UNITED STATES

securities and exchange commission

Washington, D.C. 20549

 

form 10-q

(Mark One)

[ X ]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended

September 30, 2014

 

OR

 

[    ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from

to

 

Commission file number

001-31830

 

CATHAY GENERAL BANCORP

(Exact name of registrant as specified in its charter)

 

Delaware				95-4274680
(State of other jurisdiction of incorporation or organization)				(I.R.S. Employer Identification No.)

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

  

Registrant's telephone number, including area code:

(213) 625-4700

 

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

 

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

 

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

 

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

Large accelerated filer ☑	Accelerated filer ☐
Non-accelerated filer   ☐     (Do not check if a smaller reporting company)	Smaller reporting company ☐

 

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

 

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

 

Common stock, $.01 par value, 79,704,258 shares outstanding as of October 31, 2014.

 

   

CATHAY GENERAL BANCORP AND SUBSIDIARies

3RD quarter 2014 REPORT ON FORM 10-Q

table of contents

 

PART I –	FINANCIAL INFORMATION	5
Item 1.	FINANCIAL STATEMENTS (Unaudited).	5
	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited).	8
Item 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.	39
Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	65
Item 4.	CONTROLS AND PROCEDURES.	66
PART II - OTHER INFORMATION		67
Item 1.	LEGAL PROCEEDINGS.	67
Item 1A	RISK FACTORS.	67
Item 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.	67
Item 3.	DEFAULTS UPON SENIOR SECURITIES.	68
Item 4.	MINE SAFETY DISCLOSURES.	68
Item 5.	OTHER INFORMATION.	68
Item 6.	EXHIBITS.	68
SIGNATURES		70

  

 

Forward-Looking Statements

 

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

 

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

 

●

U.S. and international business and economic conditions;

 

●

possible additional provisions for loan losses and charge-offs;

 

●

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

 

●

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

 

●

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

 

●

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

 

●

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

 

●

potential goodwill impairment;

 

●

liquidity risk;

 

●

fluctuations in interest rates;

 

●

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

 

●

inflation and deflation;

 

●

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

 

●

environmental liabilities;

  

 

●

our ability to compete with larger competitors;

 

●

our ability to retain key personnel;

 

●

successful management of reputational risk;

 

●

natural disasters and geopolitical events;

 

●

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

 

●

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

 

●

our ability to adapt our systems to technological changes;

 

●

risk management processes and strategies;

 

●

adverse results in legal proceedings;

 

●

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

 

●

changes in accounting standards or tax laws and regulations;

 

●

market disruption and volatility;

 

●

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

 

●

issuance of preferred stock;

 

●

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

 

●

the soundness of other financial institutions.

  

These and other factors are further described in Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2013 (Item 1A in particular), other reports and registration statements filed with the Securities and Exchange Commission (“SEC”), and other filings it makes with the SEC from time to time. Actual results in any future period may also vary from the past results discussed in this report. Given these risks and uncertainties, readers are cautioned not to place undue reliance on any forward-looking statements, which speak to the date of this report. We have no intention and undertake no obligation to update any forward-looking statement or to publicly announce any revision of any forward-looking statement to reflect future developments or events, except as required by law.

 

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

 

  

PART I – FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS (UNAUDITED)

 

CATHAY GENERAL BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

(In thousands, except share and per share data)		September 30, 2014				December 31, 2013
Assets
Cash and due from banks		$	200,302			$	153,747
Short-term investments and interest bearing deposits			597,747				516,938
Securities available-for-sale (amortized cost of $1,355,056 in 2014 and $1,637,965 in 2013)			1,340,092				1,586,668
Trading securities			-				4,936
Loans			8,858,254				8,084,563
Less:   Allowance for loan losses			(169,198	)			(173,889	)
Unamortized deferred loan fees, net			(12,903	)			(13,487	)
Loans, net			8,676,153				7,897,187
Federal Home Loan Bank stock			34,090				25,000
Other real estate owned, net			29,025				52,985
Affordable housing investments, net			96,504				84,108
Premises and equipment, net			100,673				102,045
Customers’ liability on acceptances			21,820				32,194
Accrued interest receivable			24,986				24,274
Goodwill			316,340				316,340
Other intangible assets, net			3,459				2,230
Other assets			158,275				190,634
Total assets		$	11,599,466			$	10,989,286
Liabilities and Stockholders’ Equity
Deposits
Non-interest-bearing demand deposits		$	1,593,003			$	1,441,858
Interest-bearing deposits:
NOW deposits			766,622				683,873
Money market deposits			1,514,496				1,286,338
Savings deposits			542,454				499,520
Time deposits under $100,000			1,103,634				931,204
Time deposits of $100,000 or more			3,174,460				3,138,512
Total deposits			8,694,669				7,981,305
Securities sold under agreements to repurchase			550,000				800,000
Advances from the Federal Home Loan Bank			555,000				521,200
Other borrowings for affordable housing investments			18,882				19,062
Long-term debt			119,136				121,136
Acceptances outstanding			21,820				32,194
Other liabilities			69,575				55,418
Total liabilities			10,029,082				9,530,315
Commitments and contingencies			-				-
Stockholders’ Equity
Common stock, $0.01 par value, 100,000,000 shares authorized, 83,905,576 issued and 79,698,011 outstanding at September 30, 2014, and 83,797,434 issued and 79,589,869 outstanding at December 31, 2013			839				838
Additional paid-in-capital			787,889				784,489
Accumulated other comprehensive loss, net			(8,835	)			(29,729	)
Retained earnings			916,227				829,109
Treasury stock, at cost (4,207,565 shares at September 30, 2014, and at December 31, 2013)			(125,736	)			(125,736	)
Total equity			1,570,384				1,458,971
Total liabilities and equity		$	11,599,466			$	10,989,286

 

See accompanying notes to unaudited condensed consolidated financial statements 

 

 

CATHAY GENERAL BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE INCOME

(Unaudited)

 

		Three months ended September 30,								Nine months ended September 30,
		2014				2013				2014				2013
		(In thousands, except share and per share data)
Interest and Dividend Income
Loans receivable, including loan fees		$	100,151			$	90,838			$	290,337			$	267,557
Investment securities- taxable			5,105				10,868				19,389				34,986
Investment securities- nontaxable			-				-				-				995
Federal Home Loan Bank stock			508				449				1,379				1,041
Deposits with banks			571				307				1,499				796
Total interest and dividend income			106,335				102,462				312,604				305,375
Interest Expense
Time deposits of $100,000 or more			7,107				6,887				20,519				20,466
Other deposits			5,005				3,485				13,462				9,244
Securities sold under agreements to repurchase			5,858				8,402				19,731				29,778
Advances from Federal Home Loan Bank			153				150				849				375
Long-term debt			1,456				930				3,012				2,778
Short-term borrowings			1				-				1
Total interest expense			19,580				19,854				57,574				62,641
Net interest income before provision for credit losses			86,755				82,608				255,030				242,734
Credit for loan losses			(5,100	)			(3,000	)			(8,800	)			(3,000	)
Net interest income after credit for loan losses			91,855				85,608				263,830				245,734
Non-Interest Income
Securities gains, net			361				8,688				6,827				27,157
Letters of credit commissions			1,559				1,698				4,547				4,608
Depository service fees			1,330				1,371				3,999				4,330
Other operating income			5,724				4,963				17,181				15,867
Total non-interest income			8,974				16,720				32,554				51,962
Non-Interest Expense
Salaries and employee benefits			22,630				22,751				69,472				67,192
Occupancy expense			3,934				3,812				11,692				10,966
Computer and equipment expense			2,471				2,446				7,307				7,488
Professional services expense			5,991				5,813				16,410				18,484
FDIC and State assessments			2,261				1,712				6,692				5,431
Marketing expense			639				1,097				2,722				2,703
Other real estate owned (income)/expense			(1,011	)			527				(629	)			886
Operations of affordable housing investments, net			1,672				1,234				5,126				4,952
Amortization of core deposit intangibles			214				1,363				510				4,097
Costs associated with debt redemption			527				6,861				3,348				22,557
Other operating expense			3,279				3,054				10,538				8,758
Total non-interest expense			42,607				50,670				133,188				153,514
Income before income tax expense			58,222				51,658				163,196				144,182
Income tax expense			22,313				19,029				60,944				52,489
Net income			35,909				32,629				102,252				91,693
Less: net income attributable to noncontrolling interest			-				151				-				452
Net income attributable to Cathay General Bancorp			35,909				32,478				102,252				91,241
Dividends on preferred stock and noncash charge from repayment			-				(2,434	)			-				(9,685	)
Net income attributable to common stockholders			35,909				30,044				102,252				81,556
Other comprehensive income/(loss), net of tax
Unrealized holding gain/(loss) on securities available-for-sale			170				(1,074	)			25,014				(5,908	)
Less: reclassification adjustments included in net income			209				5,036				3,957				15,740
Unrealized holding gain/(loss) on cash flow hedge derivatives			100				-				(163	)			-
Less: reclassification adjustments included in net income			-				-				-				-
Total other comprehensive gain/(loss), net of tax			61				(6,110	)			20,894				(21,648	)
Total comprehensive income		$	35,970			$	26,368			$	123,146			$	69,593
Net income per common share:
Basic		$	0.45			$	0.38			$	1.28			$	1.03
Diluted		$	0.45			$	0.38			$	1.28			$	1.03
Cash dividends paid per common share		$	0.07			$	0.01			$	0.19			$	0.03
Average common shares outstanding
Basic			79,677,952				78,894,262				79,639,202				78,853,333
Diluted			80,176,100				79,114,122				80,087,819				78,944,152

 

See accompanying notes to unaudited condensed consolidated financial statements.

  

 

CATHAY GENERAL BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Nine months ended September 30
		2014				2013
		(In thousands)
Cash Flows from Operating Activities
Net income		$	102,252			$	91,693
Adjustments to reconcile net income to net cash provided by/(used in) operating activities:
Credit for loan losses			(8,800	)			(3,000	)
Provision/(credit) for losses on other real estate owned			1,693				(675	)
Deferred tax (asset)/liability			13,846				(12,325	)
Depreciation			5,336				4,899
Net gains on sale and transfer of other real estate owned			(3,467	)			(843	)
Net gains on sale of loans			(300	)			(864	)
Proceeds from sales of loans			15,791				41,219
Originations of loans held-for-sale			(15,491	)			(40,356	)
Net change in trading securities			-				(152	)
Income associated with debt redemption			(550	)			-
Write-downs on venture capital investments			317				295
Write-downs on impaired securities			820				-
Net gains on sales and calls of securities			(7,647	)			(27,157	)
Amortization/accretion of security premiums/discounts, net			2,266				3,439
Amortization of other intangible assets			575				4,192
Excess tax short-fall from share-based payment arrangements			1,177				143
Stock based compensation and stock issued to officers as compensation			2,948				2,775
Net change in accrued interest receivable and other assets			1,691				24,875
Net change in other liabilities			(8,377	)			4,195
Net cash provided by operating activities			104,080				92,353
Cash Flows from Investing Activities
(Increase)/decrease in short-term investments			(75,873	)			22,959
Purchase of investment securities available-for-sale			(892,706	)			(1,026,659	)
Proceeds from sale of investment securities available-for-sale			543,305				903,915
Proceeds from repayments, maturities and calls of investment securities available-for-sale			640,478				367,026
Proceeds from repayments, maturities and calls of investment securities held-to-maturity			-				50,973
Purchase of Federal Home Loan Bank stock			(17,736	)			-
Redemptions of Federal Home Loan Bank stock			8,646				12,589
Net increase in loans			(763,211	)			(413,405	)
Purchase of premises and equipment			(4,036	)			(4,734	)
Proceeds from sale of other real estate owned			28,543				9,926
Net increase in investment in affordable housing			(5,617	)			(6,167	)
Net cash used in investing activities			(538,207	)			(83,577	)
Cash Flows from Financing Activities
Net increase in deposits			713,362				534,306
Net decrease in federal funds purchased and securities sold under agreements to repurchase			(250,000	)			(450,000	)
Advances from Federal Home Loan Bank			8,252,400				1,742,396
Repayment of Federal Home Loan Bank borrowings			(8,218,600	)			(1,512,000	)
Cash dividends paid			(15,133	)			(8,631	)
Redemption of series B preferred stock			-				(258,000	)
Repurchase of trust preferred securities			(1,450	)			-
Proceeds from shares issued under Dividend Reinvestment Plan			1,554				202
Taxes paid related to net share settlement of RSUs			(274	)			-
Excess tax short-fall from share-based payment arrangements			(1,177	)			(143	)
Net cash provided by financing activities			480,682				48,130
Increase in cash and cash equivalents			46,555				56,906
Cash and cash equivalents, beginning of the period			153,747				144,909
Cash and cash equivalents, end of the period		$	200,302			$	201,815
Supplemental disclosure of cash flow information
Cash paid during the period:
Interest		$	59,478			$	65,372
Income taxes paid		$	52,864			$	55,537
Non-cash investing and financing activities:
Net change in unrealized holding (loss)/gain on securities available-for-sale, net of tax		$	21,057			$	(21,648	)
Net change in unrealized holding loss on cash flow hedge derivatives		$	(163	)		$	-
Transfers of investment securities to available-for-sale from held-to-maturity		$	-			$	722,466
Transfers of trading securities to short-term investments		$	4,936			$	-
Transfers to other real estate owned from loans held for investment		$	(2,810	)		$	11,877
Loans to facilitate the sale of other real estate owned		$	-			$	75
Transfer of securities sold but not yet settled to other assets		$	-			$	12,469

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

  
CATHAY GENERAL BANCORP AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

1. Business

 

Cathay General Bancorp (“Bancorp”) is the holding company for Cathay Bank (the “Bank” and, together, the “Company”), six limited partnerships investing in affordable housing investments in which the Bank is the sole limited partner, and GBC Venture Capital, Inc. The 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, 2014, the Bank operated 21 branches in Southern California, 12 branches in Northern California, nine 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 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. Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance 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, 2014. 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, 2013.

 

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 consolidated financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. The most significant estimates subject to change are the allowance for loan losses, goodwill impairment, and other-than-temporary impairment.

 

3. Recent Accounting Pronouncements

  

In January 2014, the FASB issued ASU 2014-01, “Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects.” ASU No. 2014-01 permits a reporting entity to make an accounting policy election to account for its investments in affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the amount of tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense or benefit. ASU 2014-01 becomes effective for interim and annual periods beginning on or after December 15, 2014. The Company is evaluating whether to adopt ASU 2014-01 or to continue to apply the equity method of accounting for investments in affordable housing projects.

  

 

In January 2014, the FASB issued ASU 2014-04, “Receivables—Trouble Debt Restructurings by Creditors.” ASU No. 2014-04 clarifies that upon either the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement, a creditor is considered to have physical possession of residential real estate property collateralizing a consumer mortgage loan. A reporting entity is required to have interim and annual disclosure of both the amount of foreclosed residential real estate property held by the creditor and the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in process of foreclosure. ASU 2014-04 becomes effective for interim and annual periods beginning on or after December 15, 2014. Adoption of ASU 2014-04 is not expected to have a significant impact on the Company’s consolidated financial statements.

 

In April 2014, the FASB issued ASU 2014-08, “Presentation of Financial Statements and Property, Plant, and Equipment.” ASU No. 2014-08 defines a discontinued operation as disposal of components of an entity that represent a strategic shift that has or will have a major effect on an entity’s operations. ASU No. 2014-08 also requires a reporting entity to present the assets and liabilities of a disposal group that includes a discontinued operation separately in the asset and liability sections, respectively, of the statement of financial position for each comparative period. ASU 2014-08 becomes effective for interim and annual periods beginning on or after December 15, 2014. Adoption of ASU 2014-08 is not expected to have a significant impact on the Company’s consolidated financial statements.

 

In June 2014, the FASB issued ASU 2014-11, “Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.” ASU No. 2014-11 expands secured borrowing accounting for certain repurchase agreements. It requires the repurchase agreement be separate from the initial transfer of the financial asset in a repurchase financing arrangement. An entity is required to disclose additional information about certain transactions accounted for as a sale in which the transferor retains substantially all of the exposure to the economic return on the transferred financial assets through an agreement with the same counterparty. An entity is also required to disclose information about repurchase agreements, securities lending transactions and repurchase-to-maturity transactions that are accounted for as secured borrowings. ASU 2014-11 becomes effective for interim and annual periods beginning on or after December 15, 2014. Adoption of ASU 2014-11 is not expected to have a significant impact on the Company’s consolidated financial statements.

 

In June 2014, the FASB issued ASU 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.” ASU No. 2014-12 requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. An entity should recognize compensation cost in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the periods for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. ASU 2014-12 becomes effective for interim and annual periods beginning on or after December 15, 2015. Adoption of ASU 2014-12 is not expected to have a significant impact on the Company’s consolidated financial statements.

  

 

ASU 2014-15, “Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”, issued by the FASB in August 2014, requires an entity’s management to evaluate and disclose conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued.  In addition, an entity’s management is to disclose management’s plans that alleviated or that are intended to mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.  ASU 2014-15 becomes effective for interim and annual periods beginning on or after December 15, 2016.  Adoption of ASU 2014-15 is not expected to have a significant impact on the Company’s consolidated financial statements.

  

4. Earnings per Share

  

Basic earnings per share excludes 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)		2014				2013				2014				2013
Net income attributable to Cathay General Bancorp		$	35,909			$	32,478			$	102,252			$	91,241
Dividends on preferred stock and noncash charge from repayment			-				(2,434	)			-				(9,685	)
Net income available to common stockholders		$	35,909			$	30,044			$	102,252			$	81,556
Weighted-average shares:
Basic weighted-average number of common shares outstanding			79,677,952				78,894,262				79,639,202				78,853,333
Dilutive effect of weighted-average outstanding common share equivalents
Warrants			346,101				171,426				306,306				57,771
Options			109,803				-				103,022				-
Restricted stock units			42,244				48,434				39,289				33,048
Diluted weighted-average number of common shares outstanding			80,176,100				79,114,122				80,087,819				78,944,152
Average stock options and warrants with anti-dilutive effect			1,990,358				3,668,285				1,993,384				4,958,218
Earnings per common share:
Basic		$	0.45			$	0.38			$	1.28			$	1.03
Diluted		$	0.45			$	0.38			$	1.28			$	1.03

 

 

5. Stock-Based Compensation

  

Under the Company’s equity incentive plans, directors and eligible employees may be granted incentive or non-statutory stock options and/or restricted stock units, or awarded non-vested stock. As of September 30, 2014, the only options granted by the Company were non-statutory stock options to selected Bank officers and non-employee directors at exercise prices equal to the fair market value of a share of the Company’s common stock on the date of grant. Such options have a maximum ten-year term and vest in 20% annual increments (subject to early termination in certain events) except certain options granted to the Chief Executive Officer of the Company in 2005 and 2008. If such options expire or terminate without having been exercised, any shares not purchased will again be available for future grants or awards. There were no options granted during the first nine months of 2014 or the year ended December 31, 2013.

 

Option compensation expense was zero for the three months ended September 30, 2014, and for the three months ended September 30, 2013. For the nine months ended September 30, option compensation expense totaled zero for 2014 and $129,000 for 2013. Stock-based compensation is recognized ratably over the requisite service period for all awards.

  

 

No stock options were exercised in the first nine months of 2014 or in the first nine months of 2013. The table below summarizes stock option activity for the periods indicated:

 

						Weighted-average				Weighted-average Remaining Contractual Life				Aggregate Intrinsic Value
		Shares				exercise price				(in years)				(in thousands)
Balance, December 31, 2013			2,812,874			$	31.81				1.9			$	2,119
Forfeited			(438,000	)			28.70
Balance, March 31, 2014			2,374,874			$	32.38				2.0			$	1,148
Forfeited			(10,000	)			32.26
Balance, June 30, 2014			2,364,874			$	32.38				1.7			$	4,083
Forfeited			-				-
Balance, September 30, 2014			2,364,874			$	32.38				1.5			$	3,487
Exercisable, September 30, 2014			2,364,874			$	32.38				1.5			$	3,487

  

At September 30, 2014, 3,070,663 shares were available under the Company’s 2005 Incentive Plan for future grants.

 

The Company granted restricted stock units for 17,601 shares at an average closing price of $24.66 per share in the first nine months of 2014 and 25,037 shares at an average closing price of $20.68 per share in the year ended December 31, 2013. The restricted stock units granted in 2014 and 2013 are scheduled to vest two years from grant date.

 

The following table presents information relating to the restricted stock units as of September 30, 2014:

  

		Units
Balance at December 31, 2013			143,433
Granted			17,601
Forfeited			-
Vested			(42,520	)
Balance at September 30, 2014			118,514

   

The compensation expense related to the restricted stock units was $1.0 million for the three months ended September 30, 2014, compared to $476,000 for the three months ended September 30, 2013. For the nine months ended September 30, compensation expense recorded related to the restricted stock units was $2.9 million in 2014 and $1.6 million in 2013. Unrecognized stock-based compensation expense related to restricted stock units was $4.7 million at September 30, 2014, and is expected to be recognized over the next 2.0 years.

 

In December 2013, the Company granted performance-based restricted stock units in which the number of units earned is calculated based on the relative total stockholder 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 stock units in which the number of units earned is determined by comparison to the targeted earnings per share (“EPS”) for the three years ending December 31, 2016. Performance TSR restricted stock units for 119,840 shares and performance EPS restricted stock units for 116,186 shares were granted to eight executive officers. Both the performance TSR and EPS stock units are scheduled to vest on December 31, 2016. In the first nine months of 2014, the Company did not grant any performance stock units.

  

 

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

 

		Three months ended September 30,								Nine months ended September 30,
(Dollars in thousands)		2014				2013				2014				2013
Short-fall of tax deductions in excess of grant-date fair value		$	-			$	(63	)		$	(1,177	)		$	(143	)
Benefit of tax deductions on grant-date fair value			-				95				1,177				702
Total benefit of tax deductions		$	-			$	32			$	-			$	559

  

6. Investment Securities

 

Investment securities were $1.34 billion at September 30, 2014, compared to $1.59 billion at December 31, 2013. During the first quarter of 2013, due to the ongoing discussions regarding corporate income tax rates which could have a negative impact on the after-tax yields and fair values of the Company’s portfolio of municipal securities, the Company determined it may sell such securities in response to market conditions. As a result, the Company reclassified its municipal securities from securities held-to-maturity to securities available-for-sale. Concurrent with this reclassification, the Company also reclassified all other securities held-to-maturity, which together with the municipal securities had an amortized cost on the date of transfer of $722.5 million, to securities available-for-sale. At the reclassification date, a net unrealized gain was recorded in other comprehensive income for these securities totaling $40.5 million.

 

The following tables reflect the amortized cost, gross unrealized gains, gross unrealized losses, and fair value of investment securities as of September 30, 2014, and December 31, 2013:

 

		September 30, 2014
						Gross				Gross
		Amortized				Unrealized				Unrealized
		Cost				Gains				Losses				Fair Value
		(In thousands)
Securities Available-for-Sale
U.S. treasury securities		$	539,919			$	198			$	29			$	540,088
Mortgage-backed securities			703,312				1,085				21,073				683,324
Collateralized mortgage obligations			80				-				34				46
Corporate debt securities			94,941				751				1,355				94,337
Mutual funds			6,000				-				183				5,817
Preferred stock of government sponsored entities			7,196				2,056				-				9,252
Other equity securities			3,608				3,620				-				7,228
Total		$	1,355,056			$	7,710			$	22,674			$	1,340,092

  

  

		December 31, 2013
						Gross				Gross
		Amortized				Unrealized				Unrealized
		Cost				Gains				Losses				Fair Value
		(In thousands)
Securities Available-for-Sale
U.S. treasury securities		$	460,095			$	99			$	1			$	460,193
Mortgage-backed securities			1,010,294				7,049				64,529				952,814
Collateralized mortgage obligations			5,929				231				54				6,106
Asset-backed securities			123				-				-				123
Corporate debt securities			154,955				298				4,949				150,304
Mutual funds			6,000				-				275				5,725
Preferred stock of government sponsored entities			569				10,834				-				11,403
Total		$	1,637,965			$	18,511			$	69,808			$	1,586,668

 

The amortized cost and fair value of investment securities at September 30, 2014, 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		$	115,047			$	115,156
Due after one year through five years			446,739				447,662
Due after five years through ten years			85,693				84,983
Due after ten years (1)			707,577				692,291
Total		$	1,355,056			$	1,340,092
(1) Equity securities are reported in this category

 

Proceeds from sales of mortgage-backed securities were $458.4 million and from repayments, maturities and calls of mortgage-backed securities were $54.7 million during the first nine months of 2014 compared to proceeds from sales of $348.7 million and proceeds of $237.9 million from repayments, maturities, and calls during the same period a year ago. Proceeds from sales of other investment securities were $84.9 million during the first nine months of 2014 compared to $555.2 million during the same period a year ago. Proceeds from maturities and calls of other investment securities were $585.8 million during the first nine months of 2014 compared to $180.1 million during the same period a year ago. Gains of $17.1 million and losses of $9.5 million were realized on sales and calls of investment securities during the first nine months of 2014 compared to gains of $27.2 million and no losses realized during the same period a year ago.

 

  

At September 30, 2014, all of the Company’s mortgage-backed securities were rated as investment grade except for one non-agency issue. Total unrealized losses of $21.1 million from all mortgage-backed securities resulted from increases in interest rates subsequent to the date that these securities were purchased. Total unrealized losses of $1.4 million on corporate bonds relates to four issues of investments in bonds of financial institutions, all of which were investment grade at the date of acquisition and as of September 30, 2014. The unrealized losses were primarily caused by the widening of credit and liquidity spreads since the dates of acquisition. The contractual terms of those investments do not permit the issuers to settle the security at a price less than the amortized cost of the investment. The Company currently does not believe it is probable that it will be unable to collect all amounts due according to the contractual terms of the investments. Therefore, it is expected that these mortgage-backed securities and corporate bonds would not be settled at a price less than the amortized cost of the investment. Because the Company does not intend to sell and would not be required to sell these investments until a recovery of fair value, which may be maturity, it does not consider its investments in these mortgaged-backed securities and corporate bonds to be other-than-temporarily impaired at September 30, 2014.

 

The temporarily impaired securities represent 66.3% of the fair value of investment securities as of September 30, 2014. Unrealized losses for securities with unrealized losses for less than twelve months represent 0.07%, and securities with unrealized losses for twelve months or more represent 3.5%, of the historical cost of these securities. Unrealized losses on these securities generally resulted from increases in interest rates or spreads subsequent to the date that these securities were purchased. During the third quarter of 2014, the Company wrote down the carrying value of its portfolio of agency preferred stock by $820,000..

 

At September 30, 2014, management believed the impairment was temporary and, accordingly, no impairment loss on debt 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.

 

The tables below show the fair value and unrealized losses of the temporarily impaired securities in our investment securities portfolio as of September 30, 2014, and December 31, 2013:

 

		September 30, 2014
		Temporarily impaired securities
		Less than 12 months								12 months or longer								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses				Value				Losses
		(Dollars in thousands)
Securities Available-for-Sale
U.S. treasury securities		$	174,959			$	29			$	-			$	-			$	174,959			$	29
Mortgage-backed securities			92,436				151				551,854				20,922				644,290				21,073
Collateralized mortgage obligations			-				-				46				34				46				34
Corporate debt securities			-				-				63,645				1,355				63,645				1,355
Mutual funds			-				-				5,817				183				5,817				183
Total		$	267,395			$	180			$	621,362			$	22,494			$	888,757			$	22,674

  

  

		December 31, 2013
		Temporarily impaired securities
		Less than 12 months								12 months or longer								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses				Value				Losses
		(Dollars in thousands)
Securities Available-for-Sale
U.S. treasury securities		$	75,064			$	1			$	-			$	-			$	75,064			$	1
Mortgage-backed securities			792,012				64,526				272				2				792,284				64,528
Mortgage-backed securities-Non-agency			94				1				-				-				94				1
Collateralized mortgage obligations			68				4				301				50				369				54
Corporate debt securities			9,970				30				100,081				4,919				110,051				4,949
Mutual funds			-				-				5,724				275				5,724				275
Total securities available-for-sale		$	877,208			$	64,562			$	106,378			$	5,246			$	983,586			$	69,808
Total investment securities		$	877,208			$	64,562			$	106,378			$	5,246			$	983,586			$	69,808

 

Investment securities having a carrying value of $703.6 million at September 30, 2014, and $926.5 million at December 31, 2013, were pledged to secure public deposits, other borrowings, treasury tax and loan, and securities sold under agreements to repurchase. 

 

7. Loans 

 

Most of the Company’s business activity is with Asian customers located in Southern and Northern California; New York City, New York; Houston and Dallas, Texas; Seattle, Washington; Boston, Massachusetts; Chicago, Illinois; Edison, New Jersey; 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 components of loans in the condensed consolidated balance sheets as of September 30, 2014, and December 31, 2013, were as follows:

 

		September 30, 2014				December 31, 2013
		(In thousands)
Type of Loans:
Commercial loans		$	2,450,118			$	2,298,724
Residential mortgage loans			1,516,711				1,355,255
Commercial mortgage loans			4,414,067				4,023,051
Equity lines			172,223				171,277
Real estate construction loans			301,459				221,701
Installment and other loans			3,676				14,555
Gross loans			8,858,254				8,084,563
Less:
Allowance for loan losses			(169,198	)			(173,889	)
Unamortized deferred loan fees			(12,903	)			(13,487	)
Total loans, net		$	8,676,153			$	7,897,187

 

  

At September 30, 2014, recorded investment in impaired loans totaled $188.3 million and was comprised of non-accrual loans of $65.2 million and accruing troubled debt restructured loans (“TDRs) of $123.1 million. At December 31, 2013, recorded investment in impaired loans totaled $200.8 million and was comprised of non-accrual loans of $83.2 million and accruing TDRs of $117.6 million. For impaired loans, the amounts previously charged off represent 12.6% at September 30, 2014, and 23.9% at December 31, 2013, 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,
		2014				2013				2014				2013				2014				2013				2014				2013
														(In thousands)
Commercial loans		$	21,706			$	32,187			$	26,741			$	24,873			$	205			$	166			$	636			$	395
Real estate construction loans			33,276				34,946				33,459				39,014				66				67				198				199
Commercial mortgage loans			119,611				132,921				114,663				145,380				1,153				730				3,310				3,289
Residential mortgage and equity lines			16,151				16,884				17,889				17,574				128				106				363				227
Total impaired loans		$	190,744			$	216,938			$	192,752			$	226,841			$	1,552			$	1,069			$	4,507			$	4,110

 

 

The following tables present impaired loans and the related allowance for credit losses as of the dates indicated:

 

		Impaired Loans
		September 30, 2014												December 31, 2013
		Unpaid Principal Balance				Recorded Investment				Allowance				Unpaid Principal Balance				Recorded Investment				Allowance
		(In thousands)
With no allocated allowance
Commercial loans		$	19,792			$	18,764			$	-			$	20,992			$	18,905			$	-
Real estate construction loans			37,403				16,133				-				25,401				15,097				-
Commercial mortgage loans			84,274				82,586				-				105,593				78,930				-
Residential mortgage loans and equity lines			2,541				2,541				-				4,892				4,892				-
Subtotal		$	144,010			$	120,024			$	-			$	156,878			$	117,824			$	-
With allocated allowance
Commercial loans		$	8,951			$	6,985			$	2,730			$	22,737			$	13,063			$	2,519
Real estate construction loans			15,377				15,377				2,604				28,475				19,323				3,460
Commercial mortgage loans			33,749				32,973				7,999				39,223				35,613				6,584
Residential mortgage loans and equity lines			13,422				12,988				481				16,535				14,957				721
Subtotal		$	71,499			$	68,323			$	13,814			$	106,970			$	82,956			$	13,284
Total impaired loans		$	215,509			$	188,347			$	13,814			$	263,848			$	200,780			$	13,284

  

  

The following tables present the aging of the loan portfolio by type as of September 30, 2014, and as of December 31, 2013:

 

		September 30, 2014
		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
		(In thousands)
Type of Loans:
Commercial loans		$	8,307			$	3,920			$	662			$	8,851			$	21,740			$	2,428,378			$	2,450,118
Real estate construction loans			-				-				-				25,728				25,728				275,731				301,459
Commercial mortgage loans			171				1,676				-				23,830				25,677				4,388,390				4,414,067
Residential mortgage loans and equity lines			408				807				-				6,849				8,064				1,680,870				1,688,934
Installment and other loans			168				-				-				-				168				3,508				3,676
Total loans		$	9,054			$	6,403			$	662			$	65,258			$	81,377			$	8,776,877			$	8,858,254

 

		December 31, 2013
		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
		(In thousands)
Type of Loans:
Commercial loans		$	7,170			$	16,562			$	-			$	21,232			$	44,964			$	2,253,760			$	2,298,724
Real estate construction loans			-				-				-				28,586				28,586				193,115				221,701
Commercial mortgage loans			20,043				7,862				982				19,621				48,508				3,974,543				4,023,051
Residential mortgage loans and equity lines			3,508				832				-				13,744				18,084				1,508,448				1,526,532
Installment and other loans			100				-				-				-				100				14,455				14,555
Total loans		$	30,821			$	25,256			$	982			$	83,183			$	140,242			$	7,944,321			$	8,084,563

 

 

The determination of the amount of the allowance for credit 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 credit losses. The nature of the process by which the Bank determines the appropriate allowance for credit 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 economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower. The concessions may be granted in various forms, including 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.

 

TDRs 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.

  

 

At September 30, 2014, accruing TDRs were $123.1 million and non-accrual TDRs were $34.2 million compared to accruing TDRs of $117.6 million and non-accrual TDRs of $38.8 million at December 31, 2013. The Company allocated specific reserves of $8.0 million to accruing TDRs and $3.9 million to non-accrual TDRs at September 30, 2014, and $6.9 million to accruing TDRs and $2.2 million to non-accrual TDRs at December 31, 2013. The following tables present TDRs that were modified during the first nine months of 2014 and 2013, their specific reserves at September 30, 2014 and 2013, and charge-offs during the first nine months of 2014 and 2013:

 

		Nine months ended September 30, 2014																September 30, 2014
		No. of Contracts				Pre-Modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment				Charge-offs				Specific Reserve
		(Dollars in thousands)
Commercial loans			6			$	10,773			$	10,773			$	-			$	26
Commercial mortgage loans			3				11,818				11,818				-				564
Residential mortgage loans and equity lines			5				2,226				2,226				-				16
Total			14			$	24,817			$	24,817			$	-			$	606

 

 

		Nine months ended September 30, 2013																September 30, 2013
		No. of Contracts				Pre-Modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment				Charge-offs				Specific Reserve
		(Dollars in thousands)
Commercial loans			9				11,705				10,516			$	1,189			$	71
Commercial mortgage loans			3				7,474				7,474				-				191
Residential mortgage loans and equity lines			11				3,736				3,658				78				125
Total			23			$	22,915			$	21,648			$	1,267			$	387

 

 

Modifications of the loan terms during the first nine months of 2014 were in the form of changes in the stated interest rate, and/or extension of maturity dates, and/or reduction in monthly payment amount.  The length of time for which modifications involving a reduction of the stated interest rate or changes in payment terms that were documented ranged from seven months to two years from the modification date. 

  

 

We expect that the TDRs on accruing status as of September 30, 2014, 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, 2014, and December 31, 2013, is shown below:

 

		September 30, 2014
Accruing TDRs		Principal Deferral				Rate Reduction				Rate Reduction and Forgiveness of Principal				Rate Reduction and Payment Deferral				Total
		(In thousands)
Commercial loans		$	13,006			$	1,558			$	-			$	2,333			$	16,897
Real estate construction loans			-				-				-				5,782				5,782
Commercial mortgage loans			19,116				8,317				-				64,296				91,729
Residential mortgage loans			3,557				1,013				216				3,895				8,681
Total accruing TDRs		$	35,679			$	10,888			$	216			$	76,306			$	123,089

 

 

		September 30, 2014
Non-accrual TDRs		Interest Deferral				Principal Deferral				Rate Reduction and Forgiveness of Principal				Rate Reduction and Payment Deferral				Total
		(In thousands)
Commercial loans		$	-			$	2,186			$	1,225			$	243			$	3,654
Real estate construction loans			-				15,377				-				8,851				24,228
Commercial mortgage loans			226				3,159				-				1,369				4,754
Residential mortgage loans			213				-				-				1,313				1,526
Total non-accrual TDRs		$	439			$	20,722			$	1,225			$	11,776			$	34,162

 

 

		December 31, 2013
Accruing TDRs		Principal Deferral				Rate Reduction				Rate Reduction and Payment Deferral				Total
		(In thousands)
Commercial loans		$	9,112			$	2,916			$	2,708			$	14,736
Real estate construction loans			-				-				5,834				5,834
Commercial mortgage loans			11,333				9,389				70,200				90,922
Residential mortgage loans			1,564				1,024				3,517				6,105
Total accruing TDRs		$	22,009			$	13,329			$	82,259			$	117,597

 

 

		December 31, 2013
Non-accrual TDRs		Interest Deferral				Principal Deferral				Rate Reduction and Forgiveness of Principal				Rate Reduction and Payment Deferral				Total
		(In thousands)
Commercial loans		$	-			$	2,866			$	1,352			$	-			$	4,218
Real estate construction loans			-				16,009				-				9,263				25,272
Commercial mortgage loans			1,443				2,168				-				1,843				5,454
Residential mortgage loans			241				2,206				-				1,378				3,825
Total non-accrual TDRs		$	1,684			$	23,249			$	1,352			$	12,484			$	38,769

  

 

The activity within our TDRs for the periods indicated are shown below:

 

		Three months ended September 30,								Nine months ended September 30,
Accruing TDRs		2014				2013				2014				2013
		(In thousands)
Beginning balance		$	111,136			$	115,464			$	117,597			$	144,695
New restructurings			14,900				10,669				22,997				15,485
Restructured loans restored to accrual status			660				5,397				1,622				6,851
Charge-offs			-				-				-				(78	)
Payments			(3,607	)			(15,274	)			(11,897	)			(48,663	)
Restructured loans placed on nonaccrual			-				(316	)			(7,230	)			(2,350	)
Ending balance		$	123,089			$	115,940			$	123,089			$	115,940

 

 

		Three months ended September 30,								Nine months ended September 30,
Non-accrual TDRs		2014				2013				2014				2013
		(In thousands)
Beginning balance		$	43,605			$	48,524			$	38,769			$	47,731
New restructurings			34				2,415				1,820				6,163
Restructured loans placed on nonaccrual			-				316				7,230				2,350
Charge-offs			(234	)			(1,188	)			(833	)			(2,121	)
Payments			(8,583	)			(1,062	)			(11,202	)			(3,664	)
Restructured loans restored to accrual status			(660	)			(5,397	)			(1,622	)			(6,851	)
Ending balance		$	34,162			$	43,608			$	34,162			$	43,608

 

 

A loan is considered to be in payment default once it is 60 to 90 days contractually past due under the modified terms.  The Company had one commercial mortgage loan in the amount of $62,000 that was modified as a TDR during the previous twelve months and which subsequently defaulted as of September 30, 2014. 

 

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, 2014, there were no commitments to lend additional funds to those borrowers whose loans have 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 tables present loan portfolio by risk rating as of September 30, 2014, and as of December 31, 2013:

 

 

		September 30, 2014
		Pass/Watch				Special Mention				Substandard				Doubtful				Total
			(In thousands)
Commercial loans		$	2,283,837			$	82,731			$	80,180			$	3,370			$	2,450,118
Real estate construction loans			267,760				-				32,199				1,500				301,459
Commercial mortgage loans			4,124,943				112,825				176,299				-				4,414,067
Residential mortgage loans and equity lines			1,679,920				-				9,014				-				1,688,934
Installment and other loans			3,676				-				-				-				3,676
Total gross loans		$	8,360,136			$	195,556			$	297,692			$	4,870			$	8,858,254

 

 

		December 31, 2013
		Pass/Watch				Special Mention				Substandard				Doubtful				Total
			(In thousands)
Commercial loans		$	2,108,191			$	84,786			$	102,088			$	3,659			$	2,298,724
Real estate construction loans			184,449				-				33,939				3,313				221,701
Commercial mortgage loans			3,686,788				127,436				208,827				-				4,023,051
Residential mortgage loans and equity lines			1,510,647				-				15,885				-				1,526,532
Installment and other loans			14,555				-				-				-				14,555
Total gross loans		$	7,504,630			$	212,222			$	360,739			$	6,972			$	8,084,563

 

 

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, 2014, and as of December 31, 2013:

  

		Commercial				Real Estate Construction				Commercial Mortgage				Residential Mortgage Loans and				Installment and
		Loans				Loans				Loans				Equity Lines				Other Loans				Total
		(In thousands)
September 30, 2014
Loans individually evaluated for impairment
Allowance		$	2,730			$	2,604			$	7,999			$	481			$	-			$	13,814
Balance		$	25,749			$	31,510			$	115,559			$	15,529			$	-			$	188,347
Loans collectively evaluated for impairment
Allowance		$	53,566			$	32,099			$	58,740			$	10,962			$	17			$	155,384
Balance		$	2,424,369			$	269,949			$	4,298,508			$	1,673,405			$	3,676			$	8,669,907
Total allowance		$	56,296			$	34,703			$	66,739			$	11,443			$	17			$	169,198
Total balance		$	2,450,118			$	301,459			$	4,414,067			$	1,688,934			$	3,676			$	8,858,254
December 31, 2013
Loans individually evaluated for impairment
Allowance		$	2,519			$	3,460			$	6,584			$	721			$	-			$	13,284
Balance		$	31,968			$	34,420			$	114,544			$	19,848			$	-			$	200,780
Loans collectively evaluated for impairment
Allowance		$	62,584			$	8,539			$	78,169			$	11,284			$	29			$	160,605
Balance		$	2,266,756			$	187,281			$	3,908,507			$	1,506,684			$	14,555			$	7,883,783
Total allowance		$	65,103			$	11,999			$	84,753			$	12,005			$	29			$	173,889
Total balance		$	2,298,724			$	221,701			$	4,023,051			$	1,526,532			$	14,555			$	8,084,563

 

 

The following table details activity in the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2014, and September 30, 2013. 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, 2014 and 2013 

		Commercial				Real Estate Construction				Commercial Mortgage				Residential Mortgage Loans and				Installment and Other
		Loans				Loans				Loans				Equity Lines				Loans				Total
		(In thousands)
June 30, 2014 Ending Balance		$	63,239			$	9,555			$	83,395			$	12,870			$	18				169,077
Provision/(credit) for possible credit losses			(10,839	)			25,116				(17,950	)			(1,427	)			(1	)			(5,101	)
Charge-offs			(252	)			-				(903	)			-				-				(1,155	)
Recoveries			4,148				32				2,197				-				-				6,377
Net (charge-offs)/recoveries			3,896				32				1,294				-				-				5,222
September 30, 2014 Ending Balance		$	56,296			$	34,703			$	66,739			$	11,443			$	17			$	169,198
June 30, 2013 Ending Balance		$	64,379			$	13,755			$	89,678			$	11,892			$	29			$	179,733
Provision/(credit) for possible credit losses			2,121				1,660				(5,710	)			52				6				(1,871	)
Charge-offs			(200	)			-				(394	)			(160	)			-				(754	)
Recoveries			436				1,236				2,514				158				-				4,344
Net (charge-offs)/recoveries			236				1,236				2,120				(2	)			-				3,590
September 30, 2013 Ending Balance		$	66,736			$	16,651			$	86,088			$	11,942			$	35			$	181,452

 

 

Nine months ended September 30, 2014 and 2013 

		Commercial				Real Estate Construction				Commercial Mortgage				Residential Mortgage Loans and				Installment and Other
		Loans				Loans				Loans				Equity Lines				Loans				Total
		(In thousands)
2014 Beginning Balance		$	65,103			$	11,999			$	84,753			$	12,005			$	29			$	173,889
Provision/(credit) for possible credit losses			(12,067	)			24,460				(20,991	)			(562	)			(12	)			(9,172	)
Charge-offs			(7,592	)			(1,813	)			(3,327	)			-				-				(12,732	)
Recoveries			10,852				57				6,304				-				-				17,213
Net (charge-offs)/recoveries			3,260				(1,756	)			2,977				-				-				4,481
September 30, 2014 Ending Balance		$	56,296			$	34,703			$	66,739			$	11,443			$	17			$	169,198
Reserve for impaired loans		$	2,730			$	2,604			$	7,999			$	481			$	-			$	13,814
Reserve for non-impaired loans		$	53,566			$	32,099			$	58,740			$	10,962			$	17			$	155,384
Reserve for off-balance sheet credit commitments		$	901			$	668			$	410			$	39			$	-			$	2,018
2013 Beginning Balance		$	66,101			$	23,017			$	82,473			$	11,703			$	28			$	183,322
Provision/(credit) for possible credit losses			3,200				(8,622	)			935				780				(4	)			(3,711	)
Charge-offs			(4,580	)			-				(3,425	)			(766	)			-				(8,771	)
Recoveries			2,015				2,256				6,105				225				11				10,612
Net (charge-offs)/recoveries			(2,565	)			2,256				2,680				(541	)			11				1,841
September 30, 2013 Ending Balance		$	66,736			$	16,651			$	86,088			$	11,942			$	35			$	181,452
Reserve for impaired loans		$	10,849			$	5,691			$	6,129			$	693			$	-			$	23,362
Reserve for non-impaired loans		$	55,887			$	10,960			$	79,959			$	11,249			$	35			$	158,090
Reserve for off-balance sheet credit commitments		$	953			$	287			$	799			$	34			$	1			$	2,074

 

8. Commitments and Contingencies

 

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

 

  

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

 

9. Borrowed Funds

 

Securities Sold Under Agreements to Repurchase. Securities sold under agreements to repurchase were $550.0 million with a weighted average rate of 3.78% at September 30, 2014, compared to $800.0 million with a weighted average rate of 3.87% at December 31, 2013. In the first nine months of 2014, the Company prepaid securities sold under agreements to repurchase totaling $100 million with a weighted average rate of 3.5% and incurred prepayment penalties of $3.4 million. In the first nine months of 2013, the Company prepaid securities sold under agreements to repurchase totaling $300.0 million with a weighted average rate of 3.97% and incurred prepayment penalties of $15.7 million. Four floating-to-fixed rate agreements totaling $200.0 million have initial floating rates for a period of time ranging from six months to one year, with floating rates of three-month LIBOR rate minus 340 basis points. Thereafter, the rates are fixed for the remainder of the term, with interest rates ranging from 4.89% to 5.07%. After the initial floating rate term, the counterparties have the right to terminate the transaction at par at the fixed rate reset date and quarterly thereafter. Three fixed-to-floating rate agreements totaling $150.0 million have initial fixed rates ranging from 1.00% to 3.50% with initial fixed rate terms ranging from six months to 18 months. For the remaining term, the rates float at 8% minus the three-month LIBOR rate with a maximum rate of 3.50% and a minimum rate of 0.0%. After the initial fixed rate term, the counterparties have the right to terminate the transaction at par at the floating rate reset date and quarterly thereafter. The table below provides summary data for the $350.0 million of callable securities sold under agreements to repurchase as of September 30, 2014:

  

(Dollars in millions)		Fixed-to-floating								Floating-to-fixed				Total
Rate type		Float Rate								Fixed Rate
Rate index		8% minus 3 month LIBOR
Maximum rate			3.50	%			3.50	%
Minimum rate			0.0	%			0.0	%
No. of agreements			2				1				4				7
Amount		$	100.0			$	50.0			$	200.0			$	350.0
Weighted average rate			3.50	%			3.50	%			5.00	%			4.36	%
Final maturity		2014				2015				2017

  

 

The table below provides summary data for non-callable fixed rate securities sold under agreements to repurchase as of September 30, 2014:

 

		No. of				Amount				Weighted Average
Maturity		Agreements				(In thousands)				Interest Rate
1 year to 3 years			2			$	100,000				2.71	%
3 years to 5 years			2				100,000				2.86	%
Total			4			$	200,000				2.78	%

 

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 repurchase agreements, as necessary. The underlying collateral pledged for the repurchase agreements consists of U.S. Treasury securities, U.S. government agency securities, and mortgage-backed securities with a fair value of $629.3 million as of September 30, 2014, and $906.1 million as of December 31, 2013.

 

Advances from the FHLB. Advances from the FHLB were $555.0 million with weighted average rate of 0.12% at September 30, 2014, compared to $521.2 million with weighted average rate of 0.17% at December 31, 2013. The following relates to the outstanding advances at September 30, 2014, and December 31, 2013:

  

		September 30, 2014								December 31, 2013
		Amount				Weighted Average				Amount				Weighted Average
Maturity		(In thousands)				Interest Rate				(In thousands)				Interest Rate
Within 90 days		$	530,000				0.07	%		$	475,000				0.06	%
4 - 5 years			25,000				1.13	%			46,200				1.24	%
		$	555,000				0.12	%		$	521,200				0.17	%

 

 

10. Income Taxes

 

Income tax expense totaled $60.9 million, or an effective tax rate of 37.3%, for the first nine months of 2014, compared to an income tax expense of $52.5 million, or an effective tax rate of 36.5%, for the same period a year ago. The effective tax rate includes the impact of the utilization of low income housing tax credits and recognition of other tax credits for both years.

 

As of December 31, 2013, the Company had income tax refunds receivable of $8.6 million. These income tax receivables are included in other assets in the accompanying condensed consolidated balance sheets.

 

The Company’s tax returns are open for audits by the Internal Revenue Service back to 2011 and by the California Franchise Tax Board back to 2003. The Company is under audit by the California Franchise Tax Board for the years 2003 to 2007. 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.

 

 

11. Fair Value Measurements

 

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 stocks, mutual funds, and U.S. Treasury 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.

 

Trading Securities. The Company measures the fair value of trading securities based on quoted market prices in active exchange markets at the reporting date, a Level 1 measurement. The Company also measures the fair value for other trading securities based on quoted market prices for similar securities or dealer quotes, a Level 2 measurement.  

 

 

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

 

Currency Option and Foreign Exchange Contracts. The Company measures the fair value of currency option and foreign exchange contracts based on dealer quotes on a recurring basis, 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 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 tables present the Company’s hierarchy for its assets and liabilities measured at fair value on a recurring basis as of September 30, 2014, and December 31, 2013:

 

September 30, 2014		Fair Value Measurements Using												Total at
		Level 1				Level 2				Level 3				Fair Value
Assets		(In thousands)
Securities available-for-sale
U.S. Treasury securities		$	540,088			$	-			$	-			$	540,088
Mortgage-backed securities			-				683,324				-				683,324
Collateralized mortgage obligations			-				46				-				46
Corporate debt securities			-				94,337				-				94,337
Mutual funds			5,817				-				-				5,817
Preferred stock of government sponsored entities			-				9,252				-				9,252
Other equity securities			7,228				-				-				7,228
Total securities available-for-sale			553,133				786,959				-				1,340,092
Warrants			-				-				12				12
Interest rate swaps			-				442				-				442
Foreign exchange contracts			-				1,936				-				1,936
Total assets		$	553,133			$	789,337			$	12			$	1,342,482
Liabilities
Interest rate swaps		$	-			$	280			$	-			$	280
Foreign exchange contracts			-				4,437				-				4,437
Total liabilities		$	-			$	4,717			$	-			$	4,717

 

  

December 31, 2013		Fair Value Measurements Using												Total at
		Level 1				Level 2				Level 3				Fair Value
Assets		(In thousands)
Securities available-for-sale
U.S. Treasury securities		$	460,193			$	-			$	-			$	460,193
Mortgage-backed securities			-				952,815				-				952,815
Collateralized mortgage obligations			-				6,106				-				6,106
Asset-backed securities			-				123				-				123
Corporate debt securities			-				150,304				-				150,304
Mutual funds			5,724				-				-				5,724
Preferred stock of government sponsored entities			-				11,403				-				11,403
Total securities available-for-sale			465,917				1,120,751				-				1,586,668
Trading securities			-				4,936				-				4,936
Warrants			-				-				30				30
Foreign exchange contracts			-				6,182				-				6,182
Total assets		$	465,917			$	1,131,869			$	30			$	1,597,816
Liabilities
Foreign exchange contracts		$	-			$	6,140			$	-			$	6,140
Total liabilities		$	-			$	6,140			$	-			$	6,140

 

 

The Company measured the fair value of its warrants on a recurring basis using significant unobservable inputs. The fair value of warrants was $12,000 at September 30, 2014, compared to $30,000 at December 31, 2013. The fair value adjustment of warrants was included in other operating income in the third quarter of 2014. 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 4 years, risk-free interest rate from 0.59% to 1.43%, and stock volatility from 9.4% to 13.0%.

 

 

For financial assets measured at fair value on a nonrecurring basis that were still reflected in the condensed consolidated balance sheet at September 30, 2014, 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, 2014, and December 31, 2013, and the total losses/(gains) for the periods indicated:

 

		September 30, 2014																Total Losses / (Gains)
		Fair Value Measurements Using												Total at				Three Months Ended								Nine Months Ended
		Level 1				Level 2				Level 3				Fair Value				September 30, 2014				September 30, 2013				September 30, 2014				September 30, 2013
		(In thousands)
Assets
Impaired loans by type:
Commercial loans		$	-			$	-			$	4,255			$	4,255			$	-			$	-			$	17			$	536
Commercial mortgage loans			-				-				24,974				24,974				515				394				515				459
Construction loans			-				-				12,773				12,773				-				-				-				-
Residential mortgage loans and equity lines			-				-				12,507				12,507				32				160				32				191
Total impaired loans			-				-				54,509				54,509				547				554				564				1,186
Other real estate owned (1)			-				14,340				4,110				18,450				(48	)			111				277				(1,267	)
Investments in venture capital			-				-				5,698				5,698				49				84				317				295
Total assets		$	-			$	14,340			$	64,317			$	78,657			$	548			$	749			$	1,158			$	214

 

(1) Other real estate owned balance of $29.0 million in the condensed consolidated balance sheet is net of estimated disposal costs.

 

 

		December 31, 2013																Total Losses / (Gains)
		Fair Value Measurements Using												Total at				Twelve Months Ended
		Level 1				Level 2				Level 3				Fair Value				December 31, 2013				December 31, 2012
		(In thousands)
Assets
Impaired loans by type:
Commercial loans		$	-			$	-			$	7,584			$	7,584			$	5,731			$	-
Commercial mortgage loans			-				-				29,001				29,001				125				440
Construction- residential			-				-				500				500				-				-
Construction- other			-				-				15,363				15,363				-				65
Residential mortgage loans and equity lines			-				-				14,236				14,236				213				605
Land loans			-				-				29				29				-				162
Total impaired loans			-				-				66,713				66,713				6,069				1,272
Other real estate owned (1)			-				13,248				26,498				39,746				(3,134	)			10,904
Investments in venture capital			-				-				8,900				8,900				409				309
Equity investments			642				-				-				642				-				181
Total assets		$	642			$	13,248			$	102,111			$	116,001			$	3,344			$	12,666

 

(1) Other real estate owned balance of $53.0 million in the consolidated balance sheet is net of estimated disposal costs.

 

 

The significant unobservable (Level 3) inputs used in the fair value measurement of collateral for collateral-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 significant 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% to collateral value of impaired loans, quoted price, or loan sale price of loans held for sale, and appraised value of OREO.

 

12. Fair Value of Financial Instruments

 

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

 

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

 

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

 

Securities Purchased under Agreements to Resell. 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 stocks and U.S. Treasury 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. 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 of the collateral, a Level 2 measurement.

 

 

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

 

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

 

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

 

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

 

Long-term Debt. 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 estimated fair value of financial instruments as of September 30, 2014, and as of December 31, 2013:

 

		September 30, 2014								December 31, 2013
		Carrying								Carrying
		Amount				Fair Value				Amount				Fair Value
		(In thousands)
Financial Assets
Cash and due from banks		$	200,302			$	200,302			$	153,747			$	153,747
Short-term investments			597,747				597,747				516,938				516,938
Securities available-for-sale			1,340,092				1,340,092				1,586,668				1,586,668
Trading securities			-				-				4,936				4,936
Loans, net			8,676,153				8,576,545				7,897,187				7,760,490
Investment in Federal Home Loan Bank stock			34,090				34,090				25,000				25,000
Warrants			12				12				30				30

 

		Notional								Notional
		Amount				Fair Value				Amount				Fair Value
Option contracts		$	-			$	-			$	200			$	0
Foreign exchange contracts			183,753				1,936				267,644				6,182
Interest rate swaps			147,358				442				-				-

 

Financial Liabilities		Carrying								Carrying
		Amount				Fair Value				Amount				Fair Value
Deposits		$	8,694,669			$	8,692,118			$	7,981,305			$	7,977,639
Securities sold under agreements to repurchase			550,000				576,670				800,000				852,835
Advances from Federal Home Loan Bank			555,000				555,000				521,200				521,560
Other borrowings			18,882				15,853				19,062				16,107
Long-term debt			119,136				59,425				121,136				58,970

 

		Notional								Notional
		Amount				Fair Value				Amount				Fair Value
Foreign exchange contracts		$	201,240			$	4,437			$	236,350			$	6,140
Interest rate swaps			119,136				280				-				-

 

		Notional								Notional
		Amount				Fair Value				Amount				Fair Value
Off-Balance Sheet Financial Instruments
Commitments to extend credit		$	1,839,039			$	(3,160	)		$	1,858,669			$	(2,187	)
Standby letters of credit			54,304				(331	)			45,058				(205	)
Other letters of credit			49,623				(29	)			54,098				(34	)
Bill of lading guarantees			51				-				80				-

 

 

The following tables present the level in the fair value hierarchy for the estimated fair values of only financial instruments that are not already included on the condensed consolidated balance sheets at fair value as of September 30, 2014, and December 31, 2013.

 

		September 30, 2014
		Estimated
		Fair Value
		Measurements				Level 1				Level 2				Level 3
		(In thousands)
Financial Assets
Cash and due from banks		$	200,302			$	200,302			$	-			$	-
Short-term investments			597,747				597,747				-				-
Securities available-for-sale			1,340,092				553,133				786,959				-
Loans, net			8,576,545				-				-				8,576,545
Investment in Federal Home Loan Bank stock			34,090				-				34,090				-
Warrants			12				-				-				12
Financial Liabilities
Deposits			8,692,118				-				-				8,692,118
Securities sold under agreements to repurchase			576,670				-				576,670				-
Advances from Federal Home Loan Bank			555,000				-				555,000				-
Other borrowings			15,853				-				-				15,853
Long-term debt			59,425				-				59,425				-

 

 

		December 31, 2013
		Estimated
		Fair Value
		Measurements				Level 1				Level 2				Level 3
		(In thousands)
Financial Assets
Cash and due from banks		$	153,747			$	153,747			$	-			$	-
Short-term investments			516,938				516,938				-				-
Securities available-for-sale			1,586,668				465,917				1,120,751				-
Trading securities			4,936				-				4,936				-
Loans, net			7,760,490				-				-				7,760,490
Investment in Federal Home Loan Bank stock			25,000				-				25,000				-
Warrants			30				-				-				30
Financial Liabilities
Deposits			7,977,639				-				-				7,977,639
Securities sold under agreements to repurchase			852,835				-				852,835				-
Advances from Federal Home Loan Bank			521,560				-				521,560				-
Other borrowings			16,107				-				-				16,107
Long-term debt			58,970				-				58,970				-

 

 

13. 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.

 

 

At September 30, 2014, 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.

 

14. 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 related to our interest-earning assets and interest-bearing liabilities. We believe that these transactions, when properly structured and managed, may provide a hedge against inherent interest rate risk in 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.

 

In May 2014, the Bancorp entered into five interest rate swap contracts in the notional amount of $119.1 million for a period of ten years. The objective of these interest rate swap contracts, which were designated as hedging instruments in cash flow hedges, was to hedge the quarterly interest payments on the Bancorp’s $119.1 million of junior subordinated debentures that had been issued to five trusts throughout the ten-year period beginning in June 2014 and ending in June 2024, from the risk of variability of these payments resulting from changes in the three-month LIBOR interest rate. The Bancorp pays a weighted average fixed interest rate of 2.61% and receives a variable interest rate of three-month LIBOR at a weighted average rate of 0.23%. As of September 30, 2014, the notional amount of cash flow interest rate swaps was $119.1 million and their unrealized loss of $163,000, net of taxes, was included in other comprehensive income. The amount of periodic net settlement of interest rate swaps included in interest expense was $723,000 for the three months ended and $824,000 for the nine months ended September 30, 2014.

 

 

In June 2014, the Bank entered into ten interest rate swap contracts in the notional amount of $148.1 million for various terms from four to eight years. The Bank entered into these interest rate swap contracts that are matched to individual fixed-rate commercial real estate loans in the Bank’s loan portfolio. These contracts have been designated as hedging instruments to hedge the risk of changes in the fair value of the underlying commercial real estate 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 4.67% and receives a variable rate at one month LIBOR rate plus a weighted average spread of 298 basis points, or at a weighted average rate of 3.13%. As of September 30, 2014, the notional amount of fair value interest rate swaps was $147.4 million and their unrealized gain of $442,000 was included in other non-interest income. The amount of periodic net settlement of interest rate swaps reducing interest income was $580,000 for the three months ended and $606,000 for the nine months ended September 30, 2014. As of September 30, 2014, 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. The 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 the Bancorp related to derivative contracts totaled $4.3 million as of September 30, 2014.

 

The Company enters into foreign exchange forward contracts and foreign currency option contracts with various counterparties to mitigate the risk of fluctuations in foreign currency exchange rates for foreign exchange certificates of deposit, foreign exchange contracts, or foreign currency option 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, foreign exchange contracts, or foreign currency option 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. At September 30, 2014, no option contracts were outstanding. Spot and forward contracts in the total notional amount of $183.8 million had a positive fair value of $1.9 million at September 30, 2014. Spot and forward contracts in the total notional amount of $201.2 million had a negative fair value of $4.4 million at September 30, 2014. At December 31, 2013, the notional amount of option contracts totaled $200,000 with a net positive fair value of $83. Spot and forward contracts in the total notional amount of $267.6 million had a positive fair value of $6.2 million at December 31, 2013. Spot and forward contracts in the total notional amount of $236.3 million had a negative fair value of $6.1 million at December 31, 2013.

 

 

15. Balance Sheet Offsetting

 

Certain financial instruments, including resell and repurchase agreements, securities lending arrangements and derivatives, may be eligible for offset in the consolidated balance sheet and/or subject to master netting arrangements or similar agreements. The Company’s securities sold with agreement to repurchase and derivative transactions with upstream financial institution counterparties are generally executed under International Swaps and Derivative Association master agreements which 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, 2014, and December 31, 2013, are presented in the following table:

 

														Gross Amounts Not Offset in the Balance Sheet
		Gross Amounts of Recognized				Gross Amounts Offset in the Balance Sheet				Net Amounts Presented in the Balance Sheet				Financial Instruments				Collateral Posted				Net Amount
		(In thousands)
September 30, 2014
Assets:
Derivatives		$	442			$	-			$	442			$	-			$	(442	)		$	-
Liabilities:
Securities sold under agreements to repurchase		$	550,000			$	-			$	550,000			$	-			$	(550,000	)		$	-
Derivatives		$	280			$	-			$	280			$	-			$	(280	)		$	-
December 31, 2013
Liabilities:
Securities sold under agreements to repurchase		$	800,000			$	-			$	800,000			$	-			$	(800,000	)		$	-

 

 

16. Stockholders’ Equity

 

Total equity was $1.57 billion at September 30, 2014, an increase of $111.4 million, or 7.6%, from $1.46 billion at December 31, 2013, primarily due to increases in net income of $102.3 million and increases in other comprehensive income of $20.9 million offset by common stock cash dividends of $15.1 million.

 

 

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, 2014, and September 30, 2013, was as follows:

 

		Three months ended September 30, 2014												Three months ended September 30, 2013
		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										$	(8,896	)										$	(15,073	)
Cash flow hedge derivatives											-												-
Total										$	(8,896	)										$	(15,073	)
Net unrealized gains/(losses) arising during the period
Securities available-for sale		$	292			$	122			$	170			$	(1,854	)		$	(780	)		$	(1,074	)
Cash flow hedge derivatives			171				71				100				-				-				-
Total			463				193				270				(1,854	)			(780	)		$	(1,074	)
Reclassification adjustment for net losses in net income
Securities available-for sale			(361	)			(152	)			(209	)			(8,688	)			(3,652	)			(5,036	)
Cash flow hedge derivatives			-				-				-				-				-				-
Total			(361	)			(152	)			(209	)			(8,688	)			(3,652	)			(5,036	)
Total other comprehensive (loss)/income
Securities available-for sale			(69	)			(30	)			(39	)			(10,542	)			(4,432	)			(6,110	)
Cash flow hedge derivatives			171				71				100				-				-				-
Total		$	102			$	41			$	61			$	(10,542	)		$	(4,432	)		$	(6,110	)
Ending balance, (loss)/income net of tax
Securities available-for sale										$	(8,935	)										$	(21,183	)
Cash flow hedge derivatives											100												-
Total										$	(8,835	)										$	(21,183	)

 

 

		Nine months ended September 30, 2014												Nine months ended September 30, 2013
		Pre-tax				Tax expense/(benefit)				Net-of-tax				Pre-tax				Tax expense/(benefit)				Net-of-tax
		(In thousands)
Beginning balance, (loss)/income net of tax
Securities available-for sale										$	(29,729	)										$	465
Cash flow hedge derivatives											-												-
Total										$	(29,729	)										$	465
Net unrealized gains/(losses) arising during the period
Securities available-for sale		$	43,157			$	18,143			$	25,014			$	(48,245	)		$	(20,282	)		$	(27,963	)
Cash flow hedge derivatives			(281	)			(118	)			(163	)			-				-				-
Total			42,876				18,025				24,851				(48,245	)			(20,282	)		$	(27,963	)
Reclassification adjustment for net losses in net income
Securities available-for sale			(6,827	)			(2,870	)			(3,957	)			(27,157	)			(11,417	)			(15,740	)
Cash flow hedge derivatives			-				-				-				-				-				-
Total			(6,827	)			(2,870	)			(3,957	)			(27,157	)			(11,417	)			(15,740	)
Net unrealized gains arising from transferring securities held-to-maturity to available-for-sale			-				-				-				38,052				15,997				22,055
Total other comprehensive income/(loss)
Securities available-for sale			36,330				15,273				21,057				(37,350	)			(15,702	)			(21,648	)
Cash flow hedge derivatives			(281	)			(118	)			(163	)			-				-				-
Total		$	36,049			$	15,155			$	20,894			$	(37,350	)		$	(15,702	)		$	(21,648	)
Ending balance, loss net of tax
Securities available-for sale										$	(8,672	)										$	(21,183	)
Cash flow hedge derivatives											(163	)											-
Total										$	(8,835	)										$	(21,183	)

 

 

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

 

The following discussion is based on the assumption that the reader has access to and has read the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

 

Critical Accounting Policies

 

The discussion and analysis of the Company’s unaudited condensed consolidated balance sheets and results of operations are based upon its unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues, and expenses, and related disclosures of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions.

 

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

 

Accounting for the allowance for credit losses involves significant judgments and assumptions by management, which have a material impact on the carrying value of net loans. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances as described in “Allowance for Credit Losses” under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

 

Accounting for investment securities involves significant judgments and assumptions by management, which have a material impact on the carrying value of securities and the recognition of any “other-than-temporary” impairment to our investment securities. The judgments and assumptions used by management are described in “Investment Securities” under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

 

Accounting for income taxes involves significant judgments and assumptions by management, which have a material impact on the amount of taxes currently payable and the income tax expense recorded in the financial statements. The judgments and assumptions used by management are described in “Income Taxes” under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

 

Accounting for goodwill and goodwill impairment involves significant judgments and assumptions by management, which have a material impact on the amount of goodwill and noninterest expense recorded in the financial statements. The judgments and assumptions used by management are described in “Goodwill and Goodwill Impairment” under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

 

 

Highlights

 

●

Diluted earnings per share increased 18.4% to $0.45 per share for the third quarter of 2014 compared to $0.38 per share for the same quarter a year ago.

●

Total loans increased $293.0 million, or 13.6% annualized, in the third quarter of 2014, to $8.9 billion at September 30, 2014, compared to $8.6 billion at June 30, 2014, and $8.1 billion at December 31, 2013.

 

Quarterly Statement of Operations Review

 

Net Income

 

Net income available to common stockholders for the quarter ended September 30, 2014, was $35.9 million, an increase of $5.9 million, or 19.5%, compared to net income available to common stockholders of $30.0 million for the same quarter a year ago. Diluted earnings per share available to common stockholders for the quarter ended September 30, 2014, was $0.45 compared to $0.38 for the same quarter a year ago due primarily to an increase in net interest income, higher negative provision for credit losses in 2014, a decrease in the cost associated with debt redemption and the elimination of preferred stock dividends, which were partially offset by a decrease in securities gains.

 

Return on average stockholders’ equity was 9.14% and return on average assets was 1.27% for the quarter ended September 30, 2014, compared to a return on average stockholders’ equity of 8.37% and a return on average assets of 1.22% for the same quarter a year ago.

 

Financial Performance

 

		Three months ended September 30,
		2014				2013
Net income		$35.9 million				$32.5 million
Net income available to common stockholders		$35.9 million				$30.0 million
Basic earnings per common share		$	0.45			$	0.38
Diluted earnings per common share		$	0.45			$	0.38
Return on average assets			1.27	%			1.22	%
Return on average total stockholders' equity			9.14	%			8.37	%
Efficiency ratio			44.51	%			51.01	%

 

 

Net Interest Income Before Provision for Credit Losses

 

Net interest income before provision for credit losses increased $4.2 million, or 5.0%, to $86.8 million during the third quarter of 2014 compared to $82.6 million during the same quarter a year ago. The increase was due primarily to the increase in loan interest income and the decrease in interest expense from securities sold under agreements to repurchase offset by the decrease in interest income from available-for-sale securities.

 

 

The net interest margin, on a fully taxable-equivalent basis, was 3.31% for the third quarter of 2014, compared to 3.37% for the second quarter of 2014 and 3.35% for the third quarter of 2013. The decrease in the net interest margin was due mainly to the impact of interest rates swaps and higher levels of short term interest bearing cash deposits.

 

For the third quarter of 2014, the yield on average interest-earning assets was 4.06%, the cost of funds on average interest-bearing liabilities was 0.97%, and the cost of interest bearing deposits was 0.67%. In comparison, for the third quarter of 2013, the yield on average interest-earning assets was 4.15%, the cost of funds on average interest-bearing liabilities was 1.05%, and the cost of interest bearing deposits was 0.64%. The interest spread, defined as the difference between the yield on average interest-earning assets and the cost of funds on average interest-bearing liabilities, decreased to 3.09% for the quarter ended September 30, 2014, from 3.10% for the same quarter a year ago.

 

 

The following table sets forth information concerning average interest-earning assets, average interest-bearing liabilities, and the average yields and rates paid on those assets and liabilities for the three months ended September 30, 2014, and September 30, 2013. Average outstanding amounts included in the table are daily averages.

 

Interest-Earning Assets and Interest-Bearing Liabilities
		Three months ended September 30,
		2014												2013
						Interest				Average								Interest				Average
		Average				Income/				Yield/				Average				Income/				Yield/
(Dollars in thousands)		Balance				Expense				Rate (1)(2)				Balance				Expense				Rate (1)(2)
Interest earning assets:
Commercial loans		$	2,393,848			$	23,377				3.87	%		$	2,213,240			$	21,733				3.90	%
Residential mortgage loans			1,659,952				19,569				4.72				1,440,198				16,650				4.62
Commercial mortgage loans			4,343,159				52,823				4.83				3,895,436				49,941				5.09
Real estate construction loans			297,510				4,359				5.81				164,639				2,481				5.98
Other loans and leases			11,254				23				0.81				18,654				33				0.70
Total loans and leases (1)			8,705,723				100,151				4.56				7,732,167				90,838				4.66
Taxable securities			1,288,207				5,105				1.57				1,869,101				10,868				2.31
Federal Home Loan Bank stock			32,057				508				6.29				30,938				449				5.76
Interest bearing deposits			363,722				571				0.62				160,985				307				0.76
Total interest-earning assets			10,389,709				106,335				4.06				9,793,191				102,462				4.15
Non-interest earning assets:
Cash and due from banks			225,127												136,315
Other non-earning assets			749,873												783,043
Total non-interest earning assets			975,000												919,358
Less: Allowance for loan losses			(171,994	)											(180,693	)
Deferred loan fees			(13,282	)											(12,365	)
Total assets		$	11,179,433											$	10,519,491
Interest bearing liabilities:
Interest bearing demand accounts		$	736,690			$	326				0.18			$	647,037			$	262				0.16
Money market accounts			1,527,888				2,428				0.63				1,234,091				1,818				0.58
Savings accounts			557,578				241				0.17				471,849				86				0.07
Time deposits			4,345,065				9,117				0.83				4,069,612				8,206				0.80
Total interest-bearing deposits			7,167,221				12,112				0.67				6,422,589				10,372				0.64
Securities sold under agreements to repurchase			603,804				5,858				3.85				855,435				8,402				3.90
Other borrowings			102,267				154				0.60				82,822				150				0.72
Long-term debt			119,136				1,456				4.85				171,136				930				2.16
Total interest-bearing liabilities			7,992,428				19,580				0.97				7,531,982				19,854				1.05
Non-interest bearing liabilities:
Demand deposits			1,549,463												1,353,451
Other liabilities			78,129												86,452
Total equity			1,559,413												1,547,606
Total liabilities and equity		$	11,179,433											$	10,519,491
Net interest spread (3)											3.09	%											3.10	%
Net interest income (3)						$	86,755											$	82,608
Net interest margin (3)											3.31	%											3.35	%

 

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

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

(3) Net interest income, net interest spread, and net interest margin on interest-earning assets have been adjusted to a fully taxable-equivalent basis using a statutory federal income tax rate of 35%.

 

 

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

 

Taxable-Equivalent Net Interest Income — Changes Due to Rate and Volume(1)
		Three months ended September 30,
		2014-2013
		Increase (Decrease) in
		Net Interest Income Due to:
(Dollars in thousands)		Changes in Volume				Changes in Rate				Total Change
Interest-earning assets:
Loans and leases			11,207				(1,894	)			9,313
Taxable securities			(2,846	)			(2,917	)			(5,763	)
Federal Home Loan Bank stock			17				42				59
Deposits with other banks			326				(62	)			264
Total changes in interest income			8,704				(4,831	)			3,873
Interest-bearing liabilities:
Interest bearing demand accounts			38				26				64
Money market accounts			458				152				610
Savings accounts			18				137				155
Time deposits			570				341				911
Securities sold under agreements to repurchase			(2,442	)			(102	)			(2,544	)
Other borrowed funds			32				(28	)			4
Long-term debt			(348	)			874				526
Total changes in interest expense			(1,674	)			1,400				(274	)
Changes in net interest income		$	10,378			$	(6,231	)		$	4,147

 

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

 

 

Provision for Credit Losses

 

Provision for credit losses was a credit of $5.1 million for the third quarter of 2014 compared to a credit of $3.0 million for the third quarter of 2013. The provision for credit losses was based on the review of the adequacy of the allowance for loan losses at September 30, 2014. The provision or reversal for credit losses represents the charge against or benefit toward current earnings that is determined by management, through a credit review process, as the amount needed to establish an allowance that management believes to be sufficient to absorb credit losses inherent in the Company’s loan portfolio, including unfunded commitments. The following table summarizes the charge-offs and recoveries for the periods indicated:

 

		For the three months ended September 30,								For the nine months ended September 30,
		2014				2013				2014				2013
		(In thousands)
Charge-offs:
Commercial loans		$	252			$	200			$	7,592			$	4,580
Construction loans			-				-				1,813				-
Real estate loans (1)			903				554				3,327				2,873
Real estate- land loans			-				-				-				1,318
Total charge-offs			1,155				754				12,732				8,771
Recoveries:
Commercial loans			4,148				436				10,852				2,015
Construction loans			32				1,236				57				2,256
Real estate loans (1)			2,194				1,225				6,293				4,229
Real estate- land loans			3				1,447				11				2,101
Installment and other loans			-				-				-				11
Total recoveries			6,377				4,344				17,213				10,612
Net recoveries		$	(5,222	)		$	(3,590	)		$	(4,481	)		$	(1,841	)

 

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

 

 

Non-Interest Income

 

Non-interest income, which includes revenues from depository service fees, letters of credit commissions, securities gains (losses), gains (losses) on loan sales, wire transfer fees, and other sources of fee income, was $9.0 million for the third quarter of 2014, a decrease of $7.7 million, or 46.3%, compared to $16.7 million for the third quarter of 2013. The decrease in non-interest income in the third quarter of 2014 was primarily due to a decrease of $8.3 million in gains on sale of securities offset by increases of $363,000 in commissions from wealth management and $225,000 in income from venture capital investments.

 

Non-Interest Expense

 

Non-interest expense decreased $8.1 million, or 15.9%, to $42.6 million in the third quarter of 2014 compared to $50.7 million in the same quarter a year ago. The efficiency ratio was 44.51% in the third quarter of 2014 compared to 51.01% for the same quarter a year ago.

 

Costs associated with debt redemption decreased $6.3 million to $527,000 in the third quarter of 2014 compared to $6.9 million in the same quarter a year ago. The Company prepaid $171.2 million of advances from Federal Home Loan Bank in the third quarter of 2014, whereas the Company prepaid $150.0 million of securities sold under agreements to repurchase in the same period a year ago. Amortization of core deposit premiums decreased $1.1 million to $214,000 in the third quarter of 2014 compared to $1.4 million in the same quarter a year ago, as a result of the full amortization of the core deposit premium from the General Bank acquisition. Other real estate owned (“OREO”) expenses decreased $1.5 million to income of $1.0 million in the third quarter of 2014 compared to expense of $527,000 in the same quarter a year ago, primarily due to increases in gains on sale of OREO of $787,000 and decreases in OREO expenses of $517,000. Partially offsetting the decreases was a $549,000 increase in FDIC and state assessments.

 

Income Taxes

 

The effective tax rate for the third quarter of 2014 was 38.3% compared to 36.9% for the third quarter of 2013. The effective tax rate includes the impact of the utilization of low income housing tax credits.

 

Year-to-Date Statement of Operations Review

 

Net income attributable to common stockholders for the nine months ended September 30, 2014, was $102.3 million, an increase of $20.7 million, or 25.4%, compared to net income attributable to common stockholders of $81.6 million for the same period a year ago, due primarily to the elimination of dividends on preferred stock, increases in net interest income, a higher negative provision for credit losses, decreases in costs associated with debt redemption, decreases in amortization of core deposit premiums, decreases in professional services expense, and decreases in OREO expense partially offset by decreases in gains on sale of securities, increases in salaries and incentive compensation expense, and higher FDIC and state assessments. Diluted earnings per share attributable to common stockholders for the nine months ended September 30, 2014, was $1.28 compared to $1.03 for the same period a year ago. The net interest margin for the nine months ended September 30, 2014, increased to 3.35% from 3.33% for the same period a year ago.

 

Return on average stockholders’ equity was 8.98% and return on average assets was 1.25% for the nine months ended September 30, 2014, compared to a return on average stockholders’ equity of 7.78% and a return on average assets of 1.16% for the same period of 2013. The efficiency ratio for the nine months ended September 30, 2014, was 46.31% compared to 52.09% for the same period a year ago.

 

 

The following table sets forth information concerning average interest-earning assets, average interest-bearing liabilities, and the average yields and rates paid on those assets and liabilities for the nine months ended September 30, 2014, and 2013. Average outstanding amounts included in the table are daily averages.

 

Interest-Earning Assets and Interest-Bearing Liabilities
		Nine months ended September 30,
		2014												2013
						Interest				Average								Interest				Average
		Average				Income/				Yield/				Average				Income/				Yield/
(Dollars in thousands)		Balance				Expense				Rate (1)(2)				Balance				Expense				Rate (1)(2)
Interest earning assets:
Commercial loans		$	2,302,775			$	66,657				3.87	%		$	2,116,193			$	63,066				3.98	%
Residential mortgage loans			1,618,377				57,277				4.72				1,395,749				48,806				4.66
Commercial mortgage loans			4,221,589				154,688				4.90				3,829,366				148,627				5.19
Real estate construction loans			267,214				11,644				5.83				167,282				6,953				5.56
Other loans and leases			16,270				71				0.58				15,849				105				0.89
Total loans and leases (1)			8,426,225				290,337				4.61				7,524,439				267,557				4.75
Taxable securities			1,458,936				19,389				1.78				1,977,788				34,986				2.37
Tax-exempt securities (3)			-				-				-				38,874				1,531				5.27
Federal Home Loan Bank stock			28,389				1,379				6.49				35,685				1,041				3.90
Interest bearing deposits			255,627				1,499				0.78				182,820				796				0.58
Total interest-earning assets			10,169,177				312,604				4.11				9,759,606				305,911				4.19
Non-interest earning assets:
Cash and due from banks			167,779												144,992
Other non-earning assets			769,929												759,161
Total non-interest earning assets			937,708												904,153
Less: Allowance for loan losses			(172,960	)											(181,206	)
Deferred loan fees			(13,370	)											(11,223	)
Total assets		$	10,920,555											$	10,471,330
Interest bearing liabilities:
Interest bearing demand accounts		$	707,421			$	906				0.17			$	623,554			$	745				0.16
Money market accounts			1,369,838				6,371				0.62				1,178,812				4,990				0.57
Savings accounts			526,768				549				0.14				483,715				275				0.08
Time deposits			4,259,579				26,155				0.82				3,975,160				23,700				0.80
Total interest-bearing deposits			6,863,606				33,981				0.66				6,261,241				29,710				0.63
Securities sold under agreements to repurchase			669,963				19,731				3.94				1,030,403				29,778				3.86
Other borrowings			166,445				850				0.68				67,613				375				0.74
Long-term debt			120,003				3,012				3.36				171,136				2,778				2.17
Total interest-bearing liabilities			7,820,017				57,574				0.98				7,530,393				62,641				1.11
Non-interest bearing liabilities:
Demand deposits			1,498,181												1,284,579
Other liabilities			79,585												79,486
Total equity			1,522,772												1,576,872
Total liabilities and equity		$	10,920,555											$	10,471,330
Net interest spread (4)											3.13	%											3.08	%
Net interest income (4)						$	255,030											$	243,270
Net interest margin (4)											3.35	%											3.33	%

 

(1)	Yields and amounts of interest earned include loan fees. Non-accrual loans are included in the average balance.
(2)	Calculated by dividing net interest income by average outstanding interest-earning assets.
(3)	The average yield has been adjusted to a fully taxable-equivalent basis for certain securities of states and political subdivisions and other securities held using a statutory federal income tax rate of 35%.
(4)	Net interest income, net interest spread, and net interest margin on interest-earning assets have been adjusted to a fully taxable-equivalent basis using a statutory federal income tax rate of 35%.

 

 

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

 

Taxable-Equivalent Net Interest Income — Changes Due to Rate and Volume(1)
		Nine months ended September 30,
		2014-2013
		Increase (Decrease) in
		Net Interest Income Due to:
(Dollars in thousands)		Changes in Volume				Changes in Rate				Total Change
Interest-earning assets:
Loans and leases			31,313				(8,533	)			22,780
Taxable securities			(8,006	)			(7,591	)			(15,597	)
Tax-exempt securities (2)			(1,531	)			-				(1,531	)
Federal Home Loan Bank stock			(247	)			585				338
Interest bearing deposits			376				327				703
Total changes in interest income			21,905				(15,212	)			6,693
Interest-bearing liabilities:
Interest bearing demand accounts			105				56				161
Money market accounts			858				523				1,381
Savings accounts			26				248				274
Time deposits			1,731				724				2,455
Securities sold under agreements to repurchase			(10,608	)			561				(10,047	)
Other borrowings			507				(32	)			475
Long-term debts			(993	)			1,227				234
Total changes in interest expense			(8,374	)			3,307				(5,067	)
Changes in net interest income		$	30,279			$	(18,519	)		$	11,760

 

(1)	Changes in interest income and interest expense attributable to changes in both volume and rate have been allocated proportionately to changes due to volume and changes due to rate.
(2)	The amount of interest earned on certain securities of states and political subdivisions and other securities held has been adjusted to a fully taxable-equivalent basis using a statutory federal income tax rate of 35%.

 

 

Balance Sheet Review

 

Assets

 

Total assets were $11.6 billion at September 30, 2014, an increase of $610.2 million, or 5.6%, from $11.0 billion at December 31, 2013, primarily due to a $773.7 million increase in loans and a $80.8 million increase in short-term investments offset by a $246.6 million decrease in securities available-for-sale.

 

Investment Securities

 

Investment securities represented 11.6% of total assets at September 30, 2014, compared with 14.4% of total assets at December 31, 2013. The carrying value of investment securities at September 30, 2014, was $1.34 billion compared with $1.59 billion at December 31, 2013. Securities available-for-sale are carried at fair value and had a net unrealized loss, net of tax, of $8.7 million at September 30, 2014, compared with a net unrealized loss, net of tax, of $29.7 million at December 31, 2013. During the first quarter of 2013, due to the ongoing discussions regarding corporate income tax rates which could have a negative impact on the after-tax yields and fair values of the Company’s portfolio of municipal securities, the Company determined it may sell such securities in response to market conditions. As a result, the Company reclassified its municipal securities from securities held-to-maturity to securities available-for-sale. Concurrent with this reclassification, the Company also reclassified all other securities held-to-maturity, which together with the municipal securities had an amortized cost on the date of transfer of $722.5 million, to securities available-for-sale. At the reclassification date, a net unrealized gain was recorded in other comprehensive income for these securities totaling $40.5 million.

 

 

The following tables reflect the amortized cost, gross unrealized gains, gross unrealized losses, and fair value of investment securities as of September 30, 2014, and December 31, 2013:

 

		September 30, 2014
						Gross				Gross
		Amortized				Unrealized				Unrealized
		Cost				Gains				Losses				Fair Value
		(In thousands)
Securities Available-for-Sale
U.S. treasury securities		$	539,919			$	198			$	29			$	540,088
Mortgage-backed securities			703,312				1,085				21,073				683,324
Collateralized mortgage obligations			80				-				34				46
Corporate debt securities			94,941				751				1,355				94,337
Mutual funds			6,000				-				183				5,817
Preferred stock of government sponsored entities			7,196				2,056				-				9,252
Other equity securities			3,608				3,620				-				7,228
Total		$	1,355,056			$	7,710			$	22,674			$	1,340,092

 

 

		December 31, 2013
						Gross				Gross
		Amortized				Unrealized				Unrealized
		Cost				Gains				Losses				Fair Value
		(In thousands)
Securities Available-for-Sale
U.S. treasury securities		$	460,095			$	99			$	1			$	460,193
Mortgage-backed securities			1,010,294				7,049				64,529				952,814
Collateralized mortgage obligations			5,929				231				54				6,106
Asset-backed securities			123				-				-				123
Corporate debt securities			154,955				298				4,949				150,304
Mutual funds			6,000				-				275				5,725
Preferred stock of government sponsored entities			569				10,834				-				11,403
Total securities available-for-sale		$	1,637,965			$	18,511			$	69,808			$	1,586,668
Total investment securities		$	1,637,965			$	18,511			$	69,808			$	1,586,668

  

For additional information, see Note 6 to the Company’s condensed consolidated financial statements presented elsewhere in this report.

 

Investment securities having a carrying value of $703.6 million at September 30, 2014, and $926.5 million at December 31, 2013, were pledged to secure public deposits, other borrowings, treasury tax and loan, and securities sold under agreements to repurchase. 

 

 

Loans

 

Gross loans were $8.86 billion at September 30, 2014, an increase of $773.7 million, or 9.6%, from $8.08 billion at December 31, 2013, primarily due to increases of $391.0 million, or 9.7%, in commercial mortgage loans, $161.5 million, or 11.9%, in residential mortgage loans, $151.4 million, or 6.6%, in commercial loans, and $79.8 million, or 36.0%, in real estate construction loans. The following table sets forth the classification of loans by type, mix, and percentage change as of the dates indicated:

 

		September 30, 2014				% of Gross Loans				December 31, 2013				% of Gross Loans				% Change
		(Dollars in thousands)
Type of Loans
Commercial loans		$	2,450,118				27.7	%		$	2,298,724				28.4	%			6.6	%
Residential mortgage loans			1,516,711				17.1				1,355,255				16.8				11.9
Commercial mortgage loans			4,414,067				49.8				4,023,051				49.8				9.7
Equity lines			172,223				1.9				171,277				2.1				0.6
Real estate construction loans			301,459				3.4				221,701				2.7				36.0
Installment and other loans			3,676				0.1				14,555				0.2				(74.7	)
Gross loans		$	8,858,254				100	%		$	8,084,563				100	%			9.6	%
Allowance for loan losses			(169,198	)							(173,889	)							(2.7	)
Unamortized deferred loan fees			(12,903	)							(13,487	)							(4.3	)
Total loans, net		$	8,676,153							$	7,897,187								9.9	%

 

 

Non-performing Assets

 

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

 

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

 

The ratio of non-performing assets to total assets was 0.8% at September 30, 2014, compared to 1.3% at December 31, 2013. Total non-performing assets decreased $42.3 million, or 30.8%, to $94.9 million at September 30, 2014, compared to $137.2 million at December 31, 2013, primarily due to a $17.9 million, or 21.5%, decrease in non-accrual loans and a $24.0 million, or 45.2%, decrease in OREO.

 

As a percentage of gross loans plus OREO, our non-performing assets decreased to 1.07% at September 30, 2014, from 1.69% at December 31, 2013. The non-performing portfolio loan coverage ratio, defined as the allowance for credit losses to non-performing loans, increased to 259.7% at September 30, 2014, from 208.2% at December 31, 2013.

 

 

The following table presents the changes in non-performing assets and troubled debt restructurings (TDRs) at September 30, 2014, compared to December 31, 2013, and to September 30, 2013:

 

(Dollars in thousands)		September 30, 2014				December 31, 2013				% Change				September 30, 2013				% Change
Non-performing assets
Accruing loans past due 90 days or more		$	662			$	982				(33	)		$	499				33
Non-accrual loans:
Construction- residential loans			-				3,313				(100	)			3,495				(100	)
Construction- non-residential loans			25,728				25,273				2				25,500				1
Land loans			5,996				6,502				(8	)			8,334				(28	)
Commercial real estate loans, excluding land loans			17,834				13,119				36				27,662				(36	)
Commercial loans			8,851				21,232				(58	)			24,506				(64	)
Residential mortgage loans			6,849				13,744				(50	)			10,364				(34	)
Total non-accrual loans:		$	65,258			$	83,183				(22	)		$	99,861				(35	)
Total non-performing loans			65,920				84,165				(22	)			100,360				(34	)
Other real estate owned			29,025				52,985				(45	)			49,777				(42	)
Total non-performing assets		$	94,945			$	137,150				(31	)		$	150,137				(37	)
Accruing troubled debt restructurings (TDRs)		$	123,089			$	117,597				5			$	115,940				6
Allowance for loan losses		$	169,198			$	173,889				(3	)		$	181,452				(7	)
Allowance for off-balance sheet credit commitments			2,018				1,362				48				2,074				(3	)
Allowance for credit losses		$	171,216			$	175,251				(2	)		$	183,526				(7	)
Total gross loans outstanding, at period-end		$	8,858,254			$	8,084,563				10			$	7,832,013				13
Allowance for loan losses to non-performing loans, at period-end			256.67	%			206.60	%							180.80	%
Allowance for credit losses to non-performing loans, at period-end			259.73	%			208.22	%							182.87	%
Allowance for loan losses to gross loans, at period-end			1.91	%			2.15	%							2.32	%
Allowance for credit losses to gross loans, at period-end			1.93	%			2.17	%							2.34	%

 

Non-accrual Loans

 

At September 30, 2014, total non-accrual loans were $65.3 million, a decrease of $34.6 million, or 34.7%, from $99.9 million at September 30, 2013, and a decrease of $17.9 million, or 21.5%, from $83.2 million at December 31, 2013. The allowance for the collateral-dependent loans is calculated based on the difference between the outstanding loan balance and the value of the collateral as determined by recent appraisals, sales contracts, or other available market price information. The allowance for collateral-dependent loans varies from loan to loan based on the collateral coverage of the loan at the time of designation as non-performing. We continue to monitor the collateral coverage, based on recent appraisals, of these loans on a quarterly basis and adjust the allowance accordingly. Non-accrual loans also include those troubled debt restructurings that do not qualify for accrual status.

 

 

The following tables present the type of properties securing the non-accrual portfolio loans and the type of businesses the borrowers engaged in as of the dates indicated:

 

		September 30, 2014								December 31, 2013
		Real								Real
		Estate (1)				Commercial				Estate (1)				Commercial
		(In thousands)
Type of Collateral
Single/multi-family residence		$	9,306			$	1,259			$	22,370			$	2,030
Commercial real estate			41,104				922				33,079				1,366
Land			5,996				-				6,502				-
Unsecured			-				6,671				-				17,836
Total		$	56,406			$	8,852			$	61,951			$	21,232

 

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

 

 

		September 30, 2014								December 31, 2013
		Real								Real
		Estate (1)				Commercial				Estate (1)				Commercial
		(In thousands)
Type of Business
Real estate development		$	37,852			$	880			$	31,895			$	5,866
Wholesale/Retail			12,062				4,814				16,796				3,526
Food/Restaurant			684				996				569				173
Import/Export			-				1,956				-				11,667
Other			5,808				206				12,691				-
Total		$	56,406			$	8,852			$	61,951			$	21,232

 

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

 

 

Other Real Estate Owned 

 

At September 30, 2014, OREO totaled $29.0 million, which decreased $24.0 million, or 45.2%, compared to $53.0 million at December 31, 2013, and decreased $20.8 million, or 41.7%, compared to $49.8 million at September 30, 2013.

 

Impaired Loans

 

A loan is considered impaired when it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement based on current circumstances and events. The assessment for impairment occurs when and while such loans are on non-accrual as a result of delinquency status of over 90 days or receipt of information indicating that full collection of principal is doubtful, or when the loan has been restructured in a troubled debt restructuring. Those loans with a balance less than our defined selection criteria, generally a loan amount less than $500,000 (less than $100,000 for quarters before June 30, 2012), are treated as a homogeneous portfolio. If loans meeting the defined criteria are not collateral dependent, we measure the impairment based on the present value of the expected future cash flows discounted at the loan’s effective interest rate. If loans meeting the defined criteria are collateral dependent, we measure the impairment by using the loan’s observable market price or the fair value of the collateral. We obtain an appraisal to determine the amount of impairment at the date that the loan becomes impaired. The appraisals are based on “as is” or bulk sale valuations. To ensure that appraised values remain current, we generally obtain an updated appraisal every twelve months from qualified independent appraisers. If the fair value of the collateral, less cost to sell, is less than the recorded amount of the loan, we then recognize impairment by creating or adjusting an existing valuation allowance with a corresponding charge to the provision for loan losses. If an impaired loan is expected to be collected through liquidation of the collateral, the amount of impairment, excluding disposal costs, which range between 3% to 6% of the fair value, depending on the size of the impaired loan, is charged off against the allowance for loan losses. Non-accrual impaired loans, including TDRs, are not returned to accrual status unless the unpaid interest has been brought current and full repayment of the recorded balance is expected or if the borrower has made six consecutive monthly payments of the scheduled amounts due, and TDRs are reviewed for continued impairment until they are no longer reported as TDRs.

 

 

At September 30, 2014, recorded investment in impaired loans totaled $188.3 million and was comprised of non-accrual loans of $65.2 million and accruing TDRs of $123.1 million. At December 31, 2013, recorded investment in impaired loans totaled $200.8 million and was comprised of non-accrual loans of $83.2 million and accruing TDRs of $117.6 million. For impaired loans, the amounts previously charged off represent 12.6% at September 30, 2014, and 23.9% at December 31, 2013, of the contractual balances for impaired loans. As of September 30, 2014, $56.4 million, or 86.4%, of the $65.2 million of non-accrual loans were secured by real estate compared to $62.0 million, or 74.5%, of the $83.2 million of non-accrual loans that were secured by real estate at December 31, 2013. The Bank obtains current appraisals, sales contracts, or other available market price information which provide updated factors in evaluating potential loss.

 

At September 30, 2014, $13.8 million of the $169.2 million allowance for loan losses was allocated for impaired loans and $155.4 million was allocated to the general allowance. At December 31, 2013, $13.3 million of the $173.9 million allowance for loan losses was allocated for impaired loans and $160.6 million was allocated to the general allowance.

 

The allowance for credit losses to non-accrual loans increased to 262.4% at September 30, 2014, from 210.7% at December 31, 2013, primarily due to decreases in non-accrual loans. Non-accrual loans also include those TDRs that do not qualify for accrual status.    

 

 

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

 

		Impaired Loans
		September 30, 2014												December 31, 2013
		Unpaid Principal Balance				Recorded Investment				Allowance				Unpaid Principal Balance				Recorded Investment				Allowance
		(In thousands)
With no allocated allowance
Commercial loans		$	19,792			$	18,764			$	-			$	20,992			$	18,905			$	-
Real estate construction loans			37,403				16,133				-				25,401				15,097				-
Commercial mortgage loans			84,274				82,586				-				105,593				78,930				-
Residential mortgage loans and equity lines			2,541				2,541				-				4,892				4,892				-
Subtotal		$	144,010			$	120,024			$	-			$	156,878			$	117,824			$	-
With allocated allowance
Commercial loans		$	8,951			$	6,985			$	2,730			$	22,737			$	13,063			$	2,519
Real estate construction loans			15,377				15,377				2,604				28,475				19,323				3,460
Commercial mortgage loans			33,749				32,973				7,999				39,223				35,613				6,584
Residential mortgage loans and equity lines			13,422				12,988				481				16,535				14,957				721
Subtotal		$	71,499			$	68,323			$	13,814			$	106,970			$	82,956			$	13,284
Total impaired loans		$	215,509			$	188,347			$	13,814			$	263,848			$	200,780			$	13,284

 

 

Loan Interest Reserves 

 

In accordance with customary banking practice, construction loans and land development loans are originated where interest on the loan is disbursed from pre-established interest reserves included in the total original loan commitment. Our construction and land development loans generally include optional renewal terms after the maturity of the initial loan term. New appraisals are obtained prior to extension or renewal of these loans in part to determine the appropriate interest reserve to be established for the new loan term. Loans with interest reserves are underwritten to the same criteria, including loan to value and, if applicable, pro forma debt service coverage ratios, as loans without interest reserves. Construction loans with interest reserves are monitored on a periodic basis to gauge progress towards completion. Interest reserves are frozen if it is determined that additional draws would result in a loan to value ratio that exceeds policy maximums based on collateral property type. Our policy limits in this regard are consistent with supervisory limits and range from 65% in the case of land to 85% in the case of one to four family residential construction projects.

 

As of September 30, 2014, construction loans of $222.2 million were disbursed with pre-established interest reserves of $29.8 million compared to $160.8 million of such loans disbursed with pre-established interest reserves of $20.0 million at December 31, 2013.  The balance for construction loans with interest reserves which have been extended was $37.5 million with pre-established interest reserves of $4.3 million at September 30, 2014, compared to $20.5 million with pre-established interest reserves of $1.8 million at December 31, 2013.  Land loans of $72.0 million were disbursed with pre-established interest reserves of $4.1 million at September 30, 2014, compared to $32.8 million land loans disbursed with pre-established interest reserves of $3.0 million at December 31, 2013.  The balance for land loans with interest reserves which have been extended was zero at September 30, 2014, compared to $1.7 million land loans with pre-established interest reserves of $53,000 at December 31, 2013. 

 

 

At September 30, 2014, the Bank had no loans on non-accrual status with available interest reserves.  At September 30, 2014, $1.5 million of non-accrual residential construction loans, $24.2 million of non-accrual non-residential construction loans, and zero non-accrual land loans had been originated with pre-established interest reserves.  At December 31, 2013, the Bank had no loans on non-accrual status with available interest reserves.  At December 31, 2013, $3.3 million of non-accrual residential construction loans, $25.3 million of non-accrual non-residential construction loans, and $32,000 of non-accrual land loans had been originated with pre-established interest reserves.   While loans with interest reserves are typically expected to be repaid in full according to the original contractual terms, some loans require one or more extensions beyond the original maturity.  Typically, these extensions are required due to construction delays, delays in the sale or lease of property, or some combination of these two factors.

 

Loan Concentration

 

Most of the Company’s business activities are with customers located in the predominantly Asian areas of Southern and Northern California; New York City, New York; Dallas and Houston, Texas; Seattle, Washington; Boston, Massachusetts; Chicago, Illinois; Edison, New Jersey; Las Vegas, Nevada, and Hong Kong. The Company has no specific industry concentration, and generally its loans are collateralized with real property or other pledged collateral of the borrowers. Loans are generally expected to be paid off from the operating profits of the borrowers, refinancing by another lender, or through sale by the borrowers of the collateral. There were no loan concentrations to multiple borrowers in similar activities which exceeded 10% of total loans as of September 30, 2014, or as of December 31, 2013.

 

The federal banking regulatory agencies issued final guidance on December 6, 2006, regarding risk management practices for financial institutions with high or increasing concentrations of commercial real estate (“CRE”) loans on their balance sheets. The regulatory guidance reiterates the need for sound internal risk management practices for those institutions that have experienced rapid growth in CRE lending, have notable exposure to specific types of CRE, or are approaching or exceeding the supervisory criteria used to evaluate the CRE concentration risk, but the guidance is not to be construed as a limit for CRE exposure. The supervisory criteria are: (1) total reported loans for construction, land development, and other land represent 100% of the institution’s total risk-based capital, and (2) both total CRE loans represent 300% or more of the institution’s total risk-based capital and the institution’s CRE loan portfolio has increased 50% or more within the last thirty-nine months. Total loans for construction, land development, and other land represented 30% of the Bank’s total risk-based capital as of September 30, 2014, and 23% as of December 31, 2013. Total CRE loans represented 253% of total risk-based capital as of September 30, 2014, and 249% as of December 31, 2013 and were below the Bank’s internal limit for CRE loans of 300% of total capital at both dates.

 

Allowance for Credit Losses

 

The Bank maintains the allowance for credit losses at a level that is considered adequate to absorb the estimated and known risks in the loan portfolio and off-balance sheet unfunded credit commitments. Allowance for credit losses is comprised of the allowance for loan losses and the reserve for off-balance sheet unfunded credit commitments. With this risk management objective, the Bank’s management has an established monitoring system that is designed to identify impaired and potential problem loans, and to permit periodic evaluation of impairment and the adequacy level of the allowance for credit losses in a timely manner.

 

 

In addition, the Bank’s Board of Directors has established a written credit policy that includes a credit review and control system which it believes should be effective in ensuring that the Bank maintains an adequate allowance for credit losses. The Board of Directors provides oversight for the allowance evaluation process, including quarterly evaluations, and determines whether the allowance is adequate to absorb losses in the credit portfolio. The determination of the amount of the allowance for credit losses and the provision for credit losses is based on management’s current judgment about the credit quality of the loan portfolio and takes into consideration known relevant internal and external factors that affect collectability when determining the appropriate level for the allowance for credit losses. The nature of the process by which the Bank determines the appropriate allowance for credit losses requires the exercise of considerable judgment. Additions to the allowance for credit losses are made by charges to the provision for credit losses. While management utilizes its best judgment based on the information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Bank’s control, including the performance of the Bank’s loan portfolio, the economy, changes in interest rates, and the view of the regulatory authorities toward loan classifications. Identified credit exposures that are determined to be uncollectible are charged against the allowance for credit losses. Recoveries of previously charged off amounts, if any, are credited to the allowance for credit losses. A weakening of the economy or other factors that adversely affect asset quality could result in an increase in the number of delinquencies, bankruptcies, or defaults, and a higher level of non-performing assets, net charge-offs, and provision for credit losses in future periods.

 

The allowance for loan losses was $169.2 million and the allowance for off-balance sheet unfunded credit commitments was $2.0 million at September 30, 2014, which represented the amount believed by management to be sufficient to absorb credit losses inherent in the loan portfolio, including unfunded commitments. The allowance for credit losses, which is the sum of the allowances for loan losses and for off-balance sheet unfunded credit commitments, was $171.2 million at September 30, 2014, compared to $175.3 million at December 31, 2013, a decrease of $4.1 million, or 2.3%. The allowance for credit losses represented 1.93% of period-end gross loans and 259.7% of non-performing loans at September 30, 2014. The comparable ratios were 2.17% of period-end gross loans and 208.2% of non-performing loans at December 31, 2013.

 

 

The following table sets forth information relating to the allowance for loan losses, charge-offs, recoveries, and the reserve for off-balance sheet credit commitments for the periods indicated:

 

		Three months ended September 30,								Nine months ended September 30,
		2014				2013				2014				2013
		(Dollars in thousands)
Allowance for Loan Losses
Balance at beginning of period		$	169,077			$	179,733			$	173,889			$	183,322
Reversal for credit losses			(5,100	)			(3,000	)			(8,800	)			(3,000	)
Transfers from/(to) reserve for off-balance sheet credit commitments
			(1	)			1,129				(372	)			(711	)
Charge-offs :
Commercial loans			(252	)			(200	)			(7,592	)			(4,580	)
Construction loans-residential			-				-				(1,813	)			-
Construction loans-other			-				-				-				-
Real estate loans			(903	)			(554	)			(3,327	)			(2,873	)
Land loans			-				-				-				(1,318	)
Installment loans and other loans			-				-				-				-
Total charge-offs			(1,155	)			(754	)			(12,732	)			(8,771	)
Recoveries:
Commercial loans			4,148				436				10,852				2,015
Construction loans-residential			32				1,046				48				1,200
Construction loans-other			-				190				9				1,056
Real estate loans			2,194				1,225				6,293				4,229
Land loans			3				1,447				11				2,101
Installment loans and other loans			-				-				-				11
Total recoveries			6,377				4,344				17,213				10,612
Balance at end of period		$	169,198			$	181,452			$	169,198			$	181,452
Reserve for off-balance sheet credit commitments
Balance at beginning of period		$	1,844			$	3,202			$	1,362			$	1,362
Provision/(reversal) for credit losses/transfers			-				(1,128	)			482				712
Balance at end of period		$	1,844			$	2,074			$	1,844			$	2,074
Average loans outstanding  during period ended		$	8,705,723			$	7,732,167			$	8,426,225			$	7,524,439
Total gross loans outstanding, at period-end		$	8,858,254			$	7,832,013			$	8,858,254			$	7,832,013
Total non-performing loans, at period-end		$	65,920			$	100,360			$	65,920			$	100,360
Ratio of net charge-offs to average loans outstanding during the period			-0.24	%			-0.18	%			-0.07	%			-0.03	%
Provision for loan losses to averagel oans outstanding during the period			-0.23	%			-0.15	%			-0.14	%			-0.05	%
Allowance for loan losses to non-performing loans at period-end			256.67	%			180.80	%			256.67	%			180.80	%
Allowance for loan losses to gross loans at period-end			1.91	%			2.32	%			1.91	%			2.32	%

 

 

Our allowance for loan losses consists of the following:

 

•

Specific allowance: For impaired loans, we provide specific allowances for loans that are not collateral dependent based on an evaluation of the present value of the expected future cash flows discounted at the loan’s effective interest rate and for loans that are collateral dependent based on the fair value of the underlying collateral determined by the most recent valuation information received, which may be adjusted based on factors such as changes in market conditions from the time of valuation. If the measure of the impaired loan is less than the recorded investment in the loan, the deficiency will be charged off against the allowance for loan losses or, alternatively, a specific allocation will be established.

 

 

•

General allowance: The unclassified portfolio is segmented on a group basis. Segmentation is determined by loan type and common risk characteristics. The non-impaired loans are grouped into 19 segments: two commercial segments, ten commercial real estate segments, one residential construction segment, one non-residential construction segment, one SBA segment, one installment loans segment, one residential mortgage segment, one equity lines of credit segment, and one overdrafts segment. The allowance is provided for each segmented group based on the group’s historical loan loss experience aggregated based on loan risk classifications which takes into account the current financial condition of the borrowers and guarantors, the prevailing value of the underlying collateral if collateral dependent, charge-off history, management’s knowledge of the portfolio, general economic conditions, environmental factors including the trends in delinquency and non-accrual, and other significant factors, such as the national and local economy, volume and composition of the portfolio, strength of management and loan staff, underwriting standards, and concentration of credit. In addition, management reviews reports on past-due loans to ensure appropriate classification. In the second quarter of 2009, the look-back period was reduced from five years to four years, and in the second quarter of 2010, management increased the weighting given to the most recent four quarters to 50%, and reduced the weighting of the earliest and second earliest four quarters to 10% and 15%, respectively, for pass rated loans, to place greater emphasis on losses taken by the Bank during the economic downturn. In the third quarter of 2014, management reevaluated the look-back period and restored the five year look-back period in order to capture a sufficient history of loss data. Additionally, risk factor calculations for pass rated loans included a specified loss emergence period and were determined based on the higher of the not-weighted five year average or weighted at 50.0 percent for the most recent four quarters, 25.0 percent for the next four quarters,12.5 percent for the next four quarters, 7.5% for the next four quarters and 5.0% for the next four quarters. In light of the changes above, the relevant environmental factors were reduced. These refinements maintained the Bank’s allowance at a level consistent with the prior quarter.

 

 

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

 

(Dollars in thousands)		September 30, 2014								December 31, 2013
						Percentage of								Percentage of
						Loans in Each								Loans in Each
						Category								Category
						to Average								to Average
		Amount				Gross Loans				Amount				Gross Loans
Type of Loan:
Commercial loans		$	56,296				27.3	%		$	65,103				28.2	%
Residential mortgage loans (1)			11,443				19.2				12,005				18.6
Commercial mortgage loans			66,739				50.1				84,753				50.7
Real estate construction loans			34,703				3.2				11,999				2.3
Installment and other loans			17				0.2				29				0.2
Total		$	169,198				100	%		$	173,889				100	%

 

(1) Residential mortgage loans includes equity lines.

 

 

The allowance allocated to commercial loans was $56.3 million at September 30, 2014, compared to $65.1 million at December 31, 2013. The decrease is due primarily to a reduction in loss factors as a result of the net recoveries for the first three quarters of 2014 and the decrease in Substandard commercial loans from $102.1 million at December 31, 2013, to $80.2 million at September 30, 2014.

 

 

The allowance allocated to commercial mortgage loans decreased from $84.8 million at December 31, 2013, to $66.7 million at September 30, 2014, which was due primarily to decreases in loss experience from commercial mortgage loans and to the net recoveries of $2.9 million during the first nine months of 2014. The overall allowance for total commercial mortgage loans was 1.5% at September 30, 2014, and 2.1% at December 31, 2013.

 

The allowance allocated for construction loans increased to $34.7 million, or 11.5%, of construction loans at September 30, 2014, compared to $12.0 million, or 5.4%, of construction loans at December 31, 2013, primarily due to the increase in outstanding construction loans, a lengthening of the loss emergence period and due to higher loss factors resulting from the change from a four year recent period weighted loss migration methodology to a five year average weighted loss migration methodology.

 

Deposits

 

Total deposits were $8.69 billion at September 30, 2014, an increase of $713.4 million, or 8.9%, from $7.98 billion at December 31, 2013, primarily due to a $228.2 million, or 17.7%, increase in money market deposits, a $172.4 million, or 18.5%, increase in time deposits under $100,000, a $151.1 million, or 10.5%, increase in non-interest bearing demand deposits, a $82.7 million, or 12.1%, increase in NOW deposits, and a $35.9 million, or 1.1%, increase in time deposits of $100,000 or more. The following table displays the deposit mix as of the dates indicated:

 

		September 30, 2014				% of Total				December 31, 2013				% of Total
Deposits		(Dollars in thousands)
Non-interest-bearing demand deposits		$	1,593,003				18.3	%		$	1,441,858				18.1	%
NOW deposits			766,622				8.8				683,873				8.6
Money market deposits			1,514,496				17.4				1,286,338				16.1
Savings deposits			542,454				6.3				499,520				6.2
Time deposits under $100,000			1,103,634				12.7				931,204				11.7
Time deposits of $100,000 or more			3,174,460				36.5				3,138,512				39.3
Total deposits		$	8,694,669				100.0	%		$	7,981,305				100.0	%

 

 

Borrowings

 

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

 

 

Securities Sold Under Agreements to Repurchase. Securities sold under agreements to repurchase were $550.0 million with a weighted average rate of 3.78% at September 30, 2014, compared to $800.0 million with a weighted average rate of 3.87% at December 31, 2013. In the first nine months of 2014, the Company prepaid securities sold under agreements to repurchase totaling $100 million with a weighted average rate of 3.5% and incurred prepayment penalties of $3.4 million. In the first nine months of 2013, the Company prepaid securities sold under agreements to repurchase totaling $300.0 million with a weighted average rate of 3.97% and incurred prepayment penalties of $15.7 million. Four floating-to-fixed rate agreements totaling $200.0 million have initial floating rates for a period of time ranging from six months to one year, with floating rates of three-month LIBOR rate minus 340 basis points. Thereafter, the rates are fixed for the remainder of the term, with interest rates ranging from 4.89% to 5.07%. After the initial floating rate term, the counterparties have the right to terminate the transaction at par at the fixed rate reset date and quarterly thereafter. Three fixed-to-floating rate agreements totaling $150.0 million have initial fixed rates ranging from 1.00% to 3.50% with initial fixed rate terms ranging from six months to 18 months. For the remaining term, the rates float at 8% minus the three-month LIBOR rate with a maximum rate of 3.50% and a minimum rate of 0.0%. After the initial fixed rate term, the counterparties have the right to terminate the transaction at par at the floating rate reset date and quarterly thereafter. The table below provides summary data for the $350.0 million of callable securities sold under agreements to repurchase as of September 30, 2014:

 

(Dollars in millions)		Fixed-to-floating								Floating-to-fixed				Total
Rate type		Float Rate								Fixed Rate
Rate index		8% minus 3 month LIBOR
Maximum rate			3.50	%			3.50	%
Minimum rate			0.0	%			0.0	%
No. of agreements			2				1				4				7
Amount		$	100.0			$	50.0			$	200.0			$	350.0
Weighted average rate			3.50	%			3.50	%			5.00	%			4.36	%
Final maturity		2014				2015				2017

  

 

The table below provides summary data for non-callable fixed rate securities sold under agreements to repurchase as of September 30, 2014:

 

		No. of				Amount				Weighted Average
Maturity		Agreements				(In thousands)				Interest Rate
1 year to 3 years			2			$	100,000				2.71	%
3 years to 5 years			2				100,000				2.86	%
Total			4			$	200,000				2.78	%

 

 

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 repurchase agreements, as necessary. The underlying collateral pledged for the repurchase agreements consists of U.S. Treasury securities, U.S. government agency securities, and mortgage-backed securities with a fair value of $629.3 million as of September 30, 2014, and $906.1 million as of December 31, 2013.

 

 

Advances from the FHLB. Advances from the FHLB were $555.0 million with weighted average rate of 0.12% at September 30, 2014, compared to $521.2 million with weighted average rate of 0.17% at December 31, 2013. The following relates to the outstanding advances at September 30, 2014, and December 31, 2013:

 

		September 30, 2014								December 31, 2013
		Amount				Weighted Average				Amount				Weighted Average
Maturity		(In thousands)				Interest Rate				(In thousands)				Interest Rate
Within 90 days		$	530,000				0.07	%		$	475,000				0.06	%
4 - 5 years			25,000				1.13	%			46,200				1.24	%
		$	555,000				0.12	%		$	521,200				0.17	%

 

 

Long-term Debt

 

Long-term debt was $119.1 million at September 30, 2014, compared to $121.1 million at December 31, 2013. Long-term debt is comprised of Junior Subordinated Notes, which qualifies as Tier I capital for regulatory purposes, issued in connection with our various pooled trust preferred securities offerings.

 

Off-Balance-Sheet Arrangements and Contractual Obligations

 

The following table summarizes the Company’s contractual obligations to make future payments as of September 30, 2014. Payments for deposits and borrowings do not include interest. Payments related to leases are based on actual payments specified in the underlying contracts.

 

		Payment Due by Period
						More than				3 years or
						1 year but				more but
		1 year				less than				less than				5 years
		or less				3 years				5 years				or more				Total
		(In thousands)
Contractual obligations:
Deposits with stated maturity dates		$	3,360,528			$	686,095			$	231,434			$	37			$	4,278,094
Securities sold under agreements to repurchase (1)			150,000				200,000				-				-				350,000
Securities sold under agreements to repurchase (2)			-				100,000				100,000				-				200,000
Advances from the Federal Home Loan Bank			530,000				-				25,000				-				555,000
Other borrowings			-				-				-				18,882				18,882
Long-term debt			-				-				-				119,136				119,136
Operating leases			6,228				9,140				5,406				2,941				23,715
Total contractual obligations and other commitments		$	4,046,756			$	995,235			$	361,840			$	140,996			$	5,544,827

 

(1)	These repurchase agreements have a final maturity of 7-years and 10-years from origination date but are callable on a quarterly basis after six months, 12 months, or one year for the 7-year term and one year for the 10-year term.
(2)	These repurchase agreements are non-callable.

 

 

In the normal course of business, we enter into various transactions, which, in accordance with U.S. generally accepted accounting principles, are not included in our consolidated balance sheets. We enter into these transactions to meet the financing needs of our customers. These transactions include commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the condensed consolidated balance sheets.

 

 

Loan Commitments. We enter into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Substantially all of our commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of loan funding. We minimize our exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures. Management assesses the credit risk associated with certain commitments to extend credit in determining the level of the allowance for credit losses.

 

Standby Letters of Credit. Standby letters of credit are written conditional commitments issued by us to secure the obligations of a customer to a third party. In the event the customer does not perform in accordance with the terms of an agreement with the third party, we would be required to fund the commitment. The maximum potential amount of future payments we could be required to make is represented by the contractual amount of the commitment. If the commitment is funded, we would be entitled to seek reimbursement from the customer. Our policies generally require that standby letter of credit arrangements contain security and debt covenants similar to those contained in loan agreements.

 

Capital Resources

 

Total equity was $1.57 billion at September 30, 2014, an increase of $111.4 million, or 7.6%, from $1.46 billion at December 31, 2013, primarily due to increases in net income of $102.3 million and decreases in unrealized losses on securities available-for-sale of $20.9 million offset by common stock cash dividends of $15.1 million.

 

The following table summarizes changes in total equity for the nine months ended September 30, 2014:

 

		Nine months ended
(In thousands)		September 30, 2014
Net income		$	102,252
Stock issued to directors			350
Proceeds from shares issued through the Dividend Reinvestment Plan			1,553
Shares withheld related to net share settlement of RSUs			(274	)
Net tax short-fall from stock-based compensation expense			(1,177	)
Share-based compensation			2,948
Other comprehensive income			20,894
Cash dividends paid to common stockholders			(15,133	)
Net increase in total equity		$	111,413

 

 

Capital Adequacy Review

 

Management seeks to maintain the Company’s capital at a level sufficient to support future growth, protect depositors and stockholders, and comply with various regulatory requirements.

 

 

Both the Bancorp’s and the Bank’s regulatory capital continued to exceed the regulatory minimum requirements as of September 30, 2014. In addition, the capital ratios of the Bank place it in the “well capitalized” category which is defined as institutions with a Tier 1 risk-based capital ratio equal to or greater than 6.0%, total risk-based capital ratio equal to or greater than 10.0%, and Tier 1 leverage capital ratio equal to or greater than 5.0%.

 

The following table presents Bancorp’s and the Bank’s capital and leverage ratios as of September 30, 2014, and December 31, 2013:

 

		Cathay General Bancorp																Cathay Bank
		September 30, 2014								December 31, 2013								September 30, 2014								December 31, 2013
(Dollars in thousands)		Balance				%				Balance				%				Balance				%				Balance				%
Tier 1 capital (to risk-weighted assets)		$	1,377,153				14.77			$	1,288,892				15.04			$	1,344,282				14.44			$	1,244,480				14.53
Tier 1 capital minimum requirement			373,014				4.00				342,899				4.00				372,482				4.00				342,701				4.00
Excess		$	1,004,139				10.77			$	945,993				11.04			$	971,800				10.44			$	901,779				10.53
Total capital (to risk-weighted assets)		$	1,496,866				16.05			$	1,401,319				16.35			$	1,461,359				15.69			$	1,352,415				15.79
Total capital minimum requirement			746,029				8.00				685,799				8.00				744,965				8.00				685,402				8.00
Excess		$	750,837				8.05			$	715,520				8.35			$	716,394				7.69			$	667,013				7.79
Tier 1 capital (to average assets) – Leverage ratio		$	1,377,153				12.66			$	1,288,892				12.48			$	1,344,282				12.37			$	1,244,480				12.06
Minimum leverage requirement			435,028				4.00				413,158				4.00				434,521				4.00				412,815				4.00
Excess		$	942,125				8.66			$	875,734				8.48			$	909,761				8.37			$	831,665				8.06
Risk-weighted assets		$	9,325,359							$	8,572,487							$	9,312,058							$	8,567,523
Total average assets (1)		$	10,875,697							$	10,328,952							$	10,863,021							$	10,320,368

 

(1)	The quarterly total average assets reflect all debt securities at amortized cost, equity security with readily determinable fair values at the lower of cost or fair value, and equity securities without readily determinable fair values at historical cost.

 

 

In July 2013, the federal bank regulatory agencies adopted final regulations which revised their risk-based and leverage capital requirements for banking organizations to meet requirements of the Dodd-Frank Act and to implement international agreements reached by the Basel Committee on Banking Supervision that were intended to improve both the quality and quantity of banking organizations’ capital (“Basel III”). Although many of the rules contained in these final regulations are applicable only to large, internationally active banks, some of them will apply on a phased in basis to all banking organizations, including the Company and the Bank.

 

The following are among the new requirements that will be phased in beginning January 1, 2015:

 

•

An increase in the minimum Tier 1 capital ratio from 4.00% to 6.00% of risk-weighted assets.

 

•

A new category and a required 4.50% of risk-weighted assets ratio is established for “common equity Tier 1” as a subset of Tier 1 capital limited to common equity.

 

•

A minimum non-risk-based leverage ratio is set at 4.00% eliminating a 3.00% exception for higher rated banks.

 

•

Changes in the permitted composition of Tier 1 capital to exclude trust preferred securities, mortgage servicing rights and certain deferred tax assets and include unrealized gains and losses on available-for-sale debt and equity securities.

 

 

•

A new additional capital conservation buffer of 2.5% of risk weighted assets over each of the required capital ratios that will be phased in from 2016 to 2019 must be met to avoid limitations in the ability of the Bank to pay dividends, repurchase shares or pay discretionary bonuses.

 

•

The risk-weights of certain assets for purposes of calculating the risk-based capital ratios are changed for high volatility commercial real estate acquisition, development and construction loans, certain past due non-residential mortgage loans and certain mortgage-backed and other securities exposures.

 

•

An additional “countercyclical capital buffer” is required for larger and more complex institutions.

 

Management believes that, as of September 30, 2014, Bancorp and the Bank would meet all capital adequacy requirements under the Basel III rules on a fully phased-in basis as if such requirements were currently in effect.

 

Dividend Policy

 

Holders of common stock are entitled to dividends as and when declared by our Board of Directors out of funds legally available for the payment of dividends. Although we have historically paid cash dividends on our common stock, we are not required to do so. The amount of future dividends will depend on our earnings, financial condition, capital requirements and other factors, and will be determined by our Board of Directors. We are subject to Federal Reserve supervisory policies, including informing and consulting with the Federal Reserve Bank of San Francisco sufficiently in advance of any planned capital actions (i.e. increased dividend payments or stock redemptions) and, after prior notification to the Federal Reserve Bank of San Francisco, our Board of Directors increased the common stock dividend to $.07 per share in June 2014. There can be no assurance that our regulators will not object to any capital actions. The terms of our Junior Subordinated Notes also limit our ability to pay dividends.

 

The Company declared cash dividends of $.07 per share on 79,678,241 shares outstanding on September 2, 2014, for distribution to holders of our common stock on September 12, 2014, $.07 per share on 79,656,124 shares outstanding on June 12, 2014, and $.05 per share on 79,595,528 shares on March 7,2014. Total cash dividends of $15.1 million were paid during the nine months ended September 30, 2014.

 

Country Risk Exposures

 

The Company’s total assets were $11.6 billion and total foreign country risk net exposures were $805.6 million at September 30, 2014. Total foreign country risk net exposures at September 30, 2014, were comprised primarily of $364.0 million from Hong Kong, $179.3 million from China, $90.7 million from England, $45.0 million from France, $34.7 million from Switzerland, $30.1 million from Australia, $17.1 million from the Philippines, $15.9 million from Taiwan, $11.2 million from Germany, $8.8 million from Singapore, $6.4 million from Canada, and $1.8 million from Macau. Risk is determined based on location of the borrowers, issuers, and counterparties.

 

  

All foreign country risk net exposures were to non-sovereign counterparties except $36.8 million due from the Hong Kong Monetary Authority at September 30, 2014.

 

Unfunded loan to foreign entities exposures were $93.3 million at September 30, 2014, and were comprised primarily of $50.0 million unfunded loans to borrowers of Hong Kong residence, $35.7 million unfunded loans to three financial institution in China, $4.5 million unfunded loans to borrowers of Taiwan residence, and $2.9 million unfunded loans to borrowers of Philippines residence.

 

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 related to our interest-earning assets and interest-bearing liabilities. We believe that these transactions, when properly structured and managed, may provide a hedge against inherent interest rate risk in 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.

 

In May 2014, the Bancorp entered into five interest rate swap contracts in the notional amount of $119.1 million for a period of ten years. The objective of these interest rate swap contracts, which were designated as hedging instruments in cash flow hedges, was to hedge the quarterly interest payments on the Bancorp’s $119.1 million of junior subordinated debentures that had been issued to five trusts throughout the ten-year period beginning in June 2014 and ending in June 2024, from the risk of variability of these payments resulting from changes in the three-month LIBOR interest rate. The Bancorp pays a weighted average fixed interest rate of 2.61% and receives a variable interest rate of three-month LIBOR at a weighted average rate of 0.23%. As of September 30, 2014, the notional amount of cash flow interest rate swaps was $119.1 million and their unrealized loss of $163,000, net of taxes, was included in other comprehensive income. The amount of periodic net settlement of interest rate swaps included in interest expense was $723,000 for the three months ended and $824,000 for the nine months ended September 30, 2014.

 

 

In June 2014, the Bank entered into ten interest rate swap contracts in the notional amount of $148.1 million for various terms from four to eight years. The Bank entered into these interest rate swap contracts that are matched to individual fixed-rate commercial real estate loans in the Bank’s loan portfolio. These contracts have been designated as hedging instruments to hedge the risk of changes in the fair value of the underlying commercial real estate 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 4.67% and receives a variable rate at one month LIBOR rate plus a weighted average spread of 298 basis points, or at a weighted average rate of 3.13%. As of September 30, 2014, the notional amount of fair value interest rate swaps was $147.4 million and their unrealized gain of $442,000 was included in other non-interest income. The amount of periodic net settlement of interest rate swaps reducing interest income was $580,000 for the three months ended and $606,000 for the nine months ended September 30, 2014. As of September 30, 2014, 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. The 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 the Bancorp related to derivative contracts totaled $4.3 million as of September 30, 2014.

 

The Company enters into foreign exchange forward contracts and foreign currency option contracts with various counterparties to mitigate the risk of fluctuations in foreign currency exchange rates for foreign exchange certificates of deposit, foreign exchange contracts, or foreign currency option 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, foreign exchange contracts, or foreign currency option 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. At September 30, 2014, no option contracts were outstanding. Spot and forward contracts in the total notional amount of $183.8 million had a positive fair value of $1.9 million at September 30, 2014. Spot and forward contracts in the total notional amount of $201.2 million had a negative fair value of $4.4 million at September 30, 2014. At December 31, 2013, the notional amount of option contracts totaled $200,000 with a net positive fair value of $83. Spot and forward contracts in the total notional amount of $267.6 million had a positive fair value of $6.2 million at December 31, 2013. Spot and forward contracts in the total notional amount of $236.3 million had a negative fair value of $6.1 million at December 31, 2013.

 

 

Liquidity

 

Liquidity is our ability to maintain sufficient cash flow to meet maturing financial obligations and customer credit needs, and to take advantage of investment opportunities as they are presented in the marketplace. Our principal sources of liquidity are growth in deposits, proceeds from the maturity or sale of securities and other financial instruments, repayments from securities and loans, federal funds purchased, securities sold under agreements to repurchase, and advances from the FHLB. At September 30, 2014, our liquidity ratio (defined as net cash plus short-term and marketable securities to net deposits and short-term liabilities) was 15.3% compared to 15.3% at December 31, 2013.

 

The Bank is a shareholder of the FHLB of San Francisco, enabling it to have access to lower cost FHLB financing when necessary. As of September 30, 2014, the Bank had an approved credit line with the FHLB totaling $3.6 billion. Advances from the FHLB were $555.0 million at September 30, 2014. The Bank expects to be able to access this source of funding, if required, in the near term. The Bank has pledged a portion of its commercial loans to the Federal Reserve Bank’s Discount Window under the Borrower-in-Custody program to secure these borrowings. At September 30, 2014, the borrowing capacity under the Borrower-in-Custody program was $82.0 million.

 

Liquidity can also be provided through the sale of liquid assets, which consist of federal funds sold, securities sold under agreements to repurchase, and unpledged investment securities. At September 30, 2014, investment securities totaled $1.34 billion, with $703.6 million pledged as collateral for borrowings and other commitments. The remaining $636.5 million was available as additional liquidity or to be pledged as collateral for additional borrowings.

 

Approximately 78.6% of the Company’s time deposits mature within one year or less as of September 30, 2014. Management anticipates that there may be some outflow of these deposits upon maturity due to the keen competition in the Bank’s marketplace. However, based on our historical run-off experience, we expect that the outflow will be minimal and can be replenished through our normal growth in deposits. Management believes the above-mentioned sources will provide adequate liquidity to the Bank to meet its daily operating needs.

 

The business activities of Bancorp consist primarily of the operation of the Bank and limited activities in other investments. The Bank paid dividends to Bancorp totaling $138.0 million during 2013. The Bank did not pay dividends to Bancorp in the first nine months of 2014.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We use a net interest income simulation model to measure the extent of the differences in the behavior of the lending and funding rates to changing interest rates, so as to project future earnings or market values under alternative interest rate scenarios. Interest rate risk arises primarily through the Company’s traditional business activities of extending loans and accepting deposits. Many factors, including economic and financial conditions, movements in interest rates, and consumer preferences affect the spread between interest earned on assets and interest paid on liabilities. The net interest income simulation model is designed to measure the volatility of net interest income and net portfolio value, defined as net present value of assets and liabilities, under immediate rising or falling interest rate scenarios in 100 basis point increments.

 

 

Although the modeling is very helpful in managing interest rate risk, it does require significant assumptions for the projection of loan prepayment rates on mortgage related assets, loan volumes and pricing, and deposit and borrowing volume and pricing, that might prove inaccurate. Because these assumptions are inherently uncertain, the model cannot precisely estimate net interest income, or precisely predict the effect of higher or lower interest rates on net interest income. Actual results will differ from simulated results due to the timing, magnitude, and frequency of interest rate changes, the differences between actual experience and the assumed volume, changes in market conditions, and management strategies, among other factors. The Company monitors its interest rate sensitivity and attempts to reduce the risk of a significant decrease in net interest income caused by a change in interest rates.

 

We have established a tolerance level in our policy to define and limit net interest income volatility to a change of plus or minus 15% when the hypothetical rate change is plus or minus 200 basis points. When the net interest rate simulation projects that our tolerance level will be met or exceeded, we seek corrective action after considering, among other things, market conditions, customer reaction, and the estimated impact on profitability. The Company’s simulation model also projects the net economic value of our portfolio of assets and liabilities. We have established a tolerance level in our policy to value the net economic value of our portfolio of assets and liabilities to a change of plus or minus 15% when the hypothetical rate change is plus or minus 200 basis points.

 

The table below shows the estimated impact of changes in interest rate on net interest income and market value of equity as of September 30, 2014:

 

	Net Interest		Market Value
	Income		of Equity
Change in Interest Rate (Basis Points)	Volatility (1)		Volatility (2)
+200	10.3		1.9
+100	4.2		1.7
-100	-1.1		-7.2
-200	-1.9		-11.5

 

(1)	The percentage change in this column represents net interest income of the Company for 12 months in a stable interest rate environment versus the net interest income in the various rate scenarios.
(2)	The percentage change in this column represents net portfolio value of the Company in a stable interest rate environment versus the net portfolio value in the various rate scenarios.

 

 

ITEM 4. CONTROLS AND PROCEDURES.

 

The Company’s principal executive officer and principal financial officer have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this quarterly report. Based upon their evaluation, the principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

 

 

There has not been any change in our internal control over financial reporting that occurred during the third fiscal quarter of 2014 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

PART II - OTHER INFORMATION

 

ITEM 1.     LEGAL PROCEEDINGS.

 

Bancorp’s wholly-owned subsidiary, Cathay Bank, is a party to ordinary routine litigation from time to time incidental to various aspects of its operations. Management does not believe that any such litigation is expected to have a material adverse impact on the Company’s consolidated financial condition or results of operations.

 

ITEM 1A.     RISK FACTORS.

 

There is no material change in the risk factors as previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, in response to Item 1A in Part I of Form 10-K.

 

ITEM 2.     UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

ISSUER PURCHASES OF EQUITY SECURITIES
Period	(a) Total Number of Shares (or Units) Purchased	(b) Average Price Paid per Share (or Unit)	(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
Month #1 (July 1, 2014 - July 31, 2014)	0	$0	0	622,500
Month #2 (August 1, 2014 - August 31, 2014)	0	$0	0	622,500
Month #3 (September 1, 2014 - September 30, 2014)	0	$0	0	622,500
Total	0	$0	0	622,500

 

 

For a discussion of limitations on the payment of dividends, see “Dividend Policy,” and “Liquidity” under Part I—Item 2—“Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

ITEM 3.     DEFAULTS UPON SENIOR SECURITIES.

 

Not applicable.

 

ITEM  4.     MINE SAFETY DISCLOSURES.

 

Not applicable.

 

ITEM  5.     OTHER INFORMATION.

 

None.

 

ITEM  6.     EXHIBITS.

 

Exhibit 10.1	Change of Control Employment Agreement for Donald S. Chow dated as of August 14, 2014.+**
Exhibit 10.2	Amended and Restated Change of Control Employment Agreement for Pin Tai dated as of December 18, 2008.+**

 

Exhibit 31.1

Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

Exhibit 31.2

Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

Exhibit 32.1

Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

Exhibit 32.2

Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

Exhibit 101.INS

XBRL Instance Document *

 

Exhibit 101.SCH

XBRL Taxonomy Extension Schema Document*

 

Exhibit 101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document*

 

Exhibit 101.DEF

XBRL Taxonomy Extension Definition Linkbase Document*

 

Exhibit 101.LAB

XBRL Taxonomy Extension Label Linkbase Document*

 

 

Exhibit 101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document*

 

____________________

*

XBRL (Extensible Business Reporting Language) information shall not be deemed to be filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, shall not be deemed to be filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise shall not be subject to liability under these sections, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, except as expressly set forth by specific reference in such filing.

**

Management contract or compensatory plan or arrangement.

+	Filed herewith.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

Cathay General Bancorp                    (Registrant)

 

 

 

Date: November 6, 2014

/s/ Dunson K. Cheng                        Dunson K. Cheng Chairman, President, and Chief Executive Officer

 

 

Date: November 6, 2014

/s/ Heng W. Chen                              Heng W. Chen Executive Vice President and Chief Financial Officer

 

 

 

70