $397.0$478.5 million, or 20.5%19.6%, in residential mortgage loans, and $73.7$171.7 million, or 16.7%7.6%, in commercial loans, and $143.4 million, or 26.2%, in real estate construction loans partially offset by decreases of $67.9 million, or 2.9%, in commercial loans. The following table sets forth the classification of loans by type, mix,loan balances and percentage change as of the dates indicated:composition at September 30, 2017, compared to December 31, 2016, and to September 30, 2016, are presented below:

 

 

September 30, 2016

  

% of Gross Loans

  

December 31, 2015

  

% of Gross Loans

  

% Change

 
 (Dollars in thousands)  

September 30, 2017

  

% of Gross Loans

  

December 31, 2016

  

% of Gross Loans

  

% Change

 

Type of Loans

                     

(Dollars in thousands)

 

Commercial loans

 $2,248,996   20.4% $2,316,863   22.8%  (2.9%) $2,419,891   19.2% $2,248,187   20.1%  7.6%

Residential mortgage loans

  2,329,402   21.2   1,932,355   19.0   20.5   2,922,537   23.3   2,444,048   21.8   19.6 

Commercial mortgage loans

  5,743,991   52.2   5,301,218   52.2   8.4   6,377,047   50.6   5,785,248   51.7   10.2 

Equity lines

  170,022   1.5   168,980   1.7   0.6   181,751   1.4   171,711   1.5   5.8 

Real estate construction loans

  515,236   4.7   441,543   4.3   16.7   691,486   5.5   548,088   4.9   26.2 

Installment and other loans

  2,810   0.0   2,493   0.0   12.7   4,722   0.0   3,993   0.0   18.3 

Gross loans

 $11,010,457   100% $10,163,452   100%  8.3% $12,597,434   100% $11,201,275   100%  12.5%
                                        

Allowance for loan losses

  (117,942)      (138,963)      (15.1)  (121,535)      (118,966)      2.2 

Unamortized deferred loan fees

  (5,519)      (8,262)      (33.2)  (3,424)      (4,994)      (31.4)
                                        

Total loans, net

 $10,886,996      $10,016,227       8.7% $12,472,475      $11,077,315       12.6%
                                        

Loans held for sale

 $4,750      $6,676       (28.8%) $-      $7,500       (100.0%)

 

 

Non-performing Assets

 

Non-performing assets include loans past due 90 days or more and still accruing interest, non-accrual loans, and other real estate owned (“OREO”). The Company’s policy is to place loans on non-accrual status if interest and/or principal is past due 90 days or more, or in cases where management deems the full collection of principal and interest unlikely. After a loan is placed on non-accrual status, any previously accrued but unpaid interest is reversed and charged against current income and subsequent payments received are generally first applied towards the outstanding principal balance of the loan. Depending on the circumstances, management may elect to continue the accrual of interest on certain past due loans if partial payment is received and/or the loan is well collateralized and in the process of collection. The loan is generally returned to accrual status when the borrower has brought the past due principal and interest payments current and, in the opinion of management, the borrower has demonstrated the ability to make future payments of principal and interest as scheduled.

 

Management reviews the loan portfolio regularly for problem loans. During the ordinary course of business,business, management becomes aware of borrowers that may not be able to meet the contractual requirements of the loan agreements. Such loans are placed under closer supervision with consideration given to placing the loans on non-accrual status, the need for an additional allowance for loan losses, and (if appropriate) partial or full charge-off.

 

The ratio of non-performingnon-performing assets, excluding non-accrual loans held for sale, to total assets was 0.5%0.6% at September 30, 2016,2017, compared to 0.6%0.5% at December 31, 2015.2016. Total non-performing assets decreased $11.5increased $17.6 million, or 15.0%25.2%, to $65.3$87.4 million at September 30, 2016,2017, compared to $76.8$69.8 million at December 31, 2015,2016, primarily due to a decreasean increase of $7.7$15.7 million, or 14.9%31.6%, in non-accrual loans andoffset by a decrease of $3.8$2.0 million, or 15.0%9.7%, in OREO.other real estate owned.

 

As a percentage of gross loans, excluding loans held for sale, plus OREO, our non-performing assets was 0.59%0.69% as of September 30, 2016,2017, compared to 0.75%0.62% as of December 31, 2015.2016. The non-performing portfolio loan coverage ratio, defined as the allowance for credit losses to non-performing loans, increaseddecreased to 270.9%181.6% as of September 30, 2016,2017, from 269.4%245.9% as of December 31, 2015.2016.

 

 

The following table presents the changes in non-performing assets and troubled debt restructurings (“TDRs”) as of September 30, 2016,2017, compared to December 31, 2015,2016, and to September 30, 2015:2016:

 

(Dollars in thousands)

 

September 30, 2016

  

December 31, 2015

  

% Change

  

September 30, 2015

  

% Change

  

September 30, 2017

  

December 31, 2016

  

% Change

  

September 30, 2016

  

% Change

 

Non-performing assets

                                        

Accruing loans past due 90 days or more

 $-  $-   -  $2,573   (100) $3,900  $-   100  $-   100 

Non-accrual loans:

                                        

Construction loans

  5,507   16,306   (66)  16,579   (67)  14,267   5,458   161   5,507   159 

Commercial mortgage loans

  21,077   25,231   (16)  33,214   (37)  28,379   20,078   41   21,077   35 

Commercial loans

  9,251   3,545   161   14,758   (37)  15,942   15,710   1   9,251   72 

Residential mortgage loans

  8,524   7,048   21   6,690   27   6,763   8,436   (20)  8,524   (21)

Total non-accrual loans:

 $44,359  $52,130   (15) $71,241   (38) $65,351  $49,682   32  $44,359   47 

Total non-performing loans

  44,359   52,130   (15)  73,814   (40)  69,251   49,682   39   44,359   56 

Other real estate owned

  20,986   24,701   (15)  26,326   (20)  18,115   20,070   (10)  20,986   (14)

Total non-performing assets

 $65,345  $76,831   (15) $100,140   (35) $87,366  $69,752   25  $65,345   34 

Accruing troubled debt restructurings

 $86,555  $81,680   6  $89,881   (4) $62,358  $65,393   (5) $86,555   (28)

Non-accrual loans held for sale

 $4,750  $5,944   (20) $-   100  $-  $7,500   (100) $4,750   (100)
                                        

Allowance for loan losses

 $117,942  $138,963   (15) $150,076   (21) $121,535  $118,966   2  $117,942   3 
                                        

Total gross loans outstanding, at period-end(1)

 $11,010,457  $10,163,452   8  $10,039,932   10  $12,597,434  $11,201,275   12  $11,010,457   14 
                                        

Allowance for loan losses to non-performing loans, at period-end(2)

  265.88%  266.57%      203.32%      175.50%  239.45%      265.88%    

Allowance for loan losses to gross loans, at period-end(1)

  1.07%  1.37%      1.49%      0.96%  1.06%      1.07%    

 

(1) Excludes loans held for sale at period-end.

(2) Excludes non-accrual loans held for sale at period-end.

 

 

Non-accrual Loans

 

At September 30, 2016,2017, total non-accrual loans were $44.4$65.4 million, a decreasean increase of $26.8$15.7 million, or 37.7%31.6%, resulting from several construction and commercial real estate loans placed on nonaccrual, from $49.7 million at December 31, 2016, and an increase of $21.0 million, or 47.3%, from $71.2$44.4 million at September 30, 2015, and a decrease of $7.7 million, or 14.9%, from $52.1 million at December 31, 2015.2016. 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. 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. Non-accrual loans also include those TDRs that do not qualify for accrual status.

 

 

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:

 

 

September 30, 2016

  

December 31, 2015

  

September 30, 2017

  

December 31, 2016

 
 

Real

      

Real

      

Real

      

Real

     
 

Estate (1)

  

Commercial

  

Estate(1)

  

Commercial

  

Estate (1)

  

Commercial

  

Estate (1)

  

Commercial

 
 

(In thousands)

  

(In thousands)

 

Type of Collateral

                                

Single/multi-family residence

 $9,471  $-  $8,727  $-  $23,780  $7,742  $9,368  $218 

Commercial real estate

  20,728   2,416   30,588   834   25,591   -   24,321   - 

Land

  4,909   -   9,270   -   -   -   283   - 

Personal property (UCC)

  -   6,835   -   2,711   -   8,200   -   15,492 

Total

 $35,108  $9,251  $48,585  $3,545  $49,371  $15,942  $33,972  $15,710 

 

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

  

September 30, 2016

  

December 31, 2015

 
  

Real

      

Real

     
  

Estate(1)

  

Commercial

  

Estate(1)

  

Commercial

 
  

(In thousands)

 

Type of Business

                

Real estate development

 $10,004  $-  $29,174  $834 

Wholesale/Retail

  17,174   3,597   13,414   780 

Food/Restaurant

  156   -   293   - 

Import/Export

  -   4,422   -   1,931 

Other

  7,774   1,232   5,704   - 

Total

 $35,108  $9,251  $48,585  $3,545 

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

 

 

Other Real Estate Owned

  

September 30, 2017

  

December 31, 2016

 
  

Real

      

Real

     
  

Estate (1)

  

Commercial

  

Estate (1)

  

Commercial

 
  

(In thousands)

 

Type of Business

                

Real estate development

 $31,890  $20  $13,804  $- 

Wholesale/Retail

  10,807   7,924   12,312   9,213 

Food/Restaurant

  140   -   153   - 

Import/Export

  -   7,998   -   6,174 

Other

  6,534   -   7,703   323 

Total

 $49,371  $15,942  $33,972  $15,710 

 

As of September 30, 2016, OREO totaled $21.0 million, which decreased $3.7 million, or 15.0%, compared to $24.7 million as of December 31, 2015, and increased $5.3 million, or 20.3%, compared to $26.3 million as of September 30, 2015.

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

 

 

Impaired Loans

 

A loan is considered impaired when it is probable that a creditor will 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 delinquencydelinquency status 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 troubled debt restructuring.restructuring (TDRs). Those loans with a balance less than our defined selection criteria, generally a loan amount less than $500,000, are treated as a homogeneous portfolio. If loans meeting the defined criteria are not collateral dependent, we measure 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 are collateral dependent, we measure the impairment by using the loan’s observable market price or the fair value of the collateral. We obtain an appraisal to determine the amount of impairment at the date that the loan becomes impaired. The appraisals are based on “as is” or bulk sale valuations. To ensure that appraised values remain current, we generally obtain an updated appraisal every twelve months from qualified independent appraisers. If the fair value of the collateral, less cost to sell, is less than the recorded amount of the loan, we then recognize impairment by creating or adjusting an existing valuation allowance with a corresponding charge to the provision for loan losses. If an impaired loan is 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 the impaired loan, is charged off against the allowance for loan losses. Non-accrual impaired loans, including TDRs, are not returned to accrual status unless the unpaid interest has been brought current and full repayment of the recorded balance is expected or if the borrower has made six consecutive monthly payments of the scheduled amounts due, and TDRs are reviewed for continued impairment until they are no longer reported as TDRs.

 

As

As of September 30, 2017, recorded investment in impaired loans totaled $127.7 million and was comprised of non-accrual loans, excluding loans held for sale, of $65.3 million and accruing troubled debt restructured loans (TDRs) of $62.4 million. As of December 31, 2016, recorded investment in impaired loans totaled $130.9$115.1 million and was comprised of non-accrual loans, excluding loans held for sale, of $44.4$49.7 million and accruing TDRs of $86.6 million. As of December 31, 2015, recorded investment in impaired loans totaled $133.8 million and was comprised of non-accrual loans of $52.1 million and accruing TDRs of $81.7$65.4 million. For impaired loans, the amounts previously charged off represent 7.7%7.1% as of September 30, 2016,2017, and 22.4%8.4% as of December 31, 2015,2016, of the contractual balances for impaired loans. As of September 30, 2016, $35.12017, $49.4 million, or 79.1%75.7%, of the $44.4$65.3 million of non-accrual loans, excluding loans held for sale, was secured by real estate compared to $48.6$34.0 million, or 93.2%68.4%, of the $52.1$49.7 million of non-accrual loans, excluding loans held for sale, that was secured by real estate as of December 31, 2015.2016. The Bank obtains current appraisals, sales contracts, or other available market price information which provide updated factors in evaluating potential loss.

 

AsAs of September 30, 2016, $2.92017, $2.1 million of the $117.9$121.5 million allowance for loan losses was allocated for impaired loans and $115.0$119.4 million was allocated to the general allowance. As of December 31, 2015, $7.82016, $2.8 million of the $139.0$119.0 million allowance for loan losses was allocated for impaired loans and $131.2$116.2 million was allocated to the general allowance.

 

The allowance for loan losses to non-accrual loans decreased to 265.9%was 186.0% as of September 30, 2016,2017, from 266.6%239.5% as of December 31, 2015,2016, primarily due to a decreasean increase in the allowance for loan losses.non-accrual loans. Non-accrual loans also include those TDRs that do not qualify for accrual status.    

 

 

The following table presents impaired loans and the related allowance as of the dates indicated:

 

 

 

Impaired Loans

 
 

Impaired Loans

  

September 30, 2017

  

December 31, 2016

 
 

September 30, 2016

  

December 31, 2015

              
 

Unpaid

Principal

Balance

  

Recorded

Investment

  

Allowance

  

Unpaid

Principal

Balance

  

Recorded

Investment

  

Allowance

  

Unpaid Principal Balance

  

Recorded Investment

  

Allowance

  

Unpaid Principal Balance

  

Recorded Investment

  

Allowance

 
 

(In thousands)

  

(In thousands)

 
                                                

With no allocated allowance

                                                

Commercial loans

 $29,794  $29,414  $-  $15,493  $6,721  $-  $23,953  $23,373  $-  $24,037  $23,121  $- 

Real estate construction loans

  5,776   5,507   -   51,290   22,002   -   22,309   21,748   -   5,776   5,458   - 

Commercial mortgage loans

  72,319   64,298   -   59,954   54,625   -   39,154   32,370   -   60,522   54,453   - 

Residential mortgage loans and equity lines

  4,832   4,675   -   3,233   3,026   -   2,264   2,264   -   5,472   5,310   - 

Subtotal

 $112,721  $103,894  $-  $129,970  $86,374  $-  $87,680  $79,755  $-  $95,807  $88,342  $- 

With allocated allowance

                                                

Commercial loans

 $3,315  $3,217  $1,320  $7,757  $6,847  $530  $14,082  $13,985  $1,461  $5,216  $4,640  $1,827 

Commercial mortgage loans

  10,425   10,289   1,248   28,258   27,152   6,792   23,061   22,820   823   10,158   10,017   573 

Residential mortgage loans and equity lines

  14,637   13,514   375   14,383   13,437   427   12,461   11,111   322   13,263   12,075   396 

Subtotal

 $28,377  $27,020  $2,943  $50,398  $47,436  $7,749  $49,604  $47,916  $2,606  $28,637  $26,732  $2,796 

Total impaired loans

 $141,098  $130,914  $2,943  $180,368  $133,810  $7,749  $137,284  $127,671  $2,606  $124,444  $115,074  $2,796 

 

 

Loan Interest Reserves 

 

In accordance with customary banking practice, we originate construction loans and land development loans are originated where interest on the loan is disbursed from pre-established interest reserves included in the total original loan commitment. Our construction loans and land development loans generally include optional renewal terms after the maturity of the initial loan term. New appraisals are obtained prior to extension or renewal of these loans in part to determine the appropriate interest reserve to be established for the new loan term. Loans with interest reserves are 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 65% in the case of land to 85% in the case of one to four family residential construction projects.

 

As of September 30, 2016,2017, construction loans of $465.5$515.4 million were disbursed with pre-established interest reserves of $56.1$61.8 million compared to $371.4$500.2 million of such loans disbursed with pre-established interest reserves of $49.5$58.9 million at December 31, 2015.2016.  The balance for construction loans with interest reserves which have been extended was $120.1$81.3 million with pre-established interest reserves of $3.7$1.8 million at September 30, 2016,2017, compared to $67.8$113.1 million with pre-established interest reserves of $2.6$2.1 million at December 31, 2015.2016.  Land loans of $49.5$23.2 million were disbursed with pre-established interest reserves of $1.5 million$680,000 at September 30, 2016,2017, compared to $87.3$51.3 million land loans disbursed with pre-established interest reserves of $1.8$1.0 million at December 31, 2015.2016.  The balance for land loans with interest reserves which have been extended was $1.3$5.9 million at September 30, 20162017 with pre-established interest reserves of $42,000$360,000 compared to $73.2$2.0 million in land loans with pre-established interest reserves of $1.3 million$40,000 at December 31, 2015. 2016. 

 

 

At September 30, 2017 and December 31, 2016, the Bank had no loans on non-accrual status with available interest reserves.  At September 30, 2016, $5.52017, $14.3 million of non-accrual non-residential construction loans, and $9.7$8.0 million of non-accrual land loans had been originated with pre-established interest reserves.  At December 31, 2015, the Bank had no loans on non-accrual status with available interest reserves.  At December 31, 2015, $0.5 million of non-accrual residential construction loans, $15.82016, $5.5 million of non-accrual non-residential construction loans, and $13.9$7.8 million of non-accrual land loans had been originated with pre-established interest reserves.    While we typically expect loans with interest reserves are typically expected to be repaid in full according to the original contractual terms, some loans require one or more extensions beyond the original maturity.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’sCompany’s business activities are with customers located in the predominantly AsianAsian-populated areas of Southern and Northern California; New York City, New York; Dallas and Houston, Texas; Seattle, Washington; Boston, Massachusetts; Chicago, Illinois; Edison, New Jersey; Rockville, Maryland; Las Vegas, Nevada, and Hong Kong. The Company has no specific industry concentration, and generally its loans are collateralized with real property or other pledged collateral of the borrowers. Loans areThe Company generally expectedexpects 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 were no loan concentrations to multiple borrowers in similar activities whichthat exceeded 10% of total loans as of September 30, 2016,2017, or as of December 31, 2015.2016.

 

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-ninethirty-six months. Total loans for construction, land development, and other land represented 38.6%40.7% of the Bank’s total risk-based capital as of September 30, 2016,2017, and 35.8%40.4% as of December 31, 2015.2016. Total CRE loans represented 304%305% of total risk-based capital as of September 30, 2016,2017, and 286%300% as of December 31, 20152016 and were below the Bank’s internal limit for CRE loans of 400% of total capital at both dates.

 

Allowance for Credit Losses

 

The Bank maintains the allowance for credit losses at a level that is considered 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 is designed to identify impaired 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 Bank’s Board of Directors has established a written credit policy that includes a credit review and control system which itthat 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 isare 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 best judgment based on the information available, the ultimate appropriateness of the allowance is dependent upon a variety of factors beyond the Bank’s control, including the performance of the Bank’s loan portfolio, the economy, 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 $117.9$121.5 million and the allowance for off-balance sheet unfunded credit commitments was $2.2$4.3 million at September 30, 2016,2017, which represented the amount believed by management to be appropriate to absorb credit losses inherent in the loan portfolio, including unfunded commitments. The $117.9$121.5 million allowance for loan losses at September 30, 2016, decreased $21.12017, increased $2.5 million, or 15.1%2.1%, from $139.0$119.0 million at December 31, 2015.2016. The allowance for loan losses represented 1.07%0.96% of period-end gross loans, excluding loans held for sale, and 265.9%175.5% of non-performing loans at September 30, 2016.2017. The comparable ratios were 1.37%1.06% of period-end gross loans, excluding loans held for sale, and 266.6%239.5% of non-performing loans at December 31, 2015.2016. The following table sets forth information relating to the allowance for loan losses, charge-offs, recoveries, and the reserve for off-balance sheet credit commitments for the periods indicated:

 

 

Three months ended September 30,

  

Nine months ended September 30,

  

Three months ended September 30,

  

Nine months ended September 30,

 
 

2016

  

2015

  

2016

  

2015

  

2017

  

2016

  

2017

  

2016

 

Allowance for loan losses

 

(Dollars in thousands)

  

(Dollars in thousands)

 
                

Balance at beginning of period

 $122,948  $153,437  $138,963  $161,420  $115,809  $122,948  $118,966  $138,963 

Reversal for credit losses .

  -   (1,250)  (15,650)  (8,400)

Transfers to reserve for off-balance sheetcredit commitments

  -   1   -   1 

Reversal for credit losses

  -   -   (2,500)  (15,650)

Charge-offs :

                                

Commercial loans

  (3,278)  (3,310)  (12,036)  (6,754)  (80)  (3,278)  (1,810)  (12,036)

Real estate loans

  (4,625)  (97)  (5,829)  (3,774)  (305)  (4,625)  (860)  (5,829)

Total charge-offs

  (7,903)  (3,407)  (17,865)  (10,528)  (385)  (7,903)  (2,670)  (17,865)

Recoveries:

                                

Commercial loans

  2,006   606   3,720   3,084   575   2,006   1,401   3,720 

Construction loans

  548   41   7,871   163   47   548   143   7,871 

Real estate loans

  343   648   903   4,336   5,489   343   6,195   903 

Total recoveries

  2,897   1,295   12,494   7,583   6,111   2,897   7,739   12,494 
                                
                

Balance at end of period

 $121,535  $117,942  $121,535  $117,942 

Reserve for off-balance sheet credit commitments

                

Balance at beginning of period

 $4,513  $2,124  $3,224  $1,494 

Provision for credit losses

  (259)  100   1,030   730 

Balance at end of period

 $117,942  $150,076  $117,942  $150,076  $4,254  $2,224  $4,254  $2,224 
                                

Reserve for off-balance sheet credit commitments

                

Balance at beginning of period

 $2,124  $1,574  $1,494  $1,949 

Provision/(reversal) for credit losses

  100   (153)  730   (528)

Balance at end of period

 $2,224  $1,421  $2,224  $1,421 
                
                
                

Average loans outstandingduring the period(1).

 $10,668,341  $9,857,196  $10,466,764  $9,426,293 

Average loans outstanding during the period (1)

 $12,317,721  $10,668,341  $11,668,814  $10,466,764 

Total gross loans outstanding, at period-end(1)

 $11,010,457  $10,039,932  $11,010,457  $10,039,932  $12,597,434  $11,010,457  $12,597,434  $11,010,457 

Total non-performing loans, at period-end(2)

 $44,359  $73,814  $44,359  $73,814  $69,251  $44,359  $69,251  $44,359 

Ratio of net charge-offs to averageloans outstanding during the period(1)

  0.19%  0.09%  0.07%  0.04%

Ratio of net charge-offs/(recoveries) to average loans outstanding during the period (1)

  (0.18%)  0.19%  (0.06%)  0.07%

Provision for credit losses to averageloans outstanding during the period(1)

  0.00%  (0.06%)  (0.19%)  (0.13%)  (0.01%)  0.00%  (0.02%)  (0.19%)

Allowance for credit losses tonon-performing loans, at period-end(2)

  270.89%  205.24%  270.89%  205.24%  181.64%  270.89%  181.64%  270.89%
                                

Allowance for credit losses togross loans, at period-end(1)

  1.09%  1.51%  1.09%  1.51%  1.00%  1.09%  1.00%  1.09%

 

(1) Excluding loans held for sale.

(2) Excluding non-accrual loans held for sale.

 

Our allowance for loan losses consists 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 type 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. In addition, management reviews reports on past-due loans to ensure appropriate classification.

 

The table set forth below reflects management’smanagement’s allocation of the allowance for loan losses by loan category and the ratio of each loan category to the average gross loans as of the dates indicated:

 

 

September 30, 2016

  

December 31, 2015

 
     

Percentage of

      

Percentage of

  

September 30, 2017

  

December 31, 2016

 
     

Loans in Each

      

Loans in Each

      

Percentage of

      

Percentage of

 
     

Category

      

Category

      

Loans in Each

      

Loans in Each

 
     

to Average

      

to Average

      

Category

      

Category

 
 

Amount

  

Gross Loans

  

Amount

  

Gross Loans

      

to Average

      

to Average

 
 (Dollars in thousands)  

Amount

  

Gross Loans

  

Amount

  

Gross Loans

 

Type of Loan:

 

 

  

(Dollars in thousands)

 

Commercial loans

 $53,699   21.5% $56,199   24.9% $51,039   19.1% $49,203   21.1%

Residential mortgage loans(1)

  10,057   21.6   11,145   19.7   11,062   24.3   11,620   22.0 

Commercial mortgage loans

  44,933   52.3   49,440   51.5   37,402   51.5   34,864   52.2 

Real estate construction loans

  9,245   4.6   22,170   3.9   22,008   5.0   23,268   4.7 

Installment and other loans

  8   0.0   9   0.0   24   0.0   11   0.0 

Total

 $117,942   100% $138,963   100% $121,535   100% $118,966   100%

 

(1) Residential mortgage loans includes equity lines.

 

The allowance allocated to commercial loans increased $1.8 million, or 3.7%, to $51.0 million at September 30, 2017, from $49.2 million at December 31, 2016. The increase is due primarily to commercial loan growth.

The allowance allocated for residential mortgage loans decreased $0.5 million, or 4.3%, to $11.1 million at as of September 30, 2017, from $11.6 million at December 31, 2016 as a result of the decrease in the amount of general allowance determined to be required for residential mortgage loans. .

The allowance allocated to commercial mortgage loans increased $2.5 million, or 7.2%, to $37.4 million at September 30, 2017, from $34.9 million at December 31, 2016 as a result of the increase in the amount of general allowance determined to be required for commercial mortgage loans.

 

The allowance allocated to real estate construction loans decreased $1.3 million, or 5.6%, to $22.0 million at September 30, 2017 from $22.2$23.3 million as ofat December 31, 2015,2016. The decrease is due primarily to $9.2 million as of September 30, 2016, which was primarily due to updated loss factors, recoveries of $7.9 million in the first nine months of 2016 and a decrease in the amount of loans classified as substandard. The overallspecific reserves and general allowance determined to be required for total construction loans was 1.8% as of September 30, 2016, and 3.1% as of December 31, 2015.

The allowance allocated to commercial loans was $53.7 million at September 30, 2016, compared to $56.2 million at December 31, 2015. The decreaseis due primarily to updated loss factors.

The allowance allocated to commercial mortgage loans decreased $4.5 million to $44.9 million at September 30, 2016, from $49.4 million at December 31, 2015, as a result of reduced historical loan loss experience for commercial mortgage loans.

 

The allowance allocated for residential mortgage loans decreased $1.0 million, or 8.8%, to $9.8 million as

57

Table of September 30, 2016, compared to $10.1 million as of December 31, 2015.

 

Deposits

 

Total deposits were $10.9$12.6 billion at September 30, 2016,2017, an increase of $700$887 million, or 6.8%7.6%, from $10.2 billion at September 30, 2015, and an increase of $430 million, or 4.1% from $10.5$11.7 billion at December 31, 2015.2016. The following table displays the deposit mix as of the dates indicated:

 

 

  

September 30, 2016

  

% of Total

  

December 31, 2015

  

% of Total

 

Deposits

 

(Dollars in thousands)

Non-interest-bearing demand deposits

 $2,246,661   20.5% $2,033,048   19.4%

Interest bearing demand deposits

  1,073,436   9.8   966,404   9.2 

Money market deposits

  2,131,190   19.5   1,905,719   18.1 

Savings deposits

  633,345   5.8   618,164   5.9 

Time deposits

  4,854,064   44.4   4,985,752   47.4 

Total deposits

 $10,938,696   100.0% $10,509,087   100.0%

  

September 30, 2017

  

December 31, 2016

 
  

Amount

  

Percentage

  

Amount

  

Percentage

 

Deposits

 

(Dollars in thousands)

 

Non-interest-bearing demand deposits

 $2,730,006   21.7% $2,478,107   21.2%

Interest bearing demand deposits

  1,379,100   11.0   1,230,445   10.6 

Money market deposits

  2,370,724   18.9   2,198,938   18.8 

Savings deposits

  925,312   7.4   719,949   6.2 

Time deposits

  5,156,553   41.0   5,047,287   43.2 

Total deposits

 $12,561,695   100.0% $11,674,726   100.0%

 

 

The following table shows the maturity distribution of time deposits as of September 30, 2016: 

2017:

 


 

At September 30, 2016

 
 

Time Deposits -under

$100,000

  

Time Deposits -

$100,000 and over

  

Total Time

Deposits

  

Time Deposits -under $100,000

  

Time Deposits -

$100,000 and over

  

Total Time

Deposits

 
 

(In thousands)

  

(In thousands)

 

Less than three months

 $632,895  $1,553,263  $2,186,158  $320,157  $921,819  $1,241,976 

Three to six months

  200,056   585,738   785,794   320,580   836,506   1,157,086 

Six to twelve months

  266,166   955,799   1,221,965   371,407   1,704,311   2,075,718 

Over one year

  217,494   442,653   660,147   224,168   457,605   681,773 

Total

 $1,316,611  $3,537,453  $4,854,064  $1,236,312  $3,920,241  $5,156,553 
            

Percent of total deposits

  12.1%  32.3%  44.4%  9.8%  31.2%  41.0%

 

 

Borrowings

 

Borrowings include federal funds purchased, securities sold under agreements to repurchase, funds obtained as advances from the Federal Home Loan Bank (“FHLB”) of San Francisco, and borrowings from other financial institutions.

 

Securities Sold Under Agreements to Repurchase.Securities sold under agreements to repurchase were $100 million with a weighted average rate of 2.86% as of September 30, 2017, compared to $350 million with a weighted average rate of 4.06% as of September 30, 2016, compared to $400 million with a weighted average rate of 3.89% as of December 31, 2015. As of September 30, 2016, four floating-to-fixed rate agreements totaling $200 million with a weighted average rate of 5.0% and final maturity in January 2017 had initial floating rates for one year, with floating rates of the three-month LIBOR rate minus 340 basis points. Thereafter, the rates are fixed for the remainder of the term, with interest rates ranging from 4.89% to 5.07%. As of September 30, 2016, three fixed rate non-callable securities sold under agreements to repurchase totaled $150 million with a weighted average rate of 2.81%, compared to four fixed rate non-callable securities sold under agreements to repurchase totaled $200 million with a weighted average rate of 2.78% as of December 31, 2015.2016. Final maturity for the threetwo fixed rate non-callable securities sold under agreements to repurchase was $50.0 million in July 2017, $50.0 million in June 2018 and $50.0 million in July 2018.


 

These transactions are accounted for as collateralized financing transactions and recorded at the amounts at which the securities were sold. The Company may have to provide additional collateral for the repurchaserepurchase agreements, as necessary. The underlying collateral pledged for the repurchase agreements consists of U.S. Treasury securities and mortgage-backed securities with a fair value of $383$109 million as of September 30, 2016,2017, and $430$372 million as of December 31, 2015.2016.

 

Borrowing from the FHLB. As of September 30, 2016,2017, over-night borrowings from the FHLB were $300$450 million at a rate of 0.38%1.16% compared to $250$275 million at a rate of 0.27%0.55% as of December 31, 2015.2016. As of September 30, 2016,2017, the advances from the FHLB were $400$145 million at a rate of 0.47% compared to $25 million at a rate of 1.13% as of December 31, 2015.1.35%. As of September 30, 2016,2017, FHLB advances of $375$490 million will mature in October 20162017, $55 million in 2018 and $25$50 million will mature in March 2018.December 2019.

 

Long-term Debt

 

Long-term debt was $119.1$255.2 million as of September 30, 2016, compared to $119.1 million as of2017, and December 31, 2015.2016. Long-term debt is comprised of a $119.1 million Junior Subordinated Notes, which qualify as Tier I capital for regulatory purposes, issued in connection with our various pooled trust preferred securities offerings.offerings, and $136.1 million of deferred payments to Bank SinoPac.

 


Off-Balance-Sheet Arrangements and Contractual Obligations

 

The following table summarizes the Company’sCompany’s contractual obligations to make future payments as of September 30, 2016.2017. Payments for deposits and borrowings do not include interest. Payments related to leases are based on actual payments specified in the underlying contracts.

 

  

Payment Due by Period

 
      

More than

  

3 years or

         
      

1 year but

  

more but

         
  

1 year

  

less than

  

less than

  

5 years

     
  

or less

  

3 years

  

5 years

  

or more

  

Total

 
  

(In thousands)

 
                     

Contractual obligations:

                    

Deposits with stated maturity dates

 $4,474,779  $680,903  $860  $11  $5,156,553 

Non-callable securities sold under agreements to repurchase

  100,000   -   -   -   100,000 

Advances from the Federal Home Loan Bank

  540,000   55,000   -   -   595,000 

Other borrowings

  -   -   -   17,518   17,518 

Long-term debt

  -   -   -   119,136   119,136 

Deferred payments from acquisition

  -   -   136,056   -   136,056 

Operating leases

  9,820   12,853   8,791   8,052   39,516 

Total contractual obligations and other commitments

 $5,124,599  $748,756  $145,707  $144,717  $6,163,779 

 

  

Payment Due by Period

 
      

More than

  

3 years or

         
      

1 year but

  

more but

         
  

1 year

  

less than

  

less than

  

5 years

     
  

or less

  

3 years

  

5 years

  

or more

  

Total

 
  

(In thousands)

 
                     

Contractual obligations:

                    

Deposits with stated maturity dates

 $4,193,917  $656,761  $3,375  $11  $4,854,064 

Securities sold under agreements to repurchase(1)

  200,000   -   -   -   200,000 

Securities sold under agreements to repurchase(2)

  50,000   100,000   -   -   150,000 

Advances from the Federal Home Loan Bank

  675,000   25,000   -   -   700,000 

Other borrowings

  -   -   -   17,705   17,705 

Long-term debt

  -   -   -   119,136   119,136 

Operating leases

  8,565   13,017   6,938   8,465   36,985 

Total contractual obligations and other commitments

 $5,127,482  $794,778  $10,313  $145,317  $6,077,890 

(1) These repurchase agreements have a final maturity of 10-years from origination date but are callableon a quarterly basis after one year.

(2) These repurchase agreements are non-callable.

In the normal course of business, we enter into various transactions, which, in accordance with U.S. generallygenerally accepted accounting principles, are not included in our condensed 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 condensed 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.

Capital Resources

 

Total equity was $1.79$2.0 billion as of September 30, 2016,2017, an increase of $45.7$140.2 million, from $1.75$1.8 billion as of December 31, 2015,2016, primarily due to net income of $127.1$150.1 million and other comprehensive income$34.9 million of $10.3 millioncommon stock issued for the acquisition of SinoPac Bancorp partially offset by purchases of treasury stock of $54.4 million and common stock cash dividends of $42.6$50.5 million and shares withheld related to net share settlement of RSUs of $5.1 million.

 

The following table summarizes changes in total equity for the nine months ended September 30, 2016: 2017:

 

  

Nine months ended

 

(In thousands)

 

September 30, 2016

 

Net income

 $127,084 

Stock issued to directors

  550 

Stock options exercised

  49 

Proceeds from shares issued through the Dividend Reinvestment Plan

  1,643 

Shares withheld related to net share settlement of RSUs

  (103)

Net tax short-fall from stock-based compensation expense

  (134)

Share-based compensation

  3,254 

Other comprehensive income

  10,329 

Purchase of treasury stock

  (54,441)

Cash dividends paid to common stockholders

  (42,570)

Net increase in total equity

 $45,661 

  

Nine months ended

 

(In thousands)

 

September 30, 2017

 

Net income

 $150,102 

Stock issued to directors

  549 

Stock options exercised and RSUs distributed

  1,018 

Proceeds from shares issued through the Dividend Reinvestment Plan

  1,849 

Shares withheld related to net share settlement of RSUs

  (5,127)

Share-based compensation

  3,900 

Other comprehensive income

  3,498 

Equity consideration for acquisition

  34,862 

Cash dividends paid to common stockholders

  (50,491)

Net increase in total equity

 $140,160 

 

Capital Adequacy Review

 

Management seeks to maintain the Company’sCompany’s capital at a level sufficient to support future growth, protect depositors and stockholders, and comply with various regulatory requirements.

 

Both Bancorp’sBancorp’s and the Bank’s regulatory capital continued to exceed the regulatory minimum requirements under Basel III rules that became effective January 1, 2015, with transitional provisions as of September 30, 2016.2017. In addition, the capital ratios of the Bank place it in the “well capitalized” category, which is defined as institutions with a common equity tier 1 capital ratio equal to or greater than 6.5%, 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%.

 

 

The following table presents Bancorp’sBancorp’s and the Bank’s capital and leverage ratios as of September 30, 2016,2017, and December 31, 2015:

2016:

 

 

Cathay General Bancorp

  

Cathay Bank

  

Cathay General Bancorp

  

Cathay Bank

 
 

September 30, 2016

  

December 31, 2015

  

September 30, 2016

  

December 31, 2015

  

September 30, 2017

  

December 31, 2016

  

September 30, 2017

  

December 31, 2016

 

(Dollars in thousands)

 

Balance

  

%

  

Balance

  

%

  

Balance

  

%

  

Balance

  

%

  

Balance

  

%

  

Balance

  

%

  

Balance

  

%

  

Balance

  

%

 
                                                                

Common equtiy Tier 1 capital (to risk-weighted assets)

 $1,418,573   12.64  $1,383,377   12.95  $1,479,539   13.22  $1,443,159   13.54 

Common equtiy Tier 1 capital minimum requirement

  504,845   4.50   480,830   4.50   503,684   4.50   479,801   4.50 

Common equity Tier 1 capital (to risk-weighted assets)

 $1,555,919   12.22  $1,459,351   12.84  $1,461,917   12.34  $1,515,096   13.35 

Common equity Tier 1 capital minimum requirement

  573,075   4.50   511,590   4.50   532,962   4.50   510,582   4.50 

Excess

 $913,728   8.14  $902,547   8.45  $975,855   8.72  $963,358   9.04  $981,121   7.68  $947,761   8.34  $927,155   7.80  $1,004,514   8.85 
                                                                

Tier 1 capital (to risk-weighted assets)

 $1,534,028   13.67  $1,498,810   14.03  $1,479,539   13.22  $1,443,159   13.54  $1,555,919   12.22  $1,574,806   13.85  $1,461,917   12.34  $1,515,096   13.35 

Tier 1 capital minimum requirement

  673,127   6.00   641,107   6.00   671,578   6.00   639,735   6.00   764,100   6.00   682,120   6.00   710,616   6.00   680,776   6.00 

Excess

 $860,901   7.67  $857,703   8.03  $807,961   7.22  $803,424   7.54  $789,522   6.18  $892,686   7.85  $748,901   6.30  $834,320   7.35 
                                                                

Total capital (to risk-weighted assets)

 $1,657,746   14.78  $1,634,631   15.30  $1,599,705   14.29  $1,576,525   14.79  $1,802,206   14.15  $1,702,144   14.97  $1,587,501   13.40  $1,637,286   14.43 

Total capital minimum requirement

  897,502   8.00   854,809   8.00   895,438   8.00   852,980   8.00   1,018,800   8.00   909,493   8.00   947,487   8.00   907,701   8.00 

Excess

 $760,244   6.78  $779,822   7.30  $704,267   6.29  $723,545   6.79  $780,343   6.11  $792,651   6.97  $636,814   5.36  $729,585   6.43 
                                                                

Tier 1 capital (to average assets)– Leverage ratio

 $1,534,028   11.91  $1,498,810   11.95  $1,479,539   11.52  $1,443,159   11.53 

Tier 1 capital (to average assets) – Leverage ratio

 $1,555,919   10.41  $1,574,806   11.57  $1,461,917   10.54  $1,515,096   11.16 

Minimum leverage requirement

  515,283   4.00   501,875   4.00   513,622   4.00   500,455   4.00   597,635   4.00   544,614   4.00   554,685   4.00   543,059   4.00 

Excess

 $1,018,745   7.91  $996,935   7.95  $965,917   7.52  $942,704   7.53  $958,284   6.41  $1,030,192   7.57  $907,232   6.54  $972,037   7.16 
                                                                

Risk-weighted assets

 $11,218,777      $10,685,115      $11,192,971      $10,662,248      $12,734,995      $11,368,663      $11,843,593      $11,346,260     

Total average assets(1)

 $12,882,078      $12,546,879      $12,840,543      $12,511,382      $14,940,863      $13,615,348      $13,867,125      $13,576,477     

 

(1)

(1)The quarterly total average assets reflect all debt securities at amortized cost, equity securities with readily determinablefair values at the lower of cost or fair value, and equity securities without readily determinable fair values at historical cost.

 

In July 2013, the federal bank regulatory agencies adopted final regulations which revised their risk-based and leverage capital requirements for banking organizations to meet requirements of the Dodd-Frank Act and to implement international agreements reached by the Basel Committee on Banking Supervision that were intended to improve both the quality and quantity of banking organizations’ capital (“Basel III”). Although many of the rules contained in these final regulations are applicable only to large, internationally active banks, some of them will apply on a phased-in basis to all banking organizations, including Bancorp and the Bank.

The following are among the new requirements that are being phased in beginning January 1, 2015:

An increase in the minimum Tier 1 capital ratio from 4.00% to 6.00% of risk-weighted assets.

A new category and a required 4.50% of risk-weighted assets ratio is established for “common equity Tier 1” as a subset of Tier 1 capital limited to common equity.

A minimum non-risk-based leverage ratio is set at 4.00%, eliminating a 3.00% exception for higher rated banks.

Changes in the permitted composition of Tier 1 capital to exclude trust preferred securities, mortgage servicing rights and certain deferred tax assets, and to include unrealized gains and losses on available-for-sale debt and equity securities.

A new additional capital conservation buffer of 2.5% of risk-weighted assets over each of the required capital ratios that will be phased in from 2016 to 2019 and must be met to avoid limitations in the ability of the Company to pay dividends, repurchase shares, or pay discretionary bonuses.


The risk-weights of certain assets for purposes of calculating the risk-based capital ratios are changed for high volatility commercial real estate acquisition, development, and construction loans, certain past due non-residential mortgage loans and certain mortgage-backed and other securities exposures.

An additional “countercyclical capital buffer” is required for larger and more complex institutions.

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. 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. Our Board of Directors increased the common stock dividend to $0.14 per share in June 2015, and $0.18 per share in December 2015. The terms of our Junior Subordinated Notes also limit our ability to pay dividends. Our Board of Directors increased the common stock dividend to $0.21 per share in December 2016. The terms of our Junior Subordinated Notes also limit our ability to pay dividends.

 

The Company declared a cash dividend of $0.18$0.21 per share on 78,863,06480,795,512 shares outstanding on September 1, 2016,2017, for distribution to holders of our common stock on September 12, 2016,11, 2017, $0.21 per share on 78,844,50079,847,124 shares outstanding on June 1, 2016,2017, for distribution to holders of our common stock on June 13, 2016,12, 2017, and $0.21 per share on 78,794,52879,788,541 shares outstanding on March 1, 2016,2017, for distribution to holders of our common stock on March 11, 2016. Total10, 2017. The Company paid total cash dividends of $42.6$50.5 million were paid during the first nine months of 2016.2017.

 

CountryRisk Exposures

 

ThThee Company’s total assets were $14.1$15.7 billion and total foreign country risk net exposures were $516.1$454.7 million as of September 30, 2016.2017. Total foreign country risk net exposures as of September 30, 2016,2017, were comprised primarily of $300.1$277.3 million from Hong Kong, $78.4$45.6 million from China, $34.5$30.8 million from Australia, $25.2 million from France, $15.6 million from Singapore, $13.5 million from Germany, $29.3$10.0 million from Australia, $24.8Virgin Island, $9.3 million from France, $20.0England, $7.6 million from the Philippines, $13.9Taiwan, $5.1 million from Singapore, $5.4Canada, $5.0 million from Cayman Island, $4.2 million from Macau, $4.7$2.2 million from England,Indonesia, $1.4 million from Switzerland, $1.1 million from Indonesia, $1.1Japan, $0.3 million from Switzerland, $1.0New Zealand, and $0.3 million from Japan, and $0.8 million from Taiwan.Venezuela. Risk is determined based on location of the borrowers, issuers, and counterparties.

 

All foreign country risk net exposures as of September 30, 20162017, were to non-sovereign counterparties, except $14.3$11.8 million due from the Hong Kong Monetary Authority.

 

Unfunded loansloans to foreign entities exposures were $20.1$10.7 million as of September 30, 2016,2017, primarily due to a $20.0$10.0 million of unfunded loanloans to a financial institutioninstitutions in China and $0.7 million of unfunded loans to borrowers in Canada.

 

Financial Derivatives

 

It is the policy of the Company not to speculate on the future direction of interest rates. However, the Company enters into financial derivatives in order to seek mitigation of exposure to interest rate risks relatedrelated 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 the Company’s assets or liabilities and against risk in specific transactions. In such instances, the Company 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’sCompany’s consolidated balance sheet 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.


 

In May 2014, Bancorp has 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 on Bancorp’sBancorp’s $119.1 million of Junior Subordinated Debentures that had been issued to five trusts, with the quarterly interest payments 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. Bancorp pays a weighted average fixed interest rate of 2.61% and receives a variable interest rate of the three-month LIBOR at a weighted average rate of 0.85%1.32%. As of September 30, 2016,2017, the notional amount of cash flow interest rate swaps was $119.1 million and their unrealized loss of $6.6$2.3 million, net of taxes, was included in other comprehensive income. The amount of periodic net settlement of interest rate swaps included in interest expense was $588,000$407,000 for the three months ended September 30, 20162017 compared to $706,000$588,000 for the same quarter a year ago. For the nine months ended September 30, 2016,2017, the periodic net settlement of interest rate swaps included in interest expense was $1.8$1.3 million compared to $2.1$1.8 million for the same period in 2015.2016.

 

As of September 30, 2016,2017, the Bank has entered into interest rate swap contracts with various terms from four to eight years. These interest rate swap contracts 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 loan 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. The Bank pays a weighted average fixed rate of 4.63%4.55% and receives a variable rate at the one month LIBOR rate plus a weighted average spread of 318293 basis points, or at a weighted average rate of 3.70%4.16%. As of September 30, 2016,2017, the notional amount of fair value interest rate swaps was $358.3$510.6 million and their unrealized lossgain of $3.8$1.9 million was included in other non-interest income. The amount of periodic net settlement of interest rate swaps reducing interest income was $879,000$514,000 for the three months ended September 30, 2016,2017, compared to $831,000$879,000 for the same quarter a year ago. The amount of periodic net settlement of interest rate swaps reducing interest income was $2.8$1.9 million for the nine months ended September 30, 2016,2017, compared to $2.2$2.8 million for the same period a year ago. As of September 30, 2016,2017, the ineffective portion of these interest rate swaps was not significant.

 

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’sCompany’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 $14.8$6.3 million as of September 30, 2016.2017.

 

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 instrumentsinstruments and are recorded at fair value in our condensed consolidated balance sheets. Changes in the fair value of these contracts as well as the related foreign exchange certificates of deposit and foreign exchange contracts are recognized immediately in net income as a component of non-interest income. Period end gross positive fair values are recorded in other assets and gross negative fair values are recorded in other liabilities. As of September 30, 2016, there were no2017, the notional amount of option contracts outstanding.totaled $12.3 million with a net negative fair value of $234,000. As of September 30, 2016,2017, spot, forward, and swap contracts with a total notional amount of $107.1$69.3 million had a positive fair value of $1.7 million. Spot, forward, and swap contracts with a total notional amount of $45.0$86.6 million had a negative fair value of $712,000$1.1 million as of September 30, 2016.2017. As of December 31, 2015,2016, the notional amount of option contracts totaled $9.4$12.1 million with a net negative fair value of $28,000.$121,000. As of December 31, 2015,2016, spot, forward, and swap contracts with a total notional amount of $100.6$82.4 million had a positive fair value of $3.3$1.3 million. Spot, forward, and swap contracts with a total notional amount of $115.4$89.5 million had a negative fair value of $4.1$3.1 million as of December 31, 2015.2016.

 

Liquidity

 

Liquidity is our ability to maintain sufficient cash flow to meet maturing financial obligations and customercustomer 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. ForAs of September 2016,30, 2017, our average monthly liquidity ratio (defined as net cash plus short-term and marketable securities to net deposits and short-term liabilities) was 12.0%14.0% compared to 15.8%12.6% as of December 31, 2015.2016.

 

The Bank is a shareholderBefore merging on October 27, 2017, the two subsidiary banks of the Company were both shareholders of the FHLB of San Francisco, enabling itthem to have access to lower cost FHLB financing when necessary. As of September 30, 2016,2017, the Bank had antwo subsidiary banks’ approved credit line with the FHLB totaling $5.2totaled $5.5 billion. Advances from the FHLB were $700.0$595.0 million and standby letter of credits issued by FHLB on the Company’s behalf were $27.4$100.7 million as of September 30, 2016.2017. The Bank expects to be able to continue to access this source of funding, if required, in the near term. The Bank has pledged a portion of its commercial loans to the Federal Reserve Bank’s Discount Window under the Borrower-in-Custody program to secure these borrowings. As of September 30, 2016,2017, the borrowing capacity under the Borrower-in-Custody program was $24.2$47.3 million.

 

Liquidity can also be provided through the sale of liquid assets, which consist of federal funds sold, securitiessecurities sold under agreements to repurchase, and unpledged investment securities. As of September 30, 2016,2017, investment securities totaled $1.30$1.4 billion, with $505.9$291.4 million pledged as collateral for borrowings and other commitments. The remaining $792.5 million$1.1 billion was available as additional liquidity or to be pledged as collateral for additional borrowings.


 

Approximately 86.4%87.0% of the Company’s time deposits mature within one year or less as of September 30, 2016.2017. Management anticipates that there may be some outflow of these deposits upon maturity due to, among other factors, the keen competition in the Bank’s marketplace. However, based on our historical run-off experience, we expect that the outflow will be minimal and can be replenished through our normal growth in deposits. Management believes the above-mentioned sources will provide adequate liquidity to the Bank to meet its daily operating needs.

 

The business activities of Bancorp consist primarily of the operation of the Bank and limited activities in other investments. The Bank paid dividends to Bancorp totaling $163.3$113.4 million in 20152016 and $98.4$208.2 million in the first nine months of 2016.2017.

 

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

WeWe use a net interest income simulation model to measure the extent of the differences in the behavior of the lending and funding rates to changing interest rates, so as to project future earnings or market values under alternative interest rate scenarios. Interest rate risk arises primarily through the Company’s traditional business activities of extending loans and accepting deposits. Many factors, including economic and financial conditions, movements in interest rates, and consumer preferences affect the spread between interest earned on assets and interest paid on liabilities. The net interest income simulation model is designed to measure the volatility of net interest income and net portfolio value, defined as net present value of assets and liabilities, under immediate rising or falling interest rate scenarios in 100 basis point increments.

 

Although the modeling is very helpful in managing interest rate risk, it does require significant assumptionsassumptions for the projection of loan prepayment rates on mortgage related assets, loan volumes and pricing, and deposit and borrowing volume and pricing, that might prove inaccurate. Because these assumptions are inherently uncertain, the model cannot precisely estimate net interest income, or precisely predict the effect of higher or lower interest rates on net interest income. Actual results will differ from simulated results due to the timing, magnitude, and frequency of interest rate changes, the differences between actual experience and the assumed volume, changes in market conditions, and management strategies, among other factors. The Company monitors its interest rate sensitivity and attempts to reduce the risk of a significant decrease in net interest income caused by a change in interest rates.

 

We have established a tolerance level in our policy to define and limit net interest income volatility to a change of plus or minus 5% when the hypothetical rate change is plus or minus 200 basis points. When the net interest rate simulation projects that our tolerance level will be met, or exceeded, we seek corrective action after considering, among other things, market conditions, customer reaction, and the estimated impact on profitability. The Company’s simulation model also projects the net economic value of our portfolio of assets and liabilities. We have established a tolerance level in our policy to limit the loss in the net economic value of our portfolio of assets and liabilities to zero when the hypothetical rate change is plus or minus 200 basis points.


 

The table below shows the estimated impact of changes in interest ratesrates on net interest income and market value of equity as of September 30, 2016:2017:

 

 

  

Net Interest

  

Market Value

   

Net Interest

  

Market Value

 
  

Income

  

of Equity

   

Income

  

of Equity

 

Change in Interest Rate (Basis Points)

  

Volatility(1)

  

Volatility(2)

 

Change in Interest Rate (Basis Points)

 

Volatility (1)

  

Volatility (2)

 

+200

   9.0   1.4    8.9   3.1 

+100

   4.2   1.1    4.5   1.8 
-100   -2.6   3.0    -1.9   4.9 
-200   -2.8   6.5    -4.7   -0.9 

 

(1)

The percentage change in this column represents net interest income of the Company for 12 months in a stable interest rate environment versus the net interest income in the various rate scenarios.

(2)(2)

The percentage change in this column represents the net portfolio value of the Company in a stable interest rate environment versus the net portfolio value in the various rate scenarios.

 

Item 4. CONTROLS AND PROCEDURES.PROCEDURES.

 

The Company’sCompany’s principal executive officer and principal financial officer have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this quarterly report. Based upon their evaluation, the principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

There has not been any change in our internal control over financial reporting that occurred during the third quarter of 20162017 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

PART II – OTHER INFORMATION

 

Item 1.     LEGAL PROCEEDINGS.

 

Bancorp’sBancorp’s wholly-owned subsidiary, Cathay Bank, is a party to ordinary routine litigation from time to time incidental to various aspects of its operations. Management does not believe that any such litigation is expected to have a material adverse impact on the Company’s consolidated financial condition or results of operations.

 


Item 1A.1A.     RISK FACTORS.

 

 

There is no material change in the risk factors as previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015,2016, in response to Item 1A in Part I of Form 10-K.

 

 

Item 2.     UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

 

ISSUER PURCHASES OF EQUITY SECURITIES 

 

Period

 

(a) Total

Number of

Shares (or Units)

Purchased

  

(b) Average

Price Paid

per Share

(or Unit)

  

(c) Total

Number of

Shares (or Units)

Purchased as

Part of Publicly

Announced Plans

or Programs

  

(d) Maximum

Number (or

Approximate Dollar Value) of Shares (or Units)

that May Yet Be

Purchased Under the

Plans or Programs (1)

 

Month #1 (July 1, 2016 - July 31, 2016)

  0  $0   0  $7,543,008 

Month #2 (August 1, 2016 - August 31, 2016)

  0  $0   0  $7,543,008 

Month #3 (September 1, 2016 - September 30, 2016)

  0  $0   0  $7,543,008 

Total

  0  $0   0  $7,543,008 
 

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

 
 

Month #1 (July 1, 2017 - July 31, 2017)

  0   $0   0   $7,543,008 
 

Month #2 (August 1, 2017 - August 31, 2017)

  0   $0   0   $7,543,008 
 

Month #3 (September 1, 2017 - September 30, 2017)

  0   $0   0   $7,543,008 
 

Total

  0   $0   0   $7,543,008 

 

For a discussion of limitations on the payment of dividends, see “Dividend Policy” and “Liquidity”Liquidity under Part I—Item 2—“Management’s “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

 

Item 3.     DEFAULTS UPON SENIOR SECURITIES.

 

Not applicable.

 

Item 4.     MINE SAFETY DISCLOSURES.

 

Not applicable.

 

Item 5.     OTHER INFORMATION.

None.

 

None.

Item 6.     EXHIBITS.               

 


 

Item 6.     EXHIBITS.               

 

Exhibit 31.1

Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.+

 

Exhibit 31.2

Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.+

 

Exhibit 32.1

Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.++

 

Exhibit 32.2

Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.++

Exhibit 101.INS

XBRL Instance Document *

Exhibit 101.SCH

XBRL Taxonomy Extension Schema Document*

 

Exhibit 101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document*

 

Exhibit 101.DEF

XBRL Taxonomy Extension Definition Linkbase Document*

 

Exhibit 101.LAB

XBRL Taxonomy Extension Label Linkbase Document*

 

Exhibit 101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document*

 

____________________

+

+ Filed herewith.

 

++

++ Furnished herewith.

 

*

XBRL (Extensible Business Reporting Language) information shall not be deemed to be filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, shall not be deemed to be filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise shall not be subject to liability under these sections, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, except as expressly set forth by specific reference in such filing.

 

 

SIGNATURES

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

Cathay General Bancorp

(Registrant)

 

 

 (Registrant)

 

 

Date: November 7, 20162017
  

 

/s/ Pin Tai

 

 

Pin Tai

Chief Executive Officer and

President

Date: November 7, 2016

/s/ Heng W. Chen 

 

 

Date: November 7, 2017

/s/ Heng W. Chen

Heng W. Chen

Executive Vice President and

Chief Financial Officer

 

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