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”), seven limited partnerships investing in affordable housing investments in whic
h t
he 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, 2017, the Bank operates 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 J
uly 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.
The fair value of the assets and the liabilities acquired as of July 1
4, 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
. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accor
dance 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, 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, 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
. 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. Our revenue is primarily comprised of net interest income on financial assets and financial liabilities, which is explicitly excluded from the scope of ASU 2014-09, and non-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 be a material impact under the new standard.
In January 2016, the FASB issued ASU 2016-01, “
Financial Instruments Overall (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. The Company is currently evaluating the impact on its 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 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 evaluating the impact of 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. ASU 2016-02 will be effective for us on January 1, 2019 and will require transition using a modified retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements.
In June 2016, the FASB issued ASU 2016-13, “
Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.”
This update requires an entity to use a broader range of 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 has 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 the
Derecognition of Nonfinancial Assets
(Subtopic 610-20):
Clarifying the Scope of Asset Derecognition Guidance
and 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
(
T
opic
718
):
Modification
A
ccounting.
”
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.
5
. Earnings per Share
Basic earnings per share exclude
s 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)
|
|
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
. 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, 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). There were no options granted during the first nine months of 2017 or 2016.
Option compensation expense was zero
for the three months and for the nine months ended September 30, 2017, and September 30, 2016. Stock-based compensation was fully recognized over the requisite service period for all awards. There were 43,540 and 2,110 stock option shares exercised in the nine months ended September 30, 2017 and 2016, respectively. The Company received $1.0 million from the exercise of stock options which had an aggregate intrinsic value of $607,000 during the nine months ended September 30, 2017 compared to $49,000 from the exercise of stock options which had an aggregate intrinsic value of $9,000 during the nine months ended September 30, 2016. The table below summarizes stock option activity for the periods indicated:
|
|
|
|
|
|
|
|
|
|
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 grant
ed 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 2016.
Starting i
n 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 30,319 shares in 2016, 61,209 shares in 2015 and 60,456 shares in 2014, performance EPS restricted stock units for 58,241 shares in 2016, 57,409 shares in 2015 and 57,642 shares in 2014, and performance ROA restricted stock units for 29,119 shares in 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 2013 under the terms of the awards, including 76,623 shares granted and distributed based on higher than target actual performance and for cash dividends during the performance period
.
The following table presents restricted stock unit
activity during the nine months ended September 30, 2017:
|
|
Units
|
|
Balance at December 31, 2016
|
|
|
727,419
|
|
Granted
|
|
|
164,404
|
|
Distributed
|
|
|
(297,905
|
)
|
Forfeited
|
|
|
(10,424
|
)
|
Balance at September 30, 2017
|
|
|
583,494
|
|
The compensa
tion expense recorded for restricted stock units was $1.3 million for the three months ended September 30, 2017, compared to $1.2 million in the same period a year ago. For the nine months ended September 30, 2017 and 2016, compensation expense recorded related to the restricted stock units was $3
.9 million and $3.3 million, respectively. Unrecognized stock-based compensation expense related to restricted stock units was $9.1 million as of September 30, 2017, and is expected to be recognized over the next 2.
0 years.
As of
September 30, 2017, 3,465,411 shares were available under the Company’s 2005 Incentive Plan (as Amended and Restated) for future grants.
T
ax benefit 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 to income tax expense in the first nine months of 2016.
7
. Investment Securities
Investment securities were $
1.4 billion as of September 30, 2017, compared to $1.3 billion as of December 31, 2016. The following tables reflect the amortized cost, gross unrealized gains, gross unrealized losses, and fair value of investment securities as of September 30, 2017, and December 31, 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
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
Securities Available-for-Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury securities
|
|
$
|
489,839
|
|
|
$
|
35
|
|
|
$
|
857
|
|
|
$
|
489,017
|
|
U.S. government sponsored entities
|
|
|
400,000
|
|
|
|
-
|
|
|
|
9,669
|
|
|
|
390,331
|
|
Mortgage-backed securities
|
|
|
339,241
|
|
|
|
309
|
|
|
|
3,290
|
|
|
|
336,260
|
|
Collateralized mortgage obligations
|
|
|
48
|
|
|
|
-
|
|
|
|
20
|
|
|
|
28
|
|
Corporate debt securities
|
|
|
74,965
|
|
|
|
247
|
|
|
|
862
|
|
|
|
74,350
|
|
Mutual funds
|
|
|
6,500
|
|
|
|
-
|
|
|
|
270
|
|
|
|
6,230
|
|
Preferred stock of government sponsored entities
|
|
|
2,811
|
|
|
|
4,497
|
|
|
|
-
|
|
|
|
7,308
|
|
Other equity securities
|
|
|
3,608
|
|
|
|
7,213
|
|
|
|
-
|
|
|
|
10,821
|
|
Total
|
|
$
|
1,317,012
|
|
|
$
|
12,301
|
|
|
$
|
14,968
|
|
|
$
|
1,314,345
|
|
The amortized cost and fair value of investment securities a
s of September 30, 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
|
|
(1) Equity securities are reported in this category
|
|
|
There were no sales transactions of mortgage-backed
securities 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 from repayments, maturities and calls of mortgage-backed securities were $48.5 million and $125.3 million for the nine months ended September 30, 2017 and 2016, 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 from maturities and calls of other investment securities were $341.3 million during the nine months ended September 30, 2017 compared to $460.0 million during the same period a year ago. During the nine months ended September 30, 2017, $439,000 of losses were realized on sales of investment securities. Other than temporary impairment write-downs of zero and $206,000 were recorded during the first nine months of 2017 and 2016, respectively.
The table
s below show the fair value and unrealized losses of the temporarily impaired securities in our investment securities portfolio as of September 30, 2017, and December 31, 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
|
|
|
|
December 31, 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
|
|
$
|
299,088
|
|
|
$
|
857
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
299,088
|
|
|
$
|
857
|
|
U.S. government sponsored entities
|
|
|
390,331
|
|
|
|
9,669
|
|
|
|
-
|
|
|
|
-
|
|
|
|
390,331
|
|
|
|
9,669
|
|
Mortgage-backed securities
|
|
|
328,236
|
|
|
|
3,288
|
|
|
|
62
|
|
|
|
2
|
|
|
|
328,298
|
|
|
|
3,290
|
|
Collateralized mortgage obligations
|
|
|
-
|
|
|
|
-
|
|
|
|
28
|
|
|
|
20
|
|
|
|
28
|
|
|
|
20
|
|
Corporate debt securities
|
|
|
-
|
|
|
|
-
|
|
|
|
29,138
|
|
|
|
862
|
|
|
|
29,138
|
|
|
|
862
|
|
Mutual funds
|
|
|
-
|
|
|
|
-
|
|
|
|
6,230
|
|
|
|
270
|
|
|
|
6,230
|
|
|
|
270
|
|
Total
|
|
$
|
1,017,655
|
|
|
$
|
13,814
|
|
|
$
|
35,458
|
|
|
$
|
1,154
|
|
|
$
|
1,053,113
|
|
|
$
|
14,968
|
|
A
s of September 30, 2017, the Company had unrealized losses on available-for-sale securities of $9.3 million. The unrealized losses on these securities were primarily attributed to yield curve movement, together with widened liquidity spreads and credit spreads. The issuers have not, to the Company’s knowledge, established any cause for default on these securities. 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 $
291.4 million as of September 30, 2017, and $649.1 million as of December 31, 2016, were pledged to secure public deposits, other borrowings, treasury tax and loan, and securities sold under agreements to repurchase.
8
.
Loans
Most of the Company
’s business activities are with customers located in the predominately Asian-populated areas of Southern and Northern California; New York City, New York; Dallas and Houston, Texas; Seattle, Washington; Boston, Massachusetts; Chicago, Illinois; Edison, New Jersey; Rockville, Maryland; 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, 2017, and December 31, 2016, were as follows:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
|
(In thousands)
|
|
Commercial loans
|
|
$
|
2,419,891
|
|
|
$
|
2,248,187
|
|
Residential mortgage loans
|
|
|
2,922,537
|
|
|
|
2,444,048
|
|
Commercial mortgage loans
|
|
|
6,377,047
|
|
|
|
5,785,248
|
|
Real estate construction loans
|
|
|
691,486
|
|
|
|
548,088
|
|
Equity lines
|
|
|
181,751
|
|
|
|
171,711
|
|
Installment & other loans
|
|
|
4,722
|
|
|
|
3,993
|
|
Gross loans
|
|
$
|
12,597,434
|
|
|
$
|
11,201,275
|
|
Allowance for loan losses
|
|
|
(121,535
|
)
|
|
|
(118,966
|
)
|
Unamortized deferred loan fees
|
|
|
(3,424
|
)
|
|
|
(4,994
|
)
|
Total loans, net
|
|
$
|
12,472,475
|
|
|
$
|
11,077,315
|
|
Loans held for sale
|
|
$
|
-
|
|
|
$
|
7,500
|
|
A
s 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 $115.1 million and was comprised of non-accrual loans, excluding loans held for sale, of $49.7 million and accruing TDRs of $65.4 million. For impaired loans, the amounts previously charged off represent 7.1% as of September 30, 2017, and 8.4% as of December 31, 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
|
|
|
|
Average Recorded Investment
|
|
|
Interest Income Recognized
|
|
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
$
|
24,987
|
|
|
$
|
28,091
|
|
|
$
|
22,572
|
|
|
$
|
18,602
|
|
|
$
|
678
|
|
|
$
|
170
|
|
|
$
|
760
|
|
|
$
|
488
|
|
Real estate construction loans
|
|
|
29,780
|
|
|
|
5,869
|
|
|
|
29,868
|
|
|
|
12,005
|
|
|
|
99
|
|
|
|
66
|
|
|
|
287
|
|
|
|
196
|
|
Commercial mortgage loans
|
|
|
58,555
|
|
|
|
81,005
|
|
|
|
60,074
|
|
|
|
86,456
|
|
|
|
391
|
|
|
|
776
|
|
|
|
1,015
|
|
|
|
2,124
|
|
Residential mortgage loans and equity lines
|
|
|
13,937
|
|
|
|
18,256
|
|
|
|
15,208
|
|
|
|
17,456
|
|
|
|
96
|
|
|
|
148
|
|
|
|
287
|
|
|
|
401
|
|
Total impaired loans
|
|
$
|
127,259
|
|
|
$
|
133,221
|
|
|
$
|
127,722
|
|
|
$
|
134,519
|
|
|
$
|
1,264
|
|
|
$
|
1,160
|
|
|
$
|
2,349
|
|
|
$
|
3,209
|
|
The following table present
s impaired loans and the related allowance for loan losses as of the dates indicated:
|
|
Impaired Loans
|
|
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid
Principal
Balance
|
|
|
Recorded Investment
|
|
|
Allowance
|
|
|
Unpaid
Principal
Balance
|
|
|
Recorded Investment
|
|
|
Allowance
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With no allocated allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
$
|
23,953
|
|
|
$
|
23,373
|
|
|
$
|
-
|
|
|
$
|
24,037
|
|
|
$
|
23,121
|
|
|
$
|
-
|
|
Real estate construction loans
|
|
|
22,309
|
|
|
|
21,748
|
|
|
|
-
|
|
|
|
5,776
|
|
|
|
5,458
|
|
|
|
-
|
|
Commercial mortgage loans
|
|
|
39,154
|
|
|
|
32,370
|
|
|
|
-
|
|
|
|
60,522
|
|
|
|
54,453
|
|
|
|
-
|
|
Residential mortgage loans and equity lines
|
|
|
2,264
|
|
|
|
2,264
|
|
|
|
-
|
|
|
|
5,472
|
|
|
|
5,310
|
|
|
|
-
|
|
Subtotal
|
|
$
|
87,680
|
|
|
$
|
79,755
|
|
|
$
|
-
|
|
|
$
|
95,807
|
|
|
$
|
88,342
|
|
|
$
|
-
|
|
With allocated allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
$
|
14,082
|
|
|
$
|
13,985
|
|
|
$
|
1,461
|
|
|
$
|
5,216
|
|
|
$
|
4,640
|
|
|
$
|
1,827
|
|
Commercial mortgage loans
|
|
|
23,061
|
|
|
|
22,820
|
|
|
|
823
|
|
|
|
10,158
|
|
|
|
10,017
|
|
|
|
573
|
|
Residential mortgage loans and equity lines
|
|
|
12,461
|
|
|
|
11,111
|
|
|
|
322
|
|
|
|
13,263
|
|
|
|
12,075
|
|
|
|
396
|
|
Subtotal
|
|
$
|
49,604
|
|
|
$
|
47,916
|
|
|
$
|
2,606
|
|
|
$
|
28,637
|
|
|
$
|
26,732
|
|
|
$
|
2,796
|
|
Total impaired loans
|
|
$
|
137,284
|
|
|
$
|
127,671
|
|
|
$
|
2,606
|
|
|
$
|
124,444
|
|
|
$
|
115,074
|
|
|
$
|
2,796
|
|
The following table
s present the aging of the loan portfolio by type as of September 30, 2017, and as of December 31, 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
|
|
|
|
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 econo
mic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower. The concessions may be granted in various forms, including a change in the stated interest rate, a reduction in the loan balance or accrued interest, or an extension of the maturity date that causes significant delay in payment.
TDR
s 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, 2017, accruing TDRs were $62.4 million and non-accrual TDRs were $33.7 million compared to accruing TDRs of $65.4 million and non-accrual TDRs of $29.7 million as of December 31, 2016. The Company allocated specific reserves of $1.1 million to accruing TDRs and $143,000 to non-accrual TDRs as of September 30, 2017, and $1.3 million to accruing TDRs and $1.1 million to non-accrual TDRs as of December 31, 2016.
The following tables present TDRs that were modified during the three and nine months ended September 30, 2017 and 2016, their specific reserve
s as of September 30, 2017 and 2016, and charge-off
s
for the three and nine months ended September 30, 2017 and 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
|
|
|
|
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
|
|
Modifications of the loan terms during the
first nine months of 2017 were in the form of extensions of maturity dates. The length of time for which modifications involving extensions of maturity dates ranged from three to twelve months from the modification date.
We expect that the TDR
s on accruing status as of September 30, 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, 2017, and December 31, 2016, is shown below:
|
|
September 30, 2017
|
|
Accruing TDRs
|
|
Payment
Deferral
|
|
|
Rate
Reduction
|
|
|
Rate Reduction
and Payment Deferral
|
|
|
Total
|
|
|
|
(In thousands)
|
|
Commercial loans
|
|
$
|
21,416
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
21,416
|
|
Real estate construction loans
|
|
|
7,480
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,480
|
|
Commercial mortgage loans
|
|
|
16,130
|
|
|
|
5,895
|
|
|
|
4,787
|
|
|
|
26,812
|
|
Residential mortgage loans
|
|
|
3,516
|
|
|
|
337
|
|
|
|
2,797
|
|
|
|
6,650
|
|
Total accruing TDRs
|
|
$
|
48,542
|
|
|
$
|
6,232
|
|
|
$
|
7,584
|
|
|
$
|
62,358
|
|
|
|
September 30, 2017
|
|
Non-accrual TDRs
|
|
Payment
Deferral
|
|
|
Rate
Reduction
|
|
|
Rate Reduction
and Payment
Deferral
|
|
|
Total
|
|
|
|
(In thousands)
|
|
Commercial loans
|
|
$
|
13,259
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
13,259
|
|
Commercial mortgage loans
|
|
|
1,347
|
|
|
|
1,706
|
|
|
|
16,508
|
|
|
|
19,561
|
|
Residential mortgage loans
|
|
|
714
|
|
|
|
-
|
|
|
|
157
|
|
|
|
871
|
|
Total non-accrual TDRs
|
|
$
|
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 TDR
s for the periods indicated is shown below:
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
Accruing TDRs
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Beginning balance
|
|
$
|
79,819
|
|
|
$
|
74,708
|
|
|
$
|
65,393
|
|
|
$
|
81,680
|
|
New restructurings
|
|
|
21,790
|
|
|
|
18,347
|
|
|
|
49,973
|
|
|
|
20,412
|
|
Restructured loans restored to accrual status
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,303
|
|
Payments
|
|
|
(35,677
|
)
|
|
|
(6,500
|
)
|
|
|
(41,372
|
)
|
|
|
(9,816
|
)
|
Restructured loans placed on non-accrual status
|
|
|
(3,574
|
)
|
|
|
-
|
|
|
|
(9,396
|
)
|
|
|
(1,138
|
)
|
Expiration of loan concession upon renewal
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,240
|
)
|
|
|
(14,886
|
)
|
Ending balance
|
|
$
|
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
|
|
The Company considers a
loan to be in payment default once it is 60 to 90 days contractually past due under the modified terms. One commercial loan of $50,000 with charge-offs of $2.1 million had payment defaults within the previous twelve months ended September 30, 2017.
Under the Company
’s internal underwriting policy, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification in order to determine whether a borrower is experiencing financial difficulty.
As of September
30, 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 table
s present the loan portfolio by risk rating as of September 30, 2017, and as of December 31, 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
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
December 31, 2016
|
|
|
|
Pass/Watch
|
|
|
Special Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Total
|
|
|
|
(In thousands)
|
|
Commercial loans
|
|
$
|
2,023,114
|
|
|
$
|
140,682
|
|
|
$
|
84,293
|
|
|
$
|
98
|
|
|
$
|
2,248,187
|
|
Real estate construction loans
|
|
|
469,909
|
|
|
|
44,129
|
|
|
|
34,050
|
|
|
|
-
|
|
|
|
548,088
|
|
Commercial mortgage loans
|
|
|
5,410,623
|
|
|
|
250,221
|
|
|
|
124,404
|
|
|
|
-
|
|
|
|
5,785,248
|
|
Residential mortgage loans and equity lines
|
|
|
2,605,834
|
|
|
|
-
|
|
|
|
9,925
|
|
|
|
-
|
|
|
|
2,615,759
|
|
Installment and other loans
|
|
|
3,993
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,993
|
|
Total gross loans
|
|
$
|
10,513,473
|
|
|
$
|
435,032
|
|
|
$
|
252,672
|
|
|
$
|
98
|
|
|
$
|
11,201,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
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
’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, 2017, and as of December 31, 2016:
|
|
|
|
|
|
Real Estate
|
|
|
Commercial
|
|
|
Residential
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Construction
|
|
|
Mortgage
|
|
|
Mortgage Loans
|
|
|
Installment and
|
|
|
|
|
|
|
|
Loans
|
|
|
Loans
|
|
|
Loans
|
|
|
and Equity Lines
|
|
|
Other Loans
|
|
|
Total
|
|
|
|
(In thousands)
|
|
September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
|
|
$
|
1,461
|
|
|
$
|
-
|
|
|
$
|
823
|
|
|
$
|
322
|
|
|
$
|
-
|
|
|
$
|
2,606
|
|
Balance
|
|
$
|
37,358
|
|
|
$
|
21,748
|
|
|
$
|
55,190
|
|
|
$
|
13,376
|
|
|
$
|
-
|
|
|
$
|
127,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans collectively evaluated for impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
|
|
$
|
49,578
|
|
|
$
|
22,008
|
|
|
$
|
36,579
|
|
|
$
|
10,740
|
|
|
$
|
24
|
|
|
$
|
118,929
|
|
Balance
|
|
$
|
2,382,533
|
|
|
$
|
669,738
|
|
|
$
|
6,321,857
|
|
|
$
|
3,090,912
|
|
|
$
|
4,722
|
|
|
$
|
12,469,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allowance
|
|
$
|
51,039
|
|
|
$
|
22,008
|
|
|
$
|
37,402
|
|
|
$
|
11,062
|
|
|
$
|
24
|
|
|
$
|
121,535
|
|
Total balance
|
|
$
|
2,419,891
|
|
|
$
|
691,486
|
|
|
$
|
6,377,047
|
|
|
$
|
3,104,288
|
|
|
$
|
4,722
|
|
|
$
|
12,597,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
|
|
$
|
1,827
|
|
|
$
|
-
|
|
|
$
|
573
|
|
|
$
|
396
|
|
|
$
|
-
|
|
|
$
|
2,796
|
|
Balance
|
|
$
|
27,761
|
|
|
$
|
5,458
|
|
|
$
|
64,470
|
|
|
$
|
17,385
|
|
|
$
|
-
|
|
|
$
|
115,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans collectively evaluated for impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
|
|
$
|
47,376
|
|
|
$
|
23,268
|
|
|
$
|
34,291
|
|
|
$
|
11,224
|
|
|
$
|
11
|
|
|
$
|
116,170
|
|
Balance
|
|
$
|
2,220,426
|
|
|
$
|
542,630
|
|
|
$
|
5,720,778
|
|
|
$
|
2,598,374
|
|
|
$
|
3,993
|
|
|
$
|
11,086,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allowance
|
|
$
|
49,203
|
|
|
$
|
23,268
|
|
|
$
|
34,864
|
|
|
$
|
11,620
|
|
|
$
|
11
|
|
|
$
|
118,966
|
|
Total balance
|
|
$
|
2,248,187
|
|
|
$
|
548,088
|
|
|
$
|
5,785,248
|
|
|
$
|
2,615,759
|
|
|
$
|
3,993
|
|
|
$
|
11,201,275
|
|
The following table
s detail activity in the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2017, and September 30, 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, 2017 and 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate
|
|
|
Commercial
|
|
|
Residential
|
|
|
Installment
|
|
|
|
|
|
|
|
Commercial
|
|
|
Construction
|
|
|
Mortgage
|
|
|
Mortgage Loans
|
|
|
and Other
|
|
|
|
|
|
|
|
Loans
|
|
|
Loans
|
|
|
Loans
|
|
|
and Equity Lines
|
|
|
Loans
|
|
|
Total
|
|
|
|
(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
|
|
Provision/(credit) for possible credit losses
|
|
|
4,380
|
|
|
|
(2,056
|
)
|
|
|
3,132
|
|
|
|
(5,452
|
)
|
|
|
(4
|
)
|
|
|
-
|
|
Charge-offs
|
|
|
(3,277
|
)
|
|
|
-
|
|
|
|
(4,626
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(7,903
|
)
|
Recoveries
|
|
|
2,006
|
|
|
|
548
|
|
|
|
337
|
|
|
|
6
|
|
|
|
-
|
|
|
|
2,897
|
|
Net (charge-offs)/recoveries
|
|
|
(1,271
|
)
|
|
|
548
|
|
|
|
(4,289
|
)
|
|
|
6
|
|
|
|
-
|
|
|
|
(5,006
|
)
|
September 30, 2016 Ending Balance
|
|
$
|
53,699
|
|
|
$
|
9,245
|
|
|
$
|
44,933
|
|
|
$
|
10,057
|
|
|
$
|
8
|
|
|
$
|
117,942
|
|
Nine months ended September 30, 2017 and 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate
|
|
|
Commercial
|
|
|
Residential
|
|
|
Installment
|
|
|
|
|
|
|
|
Commercial
|
|
|
Construction
|
|
|
Mortgage
|
|
|
Mortgage Loans
|
|
|
and Other
|
|
|
|
|
|
|
|
Loans
|
|
|
Loans
|
|
|
Loans
|
|
|
and Equity Lines
|
|
|
Loans
|
|
|
Total
|
|
|
|
(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
|
|
Provision/(credit) for possible credit losses
|
|
|
5,815
|
|
|
|
(20,796
|
)
|
|
|
295
|
|
|
|
(963
|
)
|
|
|
(1
|
)
|
|
|
(15,650
|
)
|
Charge-offs
|
|
|
(12,035
|
)
|
|
|
-
|
|
|
|
(5,681
|
)
|
|
|
(149
|
)
|
|
|
-
|
|
|
|
(17,865
|
)
|
Recoveries
|
|
|
3,720
|
|
|
|
7,871
|
|
|
|
879
|
|
|
|
24
|
|
|
|
-
|
|
|
|
12,494
|
|
Net (charge-offs)/recoveries
|
|
|
(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
|
|
Reserve for impaired loans
|
|
$
|
1,320
|
|
|
$
|
-
|
|
|
$
|
1,248
|
|
|
$
|
375
|
|
|
$
|
-
|
|
|
$
|
2,943
|
|
Reserve for non-impaired loans
|
|
$
|
52,379
|
|
|
$
|
9,245
|
|
|
$
|
43,685
|
|
|
$
|
9,682
|
|
|
$
|
8
|
|
|
$
|
114,999
|
|
Reserve for off-balance sheet
credit commitments
|
|
$
|
2,112
|
|
|
$
|
-
|
|
|
$
|
35
|
|
|
$
|
80
|
|
|
$
|
2
|
|
|
$
|
2,229
|
|
9
.
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.
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 December 31, 2016. Final maturity for the two fixed rate non-callable securities sold under agreements to repurchase was $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 repu
rchase 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 $108 million as of September 30, 2017, and $372 million as of December 31, 2016.
Borrowing from the FHLB.
As of September 30, 2017, over-night borrowings from the FHLB were $450 million at a rate of 1.16% compared to $275 million at a rate of 0.55% as of December 31, 2016. As of September 30, 2017, the advances from the FHLB were $145 million at a rate of 1.35%. As of September 30, 2017, FHLB advances of $490 million will mature in October 2017, $55 million in 2018 and $50 million in December 2019.
1
1. 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.
As of
September 30, 2017 and December 31, 2016, the Company had income tax refunds receivable of $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
’s tax returns are open for audit by the Internal Revenue Service back to 2014 and by the California Franchise Tax Board back to 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.
1
2
. Fair Value
Measurement
s
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.
|
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, 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 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. 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 table
s present the Company’s hierarchy for its assets and liabilities measured at fair value on a recurring basis as of September 30, 2017, and December 31, 2016:
September 30, 2017
|
|
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
|
|
$
|
399,436
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
399,436
|
|
U.S. government agencies
|
|
|
-
|
|
|
|
9,700
|
|
|
|
-
|
|
|
|
9,700
|
|
U.S. government sponsored entities
|
|
|
-
|
|
|
|
393,722
|
|
|
|
-
|
|
|
|
393,722
|
|
State and municipal securities
|
|
|
-
|
|
|
|
1,931
|
|
|
|
-
|
|
|
|
1,931
|
|
Mortgage-backed securities
|
|
|
-
|
|
|
|
446,065
|
|
|
|
-
|
|
|
|
446,065
|
|
Collateralized mortgage obligations
|
|
|
-
|
|
|
|
1,710
|
|
|
|
-
|
|
|
|
1,710
|
|
Corporate debt securities
|
|
|
-
|
|
|
|
80,906
|
|
|
|
-
|
|
|
|
80,906
|
|
Mutual funds
|
|
|
6,271
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,271
|
|
Preferred stock of government sponsored entities
|
|
|
8,087
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,087
|
|
Other equity securities
|
|
|
20,659
|
|
|
|
-
|
|
|
|
-
|
|
|
|
20,659
|
|
Total securities available-for-sale
|
|
|
434,453
|
|
|
|
934,034
|
|
|
|
-
|
|
|
|
1,368,487
|
|
Warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
97
|
|
|
|
97
|
|
Foreign exchange contracts
|
|
|
-
|
|
|
|
1,725
|
|
|
|
-
|
|
|
|
1,725
|
|
Interest rate swaps
|
|
|
-
|
|
|
|
2,314
|
|
|
|
-
|
|
|
|
2,314
|
|
Total assets
|
|
$
|
434,453
|
|
|
$
|
938,073
|
|
|
$
|
97
|
|
|
$
|
1,372,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option contracts
|
|
$
|
-
|
|
|
$
|
234
|
|
|
$
|
-
|
|
|
$
|
234
|
|
Foreign exchange contracts
|
|
|
-
|
|
|
|
1,083
|
|
|
|
-
|
|
|
|
1,083
|
|
Interest rate swaps
|
|
|
-
|
|
|
|
5,049
|
|
|
|
-
|
|
|
|
5,049
|
|
Total liabilities
|
|
$
|
-
|
|
|
$
|
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 $
97,000 as of September 30, 2017, compared to $79,000 as of December 31, 2016. The fair value adjustment of warrants was included in other operating income in the third quarter of 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 6 years, risk-free interest rate from 1.51% to 2.28%, and stock volatility from 5.05% to 12.6%.
For financial assets measured at fair value on a nonrecurring basis that were still reflected in the
condensed consolidated balance sheet as of September 30, 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, 2017, and December 31, 2016, and the total losses for the periods indicated:
|
|
September 30, 2017
|
|
|
|
|
|
|
Total (Gains)/Losses
|
|
|
|
Fair Value Measurements Using
|
|
|
Total at
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Fair Value
|
|
|
September 30, 2017
|
|
|
September 30, 2016
|
|
|
September 30, 2017
|
|
|
September 30, 2016
|
|
|
|
(In thousands)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans by type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
12,525
|
|
|
$
|
12,525
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
25
|
|
|
$
|
-
|
|
Commercial mortgage loans
|
|
|
-
|
|
|
|
-
|
|
|
|
21,997
|
|
|
|
21,997
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Residential mortgage loans and equity lines
|
|
|
-
|
|
|
|
-
|
|
|
|
10,790
|
|
|
|
10,790
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total impaired loans
|
|
|
-
|
|
|
|
-
|
|
|
|
45,312
|
|
|
|
45,312
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25
|
|
|
|
-
|
|
Other real estate owned
(1)
|
|
|
-
|
|
|
|
6,317
|
|
|
|
4,322
|
|
|
|
10,639
|
|
|
|
405
|
|
|
|
(206
|
)
|
|
|
654
|
|
|
|
9
|
|
Investments in venture capital and private company stock
|
|
|
-
|
|
|
|
-
|
|
|
|
3,023
|
|
|
|
3,023
|
|
|
|
12
|
|
|
|
187
|
|
|
|
365
|
|
|
|
419
|
|
Total assets
|
|
$
|
-
|
|
|
$
|
6,317
|
|
|
$
|
52,657
|
|
|
$
|
58,974
|
|
|
$
|
417
|
|
|
$
|
(19
|
)
|
|
$
|
1,044
|
|
|
$
|
428
|
|
(1) Other real estate owned balance of $18.1 million in the condensed consolidated balance sheet is net of estimated disposal costs.
|
|
|
December 31, 2016
|
|
|
Total Losses
|
|
|
|
Fair Value Measurements Using
|
|
|
Total at
|
|
|
Twelve Months Ended
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Fair Value
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
(In thousands)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans by type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,813
|
|
|
$
|
2,813
|
|
|
$
|
322
|
|
|
$
|
806
|
|
Commercial mortgage loans
|
|
|
-
|
|
|
|
-
|
|
|
|
9,444
|
|
|
|
9,444
|
|
|
|
-
|
|
|
|
598
|
|
Residential mortgage loans and equity lines
|
|
|
-
|
|
|
|
-
|
|
|
|
11,679
|
|
|
|
11,679
|
|
|
|
-
|
|
|
|
146
|
|
Total impaired loans
|
|
|
-
|
|
|
|
-
|
|
|
|
23,936
|
|
|
|
23,936
|
|
|
|
322
|
|
|
|
1,550
|
|
Other real estate owned
(1)
|
|
|
-
|
|
|
|
6,006
|
|
|
|
4,372
|
|
|
|
10,378
|
|
|
|
9
|
|
|
|
404
|
|
Investments in venture capital and private company stock
|
|
|
-
|
|
|
|
-
|
|
|
|
3,667
|
|
|
|
3,667
|
|
|
|
976
|
|
|
|
553
|
|
Total assets
|
|
$
|
-
|
|
|
$
|
6,006
|
|
|
$
|
31,975
|
|
|
$
|
37,981
|
|
|
$
|
1,307
|
|
|
$
|
2,507
|
|
(1) Other real estate owned balance of $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 colla
teral-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 signif
icant 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% of the collateral value of impaired loans, quoted price, or loan sale price of loans held for sale, and appraised value of OREO.
1
3
. Fair Value of Financial Instruments
The Company uses the following methods and assumptions 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
.
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, 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
H
eld for
S
ale
. 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
.
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
D
ebt.
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
’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, 2017, and as of December 31, 2016:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
|
Carrying
|
|
|
|
|
|
|
Carrying
|
|
|
|
|
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Amount
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
167,886
|
|
|
$
|
167,886
|
|
|
$
|
218,017
|
|
|
$
|
218,017
|
|
Short-term investments
|
|
|
573,059
|
|
|
|
573,059
|
|
|
|
967,067
|
|
|
|
967,067
|
|
Securities available-for-sale
|
|
|
1,368,487
|
|
|
|
1,368,487
|
|
|
|
1,314,345
|
|
|
|
1,314,345
|
|
Loans held for sale
|
|
|
-
|
|
|
|
-
|
|
|
|
7,500
|
|
|
|
7,500
|
|
Loans, net
|
|
|
12,472,475
|
|
|
|
12,403,100
|
|
|
|
11,077,315
|
|
|
|
11,006,344
|
|
Investment in Federal Home Loan Bank stock
|
|
|
21,948
|
|
|
|
21,948
|
|
|
|
17,250
|
|
|
|
17,250
|
|
Investment in Federal Reserve Bank stock
|
|
|
8,733
|
|
|
|
8,733
|
|
|
|
-
|
|
|
|
-
|
|
Warrants
|
|
|
97
|
|
|
|
97
|
|
|
|
79
|
|
|
|
79
|
|
|
|
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
|
|
|
|
|
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Amount
|
|
|
Fair Value
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
12,561,695
|
|
|
$
|
12,573,127
|
|
|
$
|
11,674,726
|
|
|
$
|
11,680,017
|
|
Securities sold under agreements to repurchase
|
|
|
100,000
|
|
|
|
100,549
|
|
|
|
350,000
|
|
|
|
351,989
|
|
Advances from Federal Home Loan Bank
|
|
|
595,000
|
|
|
|
595,037
|
|
|
|
350,000
|
|
|
|
350,062
|
|
Other borrowings
|
|
|
153,574
|
|
|
|
151,643
|
|
|
|
17,662
|
|
|
|
15,944
|
|
Long-term debt
|
|
|
119,136
|
|
|
|
68,056
|
|
|
|
119,136
|
|
|
|
63,169
|
|
|
|
Notional
|
|
|
|
|
|
|
Notional
|
|
|
|
|
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Amount
|
|
|
Fair Value
|
|
Option contracts
|
|
$
|
12,307
|
|
|
$
|
234
|
|
|
$
|
12,117
|
|
|
$
|
121
|
|
Foreign exchange contracts
|
|
|
86,625
|
|
|
|
1,083
|
|
|
|
89,545
|
|
|
|
3,132
|
|
Interest rate swaps
|
|
|
510,841
|
|
|
|
5,049
|
|
|
|
119,136
|
|
|
|
3,744
|
|
|
|
Notional
|
|
|
|
|
|
|
Notional
|
|
|
|
|
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Amount
|
|
|
Fair Value
|
|
Off-Balance Sheet Financial Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments to extend credit
|
|
$
|
2,287,498
|
|
|
$
|
(6,924
|
)
|
|
$
|
2,062,241
|
|
|
$
|
(6,025
|
)
|
Standby letters of credit
|
|
|
140,682
|
|
|
|
(1,699
|
)
|
|
|
75,396
|
|
|
|
(668
|
)
|
Other letters of credit
|
|
|
41,868
|
|
|
|
(218
|
)
|
|
|
37,283
|
|
|
|
(16
|
)
|
Bill of lading guarantees
|
|
|
24
|
|
|
|
-
|
|
|
|
75
|
|
|
|
-
|
|
The following table
s present the level in the fair value hierarchy for the estimated fair values of financial instruments as of September 30, 2017, and December 31, 2016.
|
|
September 30, 2017
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Measurements
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
(In thousands)
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
167,886
|
|
|
$
|
167,886
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Short-term investments
|
|
|
573,059
|
|
|
|
573,059
|
|
|
|
-
|
|
|
|
-
|
|
Securities available-for-sale
|
|
|
1,368,487
|
|
|
|
434,453
|
|
|
|
934,034
|
|
|
|
-
|
|
Loans held-for-sale
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Loans, net
|
|
|
12,403,100
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,403,100
|
|
Investment in Federal Home Loan Bank stock
|
|
|
21,948
|
|
|
|
-
|
|
|
|
21,948
|
|
|
|
-
|
|
Investment in Federal Reserve Bank stock
|
|
|
8,733
|
|
|
|
-
|
|
|
|
8,733
|
|
|
|
-
|
|
Warrants
|
|
|
97
|
|
|
|
-
|
|
|
|
-
|
|
|
|
97
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
12,573,127
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,573,127
|
|
Securities sold under agreements to repurchase
|
|
|
100,549
|
|
|
|
-
|
|
|
|
100,549
|
|
|
|
-
|
|
Advances from Federal Home Loan Bank
|
|
|
595,037
|
|
|
|
-
|
|
|
|
595,037
|
|
|
|
-
|
|
Other borrowings
|
|
|
151,643
|
|
|
|
-
|
|
|
|
-
|
|
|
|
151,643
|
|
Long-term debt
|
|
|
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
|
|
|
|
-
|
|
1
4
. Goodwill and Goodwill Impairment
The Company
’s policy is to assess goodwill for impairment at the reporting unit level on an annual basis or between annual assessments if a triggering event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Impairment is the condition that exists when the carrying amount of goodwill exceeds its implied fair value.
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.
A
s of September 30, 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.
1
5
. 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 r
elated 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.
I
n 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 1.32%. As of September 30, 2017, the notional amount of cash flow interest rate swaps was $119.1 million and their unrealized loss of $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 $407,000 for the three months ended September 30, 2017 compared to $588,000 for the same quarter a year ago. For the nine months ended September 30, 2017, the periodic net settlement of interest rate swaps included in interest expense was $1.3 million compared to $1.8 million for the same period in 2016.
As of September
30, 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 4.55% and receives a variable rate at the one month LIBOR rate plus a weighted average spread of 293 basis points, or at a weighted average rate of 4.16%. As of September 30, 2017, the notional amount of fair value interest rate swaps was $510.6 million and their unrealized gain of $1.9 million was included in other non-interest income. The amount of periodic net settlement of interest rate swaps reducing interest income was $514,000 for the three months ended September 30, 2017, compared to $879,000 for the same quarter a year ago. The amount of periodic net settlement of interest rate swaps reducing interest income was $1.9 million for the nine months ended September 30, 2017, compared to $2.8 million for the same period a year ago. As of September 30, 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 $6.3 million as of September 30, 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, 2017, the notional amount of option contracts totaled $12.3 million with a net negative fair value of $234,000. As of September 30, 2017, spot, forward, and swap contracts with a total notional amount of $69.3 million had a positive fair value of $1.7 million. Spot, forward, and swap contracts with a total notional amount of $86.6 million had a negative fair value of $1.1 million as of September 30, 2017. As of December 31, 2016, the notional amount of option contracts totaled $12.1 million with a net negative fair value of $121,000. As of December 31, 2016, spot, forward, and swap contracts with a total notional amount of $82.4 million had a positive fair value of $1.3 million. Spot, forward, and swap contracts with a total notional amount of $89.5 million had a negative fair value of $3.1 million as of December 31, 2016.
1
6
. Balance Sheet Offsetting
Certain financial instruments, including resell and repurchase agreements, securities lending arrangements and derivatives, may be eligible for offset in the
condensed consolidated balance sheets and/or subject to master netting arrangements or similar agreements. The Company’s securities sold with agreements to repurchase and derivative transactions with upstream financial institution counterparties are generally executed under International Swaps and Derivative Association master agreements that include “right of set-off” provisions. In such cases, there is generally a legally enforceable right to offset recognized amounts and there may be an intention to settle such amounts on a net basis. Nonetheless, the Company does not generally offset such financial instruments for financial reporting purposes.
Financial instruments that are eligible for offset in the
condensed consolidated balance sheets, as of September 30, 2017, and December 31, 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
|
)
|
|
$
|
-
|
|
1
7
.
Stockholders’ Equity
Total equity was $
2.0 billion as of September 30, 2017, an increase of $140.2 million, from $1.8 billion as of December 31, 2016, primarily due to net income of $150.1 million and equity consideration for the acquisition of SinoPac Bancorp of $34.9 million partially offset by common stock cash dividends of $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, 2017, and September 30, 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
|
|
|
|
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
|
|
1
8. Stock Repurchase Program
On February 1, 2016, the
Company’s Board of Directors approved a new stock repurchase program to buy back up to $45.0 million of our common stock. In 2016, the Company repurchased 1,380,578 shares for $37.5 million, or $27.13 per share under the February 2016 repurchase program. The 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.
1
9
. S
ubsequent
E
vents
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.