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, 2017.
Critical Accounting Policies
The discussion and analysis of the Company’s financial condition and results of operations are based upon its unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues, and expenses, and related disclosures of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions.
Management of the Company considers the following to be critical accounting policies:
Accounting for the allowance for loan losses involves significant judgments and assumptions by management, which have a material impact on the carrying value of net loans. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances as described in “
Allowance for Credit Losses
” under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
H
ighlights
|
●
|
Total loans increased $334.2 million, or 10.3% annualized, to $13.3 billion for the quarter.
|
|
●
|
Net interest margin for the second quarter increased to 3.83% compared to 3.63% in the second quarter of 2017 and 3.75% in the first quarter of 2018.
|
|
●
|
Diluted earnings per share increased 40.6% to $0.90 per share for the second quarter of 2018 compared to $0.64 per share for the same quarter a year ago.
|
Quarterly
Statement of Operations Review
Net Income
Net income for the quarter ended June 30, 2018, was $73.7 million, an increase of $22.3 million, or 43.4%, compared to net income of $51.4 million for the same quarter a year ago. Diluted earnings per share for the quarter ended June 30, 2018, was $0.90 compared to $0.64 for the same quarter a year ago. Second quarter of 2018 net income included $1.7 million in acquisition and integration costs related to the FENB acquisition and a $1.1 million decrease in the fair value of equity securities.
Return on average stockholders’ equity was 14.51% and return on average assets was 1.88% for the quarter ended June 30, 2018, compared to a return on average stockholders’ equity of 10.96% and a return on average assets of 1.48% for the same quarter a year ago.
F
inancial Performance
|
|
Three months ended
|
|
|
|
June 30, 2018
|
|
|
June 30, 2017
|
|
Net income (in millions)
|
|
$
|
73.7
|
|
|
$
|
51.4
|
|
Basic earnings per common share
|
|
$
|
0.91
|
|
|
$
|
0.64
|
|
Diluted earnings per common share
|
|
$
|
0.90
|
|
|
$
|
0.64
|
|
Return on average assets
|
|
|
1.88
|
%
|
|
|
1.48
|
%
|
Return on average total stockholders' equity
|
|
|
14.51
|
%
|
|
|
10.96
|
%
|
Efficiency ratio
|
|
|
42.69
|
%
|
|
|
45.88
|
%
|
Net Interest Income Before Provision for
Credit
Losses
Net interest income before provision for credit losses increased $22.6 million, or 19.3%, to $140.0 million during the second quarter of 2018, compared to $117.4 million during the same quarter a year ago. The increase was due primarily to an increase in interest income from loans and securities, offset by increases in interest expense from time deposits and long-term debt.
The net interest margin was 3.83% for the second quarter of 2018, compared to 3.63% for the second quarter of 2017, and 3.75% for the first quarter of 2018.
For the second quarter of 2018, the yield on average interest-earning assets was 4.58%, the cost of funds on average interest-bearing liabilities was 1.03%, and the cost of interest-bearing deposits was 0.92%. In comparison, for the second quarter of 2017, the yield on average interest-earning assets was 4.19%, the cost of funds on average interest-bearing liabilities was 0.78%, and the cost of interest-bearing deposits was 0.68%. The increase in the yield on average interest earning assets resulted mainly from higher rates on loans. The net interest spread, defined as the difference between the yield on average interest-earning assets and the cost of funds on average interest-bearing liabilities, was 3.55% for the quarter ended June 30, 2018, compared to 3.41% 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 June 30, 2018, and 2017. Average outstanding amounts included in the table are daily averages.
Interest-Earning Assets and Interest-Bearing Liabilities
|
|
|
|
Three months ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
|
Average
|
|
|
Income/
|
|
|
Yield/
|
|
|
Average
|
|
|
Income/
|
|
|
Yield/
|
|
(Dollars in thousands)
|
|
Balance
|
|
|
Expense
|
|
|
Rate
(1)(2)
|
|
|
Balance
|
|
|
Expense
|
|
|
Rate
(1)(2)
|
|
Interest earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and leases
(1)
|
|
$
|
13,020,212
|
|
|
$
|
158,659
|
|
|
|
4.89
|
%
|
|
$
|
11,388,057
|
|
|
$
|
129,836
|
|
|
|
4.57
|
%
|
Investment securities
|
|
|
1,368,718
|
|
|
|
7,208
|
|
|
|
2.11
|
|
|
|
1,260,646
|
|
|
|
4,719
|
|
|
|
1.50
|
|
Federal Home Loan Bank stock
|
|
|
17,489
|
|
|
|
380
|
|
|
|
8.73
|
|
|
|
17,250
|
|
|
|
298
|
|
|
|
6.93
|
|
Interest bearing deposits
|
|
|
274,569
|
|
|
|
1,273
|
|
|
|
1.86
|
|
|
|
302,224
|
|
|
|
776
|
|
|
|
1.03
|
|
Total interest-earning assets
|
|
|
14,680,988
|
|
|
|
167,520
|
|
|
|
4.58
|
|
|
|
12,968,177
|
|
|
|
135,629
|
|
|
|
4.19
|
|
Non-interest earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
203,197
|
|
|
|
|
|
|
|
|
|
|
|
200,765
|
|
|
|
|
|
|
|
|
|
Other non-earning assets
|
|
|
988,066
|
|
|
|
|
|
|
|
|
|
|
|
915,151
|
|
|
|
|
|
|
|
|
|
Total non-interest earning assets
|
|
|
1,191,263
|
|
|
|
|
|
|
|
|
|
|
|
1,115,916
|
|
|
|
|
|
|
|
|
|
Less: Allowance for loan losses
|
|
|
(122,213
|
)
|
|
|
|
|
|
|
|
|
|
|
(115,838
|
)
|
|
|
|
|
|
|
|
|
Deferred loan fees
|
|
|
(3,252
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,043
|
)
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
15,746,786
|
|
|
|
|
|
|
|
|
|
|
$
|
13,964,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand accounts
|
|
$
|
1,381,065
|
|
|
$
|
678
|
|
|
|
0.20
|
|
|
$
|
1,260,575
|
|
|
$
|
534
|
|
|
|
0.17
|
|
Money market accounts
|
|
|
2,201,162
|
|
|
|
3,744
|
|
|
|
0.68
|
|
|
|
2,304,586
|
|
|
|
3,774
|
|
|
|
0.66
|
|
Savings accounts
|
|
|
804,064
|
|
|
|
410
|
|
|
|
0.20
|
|
|
|
794,450
|
|
|
|
390
|
|
|
|
0.20
|
|
Time deposits
|
|
|
5,848,849
|
|
|
|
18,730
|
|
|
|
1.28
|
|
|
|
4,722,920
|
|
|
|
10,769
|
|
|
|
0.91
|
|
Total interest-bearing deposits
|
|
|
10,235,140
|
|
|
|
23,562
|
|
|
|
0.92
|
|
|
|
9,082,531
|
|
|
|
15,467
|
|
|
|
0.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold under agreements to repurchase
|
|
|
83,517
|
|
|
|
608
|
|
|
|
2.92
|
|
|
|
150,000
|
|
|
|
1,065
|
|
|
|
2.85
|
|
Other borrowings
|
|
|
237,231
|
|
|
|
1,156
|
|
|
|
1.95
|
|
|
|
103,538
|
|
|
|
305
|
|
|
|
1.18
|
|
Long-term debt
|
|
|
194,136
|
|
|
|
2,163
|
|
|
|
4.47
|
|
|
|
119,136
|
|
|
|
1,440
|
|
|
|
4.86
|
|
Total interest-bearing liabilities
|
|
|
10,750,024
|
|
|
|
27,489
|
|
|
|
1.03
|
|
|
|
9,455,205
|
|
|
|
18,277
|
|
|
|
0.78
|
|
Non-interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
2,760,643
|
|
|
|
|
|
|
|
|
|
|
|
2,440,181
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
199,445
|
|
|
|
|
|
|
|
|
|
|
|
186,372
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
2,036,674
|
|
|
|
|
|
|
|
|
|
|
|
1,882,454
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
15,746,786
|
|
|
|
|
|
|
|
|
|
|
$
|
13,964,212
|
|
|
|
|
|
|
|
|
|
Net interest spread
|
|
|
|
|
|
|
|
|
|
|
3.55
|
%
|
|
|
|
|
|
|
|
|
|
|
3.41
|
%
|
Net interest income
|
|
|
|
|
|
$
|
140,031
|
|
|
|
|
|
|
|
|
|
|
$
|
117,352
|
|
|
|
|
|
Net interest margin
|
|
|
|
|
|
|
|
|
|
|
3.83
|
%
|
|
|
|
|
|
|
|
|
|
|
3.63
|
%
|
(1) Yields and amounts of interest earned include loan fees. Non-accrual loans are included in the average balance.
|
(2) Calculated by dividing net interest income by average outstanding interest-earning assets.
|
The following table summarizes the changes in interest income and interest expense attributable to changes in volume and changes in interest rates:
Taxable-Equivalent Net Interest Income — Changes Due to Volume and Rate
(1)
|
|
|
|
Three months ended June 30,
|
|
|
|
2018-2017
|
|
|
|
Increase (Decrease) in
|
|
|
|
Net Interest Income Due to:
|
|
(In thousands)
|
|
Changes in
Volume
|
|
|
Changes in
Rate
|
|
|
Total Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases
|
|
$
|
19,474
|
|
|
$
|
9,350
|
|
|
$
|
28,824
|
|
Investment securities
|
|
|
433
|
|
|
|
2,056
|
|
|
|
2,489
|
|
Federal Home Loan Bank stock
|
|
|
4
|
|
|
|
78
|
|
|
|
82
|
|
Deposits with other banks
|
|
|
(77
|
)
|
|
|
574
|
|
|
|
497
|
|
Total changes in interest income
|
|
|
19,834
|
|
|
|
12,058
|
|
|
|
31,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand accounts
|
|
|
54
|
|
|
|
90
|
|
|
|
144
|
|
Money market accounts
|
|
|
(173
|
)
|
|
|
143
|
|
|
|
(30
|
)
|
Savings accounts
|
|
|
5
|
|
|
|
16
|
|
|
|
21
|
|
Time deposits
|
|
|
2,952
|
|
|
|
5,009
|
|
|
|
7,961
|
|
Securities sold under agreements to repurchase
|
|
|
(483
|
)
|
|
|
26
|
|
|
|
(457
|
)
|
Other borrowed funds
|
|
|
565
|
|
|
|
285
|
|
|
|
850
|
|
Long-term debt
|
|
|
847
|
|
|
|
(124
|
)
|
|
|
723
|
|
Total changes in interest expense
|
|
|
3,767
|
|
|
|
5,445
|
|
|
|
9,212
|
|
Changes in net interest income
|
|
$
|
16,067
|
|
|
$
|
6,613
|
|
|
$
|
22,680
|
|
(1)
|
Changes in interest income and interest expense attributable to changes in both volume and rate have been allocated proportionately to changes due to volume and changes due to rate.
|
Provision/(reversal) for credit losses
There was no reversal for credit losses for the second quarter of 2018 or 2017. The reversal for credit losses was based on a review of the appropriateness of the allowance for loan losses at June 30, 2018. The following table summarizes the charge-offs and recoveries for the periods indicated:
|
|
Three months ended June 30,
|
|
|
Six months ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
$
|
488
|
|
|
$
|
527
|
|
|
$
|
507
|
|
|
$
|
1,730
|
|
Real estate loans
(1)
|
|
|
390
|
|
|
|
-
|
|
|
|
390
|
|
|
|
555
|
|
Total charge-offs
|
|
|
878
|
|
|
|
527
|
|
|
|
897
|
|
|
|
2,285
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
|
150
|
|
|
|
335
|
|
|
|
1,063
|
|
|
|
826
|
|
Construction loans
|
|
|
44
|
|
|
|
47
|
|
|
|
88
|
|
|
|
96
|
|
Real estate loans
(1)
|
|
|
499
|
|
|
|
410
|
|
|
|
1,366
|
|
|
|
706
|
|
Total recoveries
|
|
|
693
|
|
|
|
792
|
|
|
|
2,517
|
|
|
|
1,628
|
|
Net (recoveries)/charge-offs
|
|
$
|
185
|
|
|
$
|
(265
|
)
|
|
$
|
(1,620
|
)
|
|
$
|
657
|
|
(1) Real estate loans include commercial mortgage loans, residential mortgage loans, and equity lines.
|
Non
-Interest Income
Non-interest income, which includes revenues from depository service fees, letters of credit commissions, securities gains (losses), wire transfer fees, and other sources of fee income, was $7.8 million for the second quarter of 2018, an increase of $1.6 million, or 25.8%, compared to $6.2 million for the second quarter of 2017, primarily due to a $2.7 million increase in other operating income and offset by a $1.1 million loss from the decrease in the fair value of equity securities during the quarter.
Non-Interest Expense
Non-interest expense increased $6.4 million, or 11.3%, to $63.1 million in the second quarter of 2018 compared to $56.7 million in the same quarter a year ago. The increase in non-interest expense in the second quarter of 2018 was primarily due to a $4.5 million increase in salaries and employee benefits expense, partly from the acquisition of FENB, a $1.5 million increase in marketing expense, a $1.7 million increase in acquisition and integration costs offset by a $2.6 million decrease in provision for unfunded commitments, when compared to the same quarter a year ago. The efficiency ratio was 42.7% in the second quarter of 2018, compared to 45.9% for the same quarter a year ago.
Income Taxes
The effective tax rate for the second quarter of 2018 was 13.0% compared to 23.1% for the second quarter of 2017. The effective tax rate includes the reduction of the corporate tax rate from the enactment of the Tax Legislation, an alternative energy investment made in the second quarter and the impact of low income housing tax credits. Income tax expense for 2018 was reduced by $0.8 million in benefits from the distribution of restricted stock units and exercises of stock options.
Year-to-Date
Statement of Operations Review
Net income for the six months ended June 30, 2018, was $137.5 million, an increase of $37.1 million, or 37.0%, compared to net income of $100.4 million for the same period a year ago. Diluted earnings per share was $1.68 compared to $1.25 per share for the same period a year ago. The net interest margin for the six months ended June 30, 2018, was 3.79% compared to 3.56% for the same period a year ago.
Return on average stockholders’ equity was 13.76% and return on average assets was 1.76% for the six months ended June 30, 2018, compared to a return on average stockholders’ equity of 10.84% and a return on average assets of 1.45% for the same period a year ago. The efficiency ratio for the six months ended June 30, 2018, was 43.01% compared to 44.79% 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 six months ended June 30, 2018, and 2017. Average outstanding amounts included in the table are daily averages.
Interest-Earning Assets and Interest-Bearing Liabilities
|
|
|
|
Six months ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
|
|
|
|
Interest
|
|
|
Average
|
|
|
|
Average
|
|
|
Income/
|
|
|
Yield/
|
|
|
Average
|
|
|
Income/
|
|
|
Yield/
|
|
(Dollars in thousands)
|
|
Balance
|
|
|
Expense
|
|
|
Rate
(1)(2)
|
|
|
Balance
|
|
|
Expense
|
|
|
Rate
(1)(2)
|
|
Interest earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and leases
(1)
|
|
$
|
12,970,484
|
|
|
$
|
309,949
|
|
|
|
4.82
|
%
|
|
$
|
11,338,983
|
|
|
$
|
254,746
|
|
|
|
4.53
|
%
|
Investment securities
|
|
|
1,336,871
|
|
|
|
13,666
|
|
|
|
2.06
|
|
|
|
1,247,432
|
|
|
|
9,125
|
|
|
|
1.48
|
|
Federal Home Loan Bank stock
|
|
|
19,852
|
|
|
|
776
|
|
|
|
7.89
|
|
|
|
17,250
|
|
|
|
710
|
|
|
|
8.30
|
|
Interest bearing deposits
|
|
|
334,465
|
|
|
|
2,829
|
|
|
|
1.71
|
|
|
|
393,627
|
|
|
|
1,852
|
|
|
|
0.95
|
|
Total interest-earning assets
|
|
|
14,661,672
|
|
|
|
327,220
|
|
|
|
4.50
|
|
|
|
12,997,292
|
|
|
|
266,433
|
|
|
|
4.13
|
|
Non-interest earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
215,944
|
|
|
|
|
|
|
|
|
|
|
|
204,920
|
|
|
|
|
|
|
|
|
|
Other non-earning assets
|
|
|
976,229
|
|
|
|
|
|
|
|
|
|
|
|
900,470
|
|
|
|
|
|
|
|
|
|
Total non-interest earning assets
|
|
|
1,192,173
|
|
|
|
|
|
|
|
|
|
|
|
1,105,390
|
|
|
|
|
|
|
|
|
|
Less: Allowance for loan losses
|
|
|
(123,089
|
)
|
|
|
|
|
|
|
|
|
|
|
(117,319
|
)
|
|
|
|
|
|
|
|
|
Deferred loan fees
|
|
|
(3,290
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,368
|
)
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
15,727,466
|
|
|
|
|
|
|
|
|
|
|
$
|
13,980,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand accounts
|
|
$
|
1,393,883
|
|
|
$
|
1,308
|
|
|
|
0.19
|
|
|
$
|
1,249,050
|
|
|
$
|
1,051
|
|
|
|
0.17
|
|
Money market accounts
|
|
|
2,228,446
|
|
|
|
7,239
|
|
|
|
0.66
|
|
|
|
2,290,400
|
|
|
|
7,418
|
|
|
|
0.65
|
|
Savings accounts
|
|
|
821,121
|
|
|
|
871
|
|
|
|
0.21
|
|
|
|
754,049
|
|
|
|
675
|
|
|
|
0.18
|
|
Time deposits
|
|
|
5,750,722
|
|
|
|
34,458
|
|
|
|
1.21
|
|
|
|
4,790,025
|
|
|
|
21,751
|
|
|
|
0.92
|
|
Total interest-bearing deposits
|
|
|
10,194,172
|
|
|
|
43,876
|
|
|
|
0.87
|
|
|
|
9,083,524
|
|
|
|
30,895
|
|
|
|
0.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold under agreements to repurchase
|
|
|
91,713
|
|
|
|
1,322
|
|
|
|
2.91
|
|
|
|
169,613
|
|
|
|
2,615
|
|
|
|
3.11
|
|
Other borrowings
|
|
|
277,845
|
|
|
|
2,403
|
|
|
|
1.74
|
|
|
|
102,547
|
|
|
|
593
|
|
|
|
1.17
|
|
Long-term debt
|
|
|
194,136
|
|
|
|
4,245
|
|
|
|
4.41
|
|
|
|
119,136
|
|
|
|
2,864
|
|
|
|
4.85
|
|
Total interest-bearing liabilities
|
|
|
10,757,866
|
|
|
|
51,846
|
|
|
|
0.97
|
|
|
|
9,474,820
|
|
|
|
36,967
|
|
|
|
0.79
|
|
Non-interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
2,755,754
|
|
|
|
|
|
|
|
|
|
|
|
2,455,587
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
198,938
|
|
|
|
|
|
|
|
|
|
|
|
184,145
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
2,014,908
|
|
|
|
|
|
|
|
|
|
|
|
1,866,443
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
15,727,466
|
|
|
|
|
|
|
|
|
|
|
$
|
13,980,995
|
|
|
|
|
|
|
|
|
|
Net interest spread
|
|
|
|
|
|
|
|
|
|
|
3.53
|
%
|
|
|
|
|
|
|
|
|
|
|
3.34
|
%
|
Net interest income
|
|
|
|
|
|
$
|
275,374
|
|
|
|
|
|
|
|
|
|
|
$
|
229,466
|
|
|
|
|
|
Net interest margin
|
|
|
|
|
|
|
|
|
|
|
3.79
|
%
|
|
|
|
|
|
|
|
|
|
|
3.56
|
%
|
(1) Yields and amounts of interest earned include loan fees. Non-accrual loans are included in the average balance.
|
(2) Calculated by dividing net interest income by average outstanding interest-earning assets.
|
The following table summarizes the changes in interest income and interest expense attributable to changes in volume and changes in interest rates:
Taxable-Equivalent Net Interest Income — Changes Due to Volume and Rate
(1)
|
|
|
|
Six months ended June 30,
|
|
|
|
2018-2017
|
|
|
|
Increase (Decrease) in
|
|
|
|
Net Interest Income Due to:
|
|
(In thousands)
|
|
Changes in
Volume
|
|
|
Changes in
Rate
|
|
|
Total Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases
|
|
$
|
38,272
|
|
|
$
|
16,931
|
|
|
$
|
55,203
|
|
Investment securities
|
|
|
694
|
|
|
|
3,847
|
|
|
|
4,541
|
|
Federal Home Loan Bank stock
|
|
|
103
|
|
|
|
(37
|
)
|
|
|
66
|
|
Deposits with other banks
|
|
|
(317
|
)
|
|
|
1,294
|
|
|
|
977
|
|
Total changes in interest income
|
|
|
38,752
|
|
|
|
22,035
|
|
|
|
60,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand accounts
|
|
|
129
|
|
|
|
128
|
|
|
|
257
|
|
Money market accounts
|
|
|
(202
|
)
|
|
|
23
|
|
|
|
(179
|
)
|
Savings accounts
|
|
|
64
|
|
|
|
132
|
|
|
|
196
|
|
Time deposits
|
|
|
4,900
|
|
|
|
7,807
|
|
|
|
12,707
|
|
Securities sold under agreements to repurchase
|
|
|
(1,133
|
)
|
|
|
(160
|
)
|
|
|
(1,293
|
)
|
Other borrowed funds
|
|
|
1,403
|
|
|
|
407
|
|
|
|
1,810
|
|
Long-term debt
|
|
|
1,664
|
|
|
|
(283
|
)
|
|
|
1,381
|
|
Total changes in interest expense
|
|
|
6,825
|
|
|
|
8,054
|
|
|
|
14,879
|
|
Changes in net interest income
|
|
$
|
31,927
|
|
|
$
|
13,981
|
|
|
$
|
45,908
|
|
(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.
|
Balance Sheet
Review
Assets
Total assets were $16.2 billion as of June 30, 2018, an increase of $557.6 million, or 3.6%, from $15.6 billion as of December 31, 2017, primarily due to loan growth and increases in investment securities offset by decreases in short-term investments.
Investment
S
ecurities
Investment securities represented 9.1% of total assets as of June 30, 2018, compared to 8.5% of total assets as of December 31, 2017. Securities available-for-sale were $1.5 billion as of June 30, 2018, compared to $1.3 billion as of December 31, 2017.
The following tables reflect the amortized cost, gross unrealized gains, gross unrealized losses, and fair value of securities available-for-sale as of June 30, 2018, and investment securities as of December 31, 2017:
|
|
June 30, 2018
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
Debt Securities Available-for-Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury securities
|
|
$
|
348,677
|
|
|
$
|
8
|
|
|
$
|
141
|
|
|
$
|
348,544
|
|
U.S. government agency entities
|
|
|
8,397
|
|
|
|
-
|
|
|
|
208
|
|
|
|
8,189
|
|
U.S. government sponsored entities
|
|
|
400,000
|
|
|
|
-
|
|
|
|
16,041
|
|
|
|
383,959
|
|
Mortgage-backed securities
|
|
|
676,855
|
|
|
|
189
|
|
|
|
18,756
|
|
|
|
658,288
|
|
Collateralized mortgage obligations
|
|
|
1,233
|
|
|
|
-
|
|
|
|
30
|
|
|
|
1,203
|
|
Corporate debt securities
|
|
|
74,980
|
|
|
|
786
|
|
|
|
-
|
|
|
|
75,766
|
|
Total
|
|
$
|
1,510,142
|
|
|
$
|
983
|
|
|
$
|
35,176
|
|
|
$
|
1,475,949
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
Securities Available-for-Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury securities
|
|
$
|
249,877
|
|
|
$
|
-
|
|
|
$
|
357
|
|
|
$
|
249,520
|
|
U.S. government agency entities
|
|
|
9,047
|
|
|
|
11
|
|
|
|
70
|
|
|
|
8,988
|
|
U.S. government sponsored entities
|
|
|
400,000
|
|
|
|
-
|
|
|
|
9,664
|
|
|
|
390,336
|
|
State and municipal securities
|
|
|
1,944
|
|
|
|
-
|
|
|
|
30
|
|
|
|
1,914
|
|
Mortgage-backed securities
|
|
|
577,987
|
|
|
|
241
|
|
|
|
6,259
|
|
|
|
571,969
|
|
Collateralized mortgage obligations
|
|
|
1,533
|
|
|
|
-
|
|
|
|
17
|
|
|
|
1,516
|
|
Corporate debt securities
|
|
|
80,007
|
|
|
|
1,291
|
|
|
|
17
|
|
|
|
81,281
|
|
Mutual funds
|
|
|
6,500
|
|
|
|
-
|
|
|
|
270
|
|
|
|
6,230
|
|
Preferred stock of government sponsored entities
|
|
|
5,842
|
|
|
|
4,260
|
|
|
|
-
|
|
|
|
10,102
|
|
Other equity securities
|
|
|
3,608
|
|
|
|
8,162
|
|
|
|
-
|
|
|
|
11,770
|
|
Total
|
|
$
|
1,336,345
|
|
|
$
|
13,965
|
|
|
$
|
16,684
|
|
|
$
|
1,333,626
|
|
For additional information, see Note 7 to the Company’s unaudited condensed consolidated financial statements.
Investment securities having a carrying value of $158.1 million as of June 30, 2018, and $272.2 million as of December 31, 2017, were pledged to secure public deposits, other borrowings, treasury tax and loan and securities sold under agreements to repurchase.
Equity Securities
The adoption of ASU 2016-01 resulted in approximately $8.6 million being reclassified from accumulated other comprehensive income to retained earnings, representing an increase to retained earnings as of January 1, 2018. For the six months ended June 30, 2018, the Company recognized a net loss of $5.0 million due to the decrease in fair value of equity investments with readily determinable fair values. Equity securities were $23.1 million as of June 30, 2018, compared to $28.1 million as of December 31, 2017.
Loans
Gross loans, excluding loans held for sale, were $13.3 billion at June 30, 2018, an increase of $478 million, or 3.7%, from $12.9 billion at December 31, 2017. The increase was primarily due to increases of $316.8 million, or 10.3%, in residential mortgage loans, $133.1 million, or 2.1%, in commercial mortgage loans, and $115.4 million, or 4.7%, in commercial loans, which were partially offset by a decrease of $96.9 million, or 14.3%, in real estate construction loans. The loan balances and composition at June 30, 2018, compared to December 31, 2017 are presented below:
|
|
June 30, 2018
|
|
|
% of Gross Loans
|
|
|
December 31, 2017
|
|
|
% of Gross Loans
|
|
|
% Change
|
|
Type of Loans
|
|
(Dollars in thousands)
|
|
Commercial loans
|
|
$
|
2,576,649
|
|
|
|
19.3
|
%
|
|
$
|
2,461,266
|
|
|
|
19.1
|
%
|
|
|
4.7
|
%
|
Residential mortgage loans
|
|
|
3,378,875
|
|
|
|
25.3
|
|
|
|
3,062,050
|
|
|
|
23.8
|
|
|
|
10.3
|
|
Commercial mortgage loans
|
|
|
6,615,791
|
|
|
|
49.6
|
|
|
|
6,482,695
|
|
|
|
50.4
|
|
|
|
2.1
|
|
Equity lines
|
|
|
191,445
|
|
|
|
1.4
|
|
|
|
180,304
|
|
|
|
1.4
|
|
|
|
6.2
|
|
Real estate construction loans
|
|
|
581,917
|
|
|
|
4.4
|
|
|
|
678,805
|
|
|
|
5.3
|
|
|
|
(14.3
|
)
|
Installment and other loans
|
|
|
4,060
|
|
|
|
0.0
|
|
|
|
5,170
|
|
|
|
0.0
|
|
|
|
(21.5
|
)
|
Gross loans
|
|
$
|
13,348,737
|
|
|
|
100
|
%
|
|
$
|
12,870,290
|
|
|
|
100
|
%
|
|
|
3.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
(121,899
|
)
|
|
|
|
|
|
|
(123,279
|
)
|
|
|
|
|
|
|
(1.1
|
)
|
Unamortized deferred loan fees
|
|
|
(3,248
|
)
|
|
|
|
|
|
|
(3,245
|
)
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans, net
|
|
$
|
13,223,590
|
|
|
|
|
|
|
$
|
12,743,766
|
|
|
|
|
|
|
|
3.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale
|
|
$
|
-
|
|
|
|
|
|
|
$
|
8,000
|
|
|
|
|
|
|
|
(100.0
|
%)
|
Non-performing Assets
Non-performing assets include loans past due 90 days or more and still accruing interest, non-accrual loans, and other real estate owned (“OREO”). The Company’s policy is to place loans on non-accrual status if interest and/or principal is past due 90 days or more, or in cases where management deems the full collection of principal and interest unlikely. After a loan is placed on non-accrual status, any previously accrued but unpaid interest is reversed and charged against current income and subsequent payments received are generally first applied towards the outstanding principal balance of the loan. Depending on the circumstances, management may elect to continue the accrual of interest on certain past due loans if partial payment is received and/or the loan is well collateralized and in the process of collection. The loan is generally returned to accrual status when the borrower has brought the past due principal and interest payments current and, in the opinion of management, the borrower has demonstrated the ability to make future payments of principal and interest as scheduled.
Management reviews the loan portfolio regularly for problem loans. During the ordinary course of business, 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, excluding non-accrual loans held for sale, to total assets was 0.4% at June 30, 2018, compared to 0.4% at December 31, 2017. Total non-performing assets increased $2.7 million, or 4.6%, to $60.9 million at June 30, 2018, compared to $58.2 million at December 31, 2017, primarily due to an increase of $3.9 million, or 8.0%, in non-accrual loans and offset by a decrease of $1.2 million, or 12.9%, in other real estate owned.
As a percentage of gross loans, excluding loans held for sale, plus OREO, our non-performing assets was 0.46% as of June 30, 2018, compared to 0.45% as of December 31, 2017. The non-performing loan portfolio coverage ratio, defined as the allowance for credit losses to non-performing loans, decreased to 237.0% as of June 30, 2018, from 262.1% as of December 31, 2017.
The following table presents the changes in non-performing assets and troubled debt restructurings (“TDRs”) as of June 30, 2018, compared to December 31, 2017, and to June 30, 2017:
(Dollars in thousands)
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
|
% Change
|
|
|
June 30, 2017
|
|
|
% Change
|
|
Non-performing assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing loans past due 90 days or more
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
495
|
|
|
|
(100
|
)
|
Non-accrual loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction loans
|
|
|
8,040
|
|
|
|
8,185
|
|
|
|
(2
|
)
|
|
|
16,585
|
|
|
|
(52
|
)
|
Commercial mortgage loans
|
|
|
17,154
|
|
|
|
19,820
|
|
|
|
(13
|
)
|
|
|
27,448
|
|
|
|
(38
|
)
|
Commercial loans
|
|
|
19,212
|
|
|
|
14,296
|
|
|
|
34
|
|
|
|
13,064
|
|
|
|
47
|
|
Residential mortgage loans
|
|
|
8,322
|
|
|
|
6,486
|
|
|
|
28
|
|
|
|
6,947
|
|
|
|
20
|
|
Total non-accrual loans
|
|
$
|
52,728
|
|
|
$
|
48,787
|
|
|
|
8
|
|
|
$
|
64,044
|
|
|
|
(18
|
)
|
Total non-performing loans
|
|
|
52,728
|
|
|
|
48,787
|
|
|
|
8
|
|
|
|
64,539
|
|
|
|
(18
|
)
|
Other real estate owned
|
|
|
8,220
|
|
|
|
9,442
|
|
|
|
(13
|
)
|
|
|
19,230
|
|
|
|
(57
|
)
|
Total non-performing assets
|
|
$
|
60,948
|
|
|
$
|
58,229
|
|
|
|
5
|
|
|
$
|
83,769
|
|
|
|
(27
|
)
|
Accruing troubled debt restructurings
|
|
$
|
84,487
|
|
|
$
|
68,565
|
|
|
|
23
|
|
|
$
|
79,819
|
|
|
|
6
|
|
Non-accrual loans held for sale
|
|
$
|
-
|
|
|
$
|
8,000
|
|
|
|
(100
|
)
|
|
$
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
$
|
121,899
|
|
|
$
|
123,279
|
|
|
|
(1
|
)
|
|
$
|
115,809
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross loans outstanding, at period-end
(1)
|
|
$
|
13,348,737
|
|
|
$
|
12,870,290
|
|
|
|
4
|
|
|
$
|
11,571,232
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses to non-performing loans, at period-end
(2)
|
|
|
231.18
|
%
|
|
|
252.69
|
%
|
|
|
|
|
|
|
179.44
|
%
|
|
|
|
|
Allowance for loan losses to gross loans, at period-end
(1)
|
|
|
0.91
|
%
|
|
|
0.96
|
%
|
|
|
|
|
|
|
1.00
|
%
|
|
|
|
|
(1) Excludes loans held for sale at period-end.
|
(2) Excludes non-accrual loans held for sale at period-end.
|
Non-accrual Loans
At June 30, 2018, total non-accrual loans were $52.7 million, an increase of $3.9 million, or 8.0%, from $48.8 million at December 31, 2017, and a decrease of $11.3 million, or 17.7%, from $64.0 million at June 30, 2017. The allowance for the collateral-dependent loans is calculated based on the difference between the outstanding loan balance and the value of the collateral as determined by recent appraisals, sales contracts, or other available market price information, less cost to sell. The allowance for collateral-dependent loans varies from loan to loan based on the collateral coverage of the loan at the time of designation as non-performing. We continue to monitor the collateral coverage of these loans, based on recent appraisals, on a quarterly basis and adjust the allowance accordingly. Non-accrual loans also include those TDRs that do not qualify for accrual status.
The following tables present the type of properties securing the non-accrual portfolio loans and the type of businesses the borrowers engaged in as of the dates indicated:
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
|
|
Real
|
|
|
|
|
|
|
Real
|
|
|
|
|
|
|
|
Estate
(1)
|
|
|
Commercial
|
|
|
Estate
(1)
|
|
|
Commercial
|
|
|
|
(In thousands)
|
|
Type of Collateral
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single/multi-family residence
|
|
$
|
15,096
|
|
|
$
|
8,430
|
|
|
$
|
14,952
|
|
|
$
|
7,575
|
|
Commercial real estate
|
|
|
16,941
|
|
|
|
-
|
|
|
|
19,540
|
|
|
|
-
|
|
Personal property (UCC)
|
|
|
1,479
|
|
|
|
10,782
|
|
|
|
-
|
|
|
|
6,721
|
|
Total
|
|
$
|
33,516
|
|
|
$
|
19,212
|
|
|
$
|
34,492
|
|
|
$
|
14,296
|
|
(1)
|
Real estate includes commercial mortgage loans, real estate construction loans, residential mortgage loans and equity lines.
|
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
|
|
Real
|
|
|
|
|
|
|
Real
|
|
|
|
|
|
|
|
Estate
(1)
|
|
|
Commercial
|
|
|
Estate
(1)
|
|
|
Commercial
|
|
|
|
(In thousands)
|
|
Type of Business
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate development
|
|
$
|
13,855
|
|
|
$
|
-
|
|
|
$
|
16,672
|
|
|
$
|
-
|
|
Wholesale/Retail
|
|
|
11,650
|
|
|
|
12,658
|
|
|
|
11,429
|
|
|
|
7,743
|
|
Food/Restaurant
|
|
|
124
|
|
|
|
-
|
|
|
|
137
|
|
|
|
-
|
|
Import/Export
|
|
|
-
|
|
|
|
6,554
|
|
|
|
-
|
|
|
|
6,553
|
|
Other
|
|
|
7,887
|
|
|
|
-
|
|
|
|
6,254
|
|
|
|
-
|
|
Total
|
|
$
|
33,516
|
|
|
$
|
19,212
|
|
|
$
|
34,492
|
|
|
$
|
14,296
|
|
(1)
|
Real estate includes commercial mortgage loans, real estate construction loans, residential mortgage loans and equity lines.
|
Impaired Loans
A loan is considered impaired when it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement based on current circumstances and events. The assessment for impairment occurs when and while such loans are on non-accrual as a result of 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 (TDRs). Those loans with a balance less than our defined selection criteria, generally a loan amount less than $500,000, are treated as a homogeneous portfolio. If loans meeting the defined criteria are not collateral dependent, we measure the impairment based on the present value of the expected future cash flows discounted at the loan’s effective interest rate. If loans meeting the defined criteria are collateral dependent, we measure the impairment by using the loan’s observable market price or the fair value of the collateral. We obtain an appraisal to determine the amount of impairment at the date that the loan becomes impaired. The appraisals are based on “as is” or bulk sale valuations. To ensure that appraised values remain current, we generally obtain an updated appraisal every twelve months from qualified independent appraisers. If the fair value of the collateral, less cost to sell, is less than the recorded amount of the loan, we then recognize impairment by creating or adjusting an existing valuation allowance with a corresponding charge to the provision for loan losses. If an impaired loan is expected to be collected through liquidation of the collateral, the amount of impairment, excluding disposal costs, which range between 3% to 6% of the fair value, depending on the size of the impaired loan, is charged off against the allowance for loan losses. Non-accrual impaired loans, including TDRs, are not returned to accrual status unless the unpaid interest has been brought current and full repayment of the recorded balance is expected or if the borrower has made six consecutive monthly payments of the scheduled amounts due, and TDRs are reviewed for continued impairment until they are no longer reported as TDRs.
As of June 30, 2018, recorded investment in impaired loans totaled $137.2 million and was comprised of non-accrual loans, excluding loans held for sale, of $52.7 million and accruing troubled debt restructured loans (TDRs) of $84.5 million. As of December 31, 2017, recorded investment in impaired loans totaled $117.4 million and was comprised of non-accrual loans, excluding loans held for sale, of $48.8 million and accruing TDRs of $68.6 million. For impaired loans, the amounts previously charged off represent 6.5% as of June 30, 2018, and 7.2% as of December 31, 2017, of the contractual balances for impaired loans. As of June 30, 2018, $33.5 million, or 63.6%, of the $52.7 million of non-accrual loans, excluding loans held for sale, was secured by real estate compared to $34.5 million, or 70.7%, of the $48.8 million of non-accrual loans, excluding loans held for sale, that was secured by real estate as of December 31, 2017. The Bank obtains current appraisals, sales contracts, or other available market price information intended to provide updated factors in evaluating potential loss.
As of June 30, 2018, $3.8 million of the $121.9 million allowance for loan losses was allocated for impaired loans and $118.1 million was allocated to the general allowance. As of December 31, 2017, $2.1 million of the $123.3 million allowance for loan losses was allocated for impaired loans and $121.1 million was allocated to the general allowance.
The allowance for loan losses to non-accrual loans was 231.2% as of June 30, 2018, from 252.7% as of December 31, 2017, primarily due to an increase in the non-accrual loans. Non-accrual loans also include those TDRs that do not qualify for accrual status.
The following table presents impaired loans and the related allowance as of the dates indicated:
|
|
Impaired Loans
|
|
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
|
|
Unpaid
Principal
Balance
|
|
|
Recorded
Investment
|
|
|
Allowance
|
|
|
Unpaid
Principal
Balance
|
|
|
Recorded
Investment
|
|
|
Allowance
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With no allocated allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
$
|
51,143
|
|
|
$
|
49,521
|
|
|
$
|
-
|
|
|
$
|
43,483
|
|
|
$
|
42,702
|
|
|
$
|
-
|
|
Real estate construction loans
|
|
|
8,821
|
|
|
|
8,040
|
|
|
|
-
|
|
|
|
8,821
|
|
|
|
8,185
|
|
|
|
-
|
|
Commercial mortgage loans
|
|
|
41,970
|
|
|
|
34,508
|
|
|
|
-
|
|
|
|
37,825
|
|
|
|
31,029
|
|
|
|
-
|
|
Residential mortgage loans and equity lines
|
|
|
6,551
|
|
|
|
6,543
|
|
|
|
-
|
|
|
|
1,301
|
|
|
|
1,301
|
|
|
|
-
|
|
Subtotal
|
|
$
|
108,485
|
|
|
$
|
98,612
|
|
|
$
|
-
|
|
|
$
|
91,430
|
|
|
$
|
83,217
|
|
|
$
|
-
|
|
With allocated allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
$
|
3,247
|
|
|
$
|
3,218
|
|
|
$
|
2,463
|
|
|
$
|
891
|
|
|
$
|
793
|
|
|
$
|
43
|
|
Commercial mortgage loans
|
|
|
27,495
|
|
|
|
27,445
|
|
|
|
1,036
|
|
|
|
21,733
|
|
|
|
21,635
|
|
|
|
1,738
|
|
Residential mortgage loans and equity lines
|
|
|
9,143
|
|
|
|
7,939
|
|
|
|
334
|
|
|
|
13,022
|
|
|
|
11,708
|
|
|
|
353
|
|
Subtotal
|
|
$
|
39,885
|
|
|
$
|
38,602
|
|
|
$
|
3,833
|
|
|
$
|
35,646
|
|
|
$
|
34,136
|
|
|
$
|
2,134
|
|
Total impaired loans
|
|
$
|
148,370
|
|
|
$
|
137,214
|
|
|
$
|
3,833
|
|
|
$
|
127,076
|
|
|
$
|
117,353
|
|
|
$
|
2,134
|
|
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 June 30, 2018, construction loans of $522.9 million were disbursed with pre-established interest reserves of $77.8 million compared to $545.0 million of such loans disbursed with pre-established interest reserves of $72.3 million at December 31, 2017. The balance for construction loans with interest reserves that have been extended was $92.3 million with pre-established interest reserves of $3.3 million at June 30, 2018, compared to $62.1 million with pre-established interest reserves of $2.0 million at December 31, 2017. Land loans of $11.6 million were disbursed with pre-established interest reserves of $304,000 at June 30, 2018, compared to $32.7 million of land loans disbursed with pre-established interest reserves of $1.3 million at December 31, 2017. The balance for land loans with interest reserves that have been extended was $5.5 million at June 30, 2018 with pre-established interest reserves of $124,000 compared to $6.9 million in land loans with pre-established interest reserves of $221,000 at December 31, 2017.
At June 30, 2018 and December 31, 2017, the Bank had no loans on non-accrual status with available interest reserves. At June 30, 2018, $8.0 million of non-accrual non-residential construction loans had been originated with pre-established interest reserves. At December 31, 2017, $8.2 million of non-accrual non-residential construction loans and $8.0 million of non-accrual land loans had been originated with pre-established interest reserves. While we typically expect loans with interest reserves to be repaid in full according to the original contractual terms, some loans require one or more extensions beyond the original maturity before full repayment. Typically, these extensions are required due to construction delays, delays in the sale or lease of property, or some combination of these two factors.
Loan Concentration
Most of the Company’s business activities are with customers located in the high-density Asian-populated areas of Southern and Northern California; New York City, New York; Dallas and Houston, Texas; Seattle, Washington; Boston, Massachusetts; Chicago, Illinois; Edison, New Jersey; Rockville, Maryland; Las Vegas, Nevada; and Hong Kong. The Company has no specific industry concentration, and generally its loans are collateralized with real property or other pledged collateral of the borrowers. The Company generally expects loans to be paid off from the operating profits of the borrowers, refinancing by another lender, or through sale by the borrowers of the collateral. There were no loan concentrations to multiple borrowers in similar activities that exceeded 10% of total loans as of June 30, 2018, or as of December 31, 2017.
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) total CRE loans represent 300% or more of the institution’s total risk-based capital and the institution’s CRE loan portfolio has increased 50% or more within the last thirty-six months. Total loans for construction, land development, and other land represented 33% of the Bank’s total risk-based capital as of June 30, 2018, and 41% as of December 31, 2017. Total CRE loans represented 281% of total risk-based capital as of June 30, 2018, and 293% as of December 31, 2017 and were below the Bank’s internal limit for CRE loans of 400% of total capital at both dates.
Allowance for
Credit
Losses
The Bank maintains the allowance for credit losses at a level that the Bank considers appropriate to absorb the estimated and known risks in the loan portfolio and off-balance sheet unfunded credit commitments. Allowance for credit losses is comprised of the allowance for loan losses and the reserve for off-balance sheet unfunded credit commitments. With this risk management objective, the Bank’s management has an established monitoring system that is designed to identify impaired and potential problem loans, and to permit periodic evaluation of impairment and the appropriate level of the allowance for credit losses in a timely manner.
In addition, the Bank’s Board of Directors has established a written credit policy that includes a credit review and control system that the Board of Directors believes should be effective in ensuring that the Bank maintains an appropriate allowance for credit losses. The Board of Directors provides oversight for the allowance evaluation process, including quarterly evaluations, and determines whether the allowance is appropriate to absorb losses in the credit portfolio. The determination of the amount of the allowance for credit losses and the provision for credit losses are based on management’s current judgment about the credit quality of the loan portfolio and take into consideration known relevant internal and external factors that affect collectability when determining the appropriate level for the allowance for credit losses. The nature of the process by which the Bank determines the appropriate allowance for credit losses requires the exercise of considerable judgment. Additions to the allowance for credit losses are made by charges to the provision for credit losses. While management utilizes its best judgment based on the information available, the ultimate appropriateness of the allowance is dependent upon a variety of factors beyond the Bank’s control, including the performance of the Bank’s loan portfolio, the economy, changes in interest rates, and the view of the regulatory authorities toward loan classifications. Identified credit exposures that are determined to be uncollectible are charged against the allowance for credit losses. Recoveries of previously charged off amounts, if any, are credited to the allowance for credit losses. A weakening of the economy or other factors that adversely affect asset quality could result in an increase in the number of delinquencies, bankruptcies, or defaults, and a higher level of non-performing assets, net charge-offs, and provision for credit losses in future periods.
The allowance for loan losses was $121.9 million and the allowance for off-balance sheet unfunded credit commitments was $3.1 million at June 30, 2018, which represented the amount believed by management to be appropriate to absorb credit losses inherent in the loan portfolio, including unfunded credit commitments. The $121.9 million allowance for loan losses at June 30, 2018, decreased $1.4 million, or 1.1%, from $123.3 million at December 31, 2017. The allowance for loan losses represented 0.91% of period-end gross loans, excluding loans held for sale, and 231.2% of non-performing loans at June 30, 2018. The comparable ratios were 0.96% of period-end gross loans, excluding loans held for sale, and 252.7% of non-performing loans at December 31, 2017.
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 June 30,
|
|
|
Six months ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(Dollars in thousands)
|
|
Allowance for loan losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
122,084
|
|
|
$
|
115,544
|
|
|
$
|
123,279
|
|
|
$
|
118,966
|
|
Reversal for credit losses
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,000
|
)
|
|
|
(2,500
|
)
|
Charge-offs :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
|
(488
|
)
|
|
|
(527
|
)
|
|
|
(507
|
)
|
|
|
(1,730
|
)
|
Real estate loans
|
|
|
(390
|
)
|
|
|
-
|
|
|
|
(390
|
)
|
|
|
(555
|
)
|
Total charge-offs
|
|
|
(878
|
)
|
|
|
(527
|
)
|
|
|
(897
|
)
|
|
|
(2,285
|
)
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
|
150
|
|
|
|
335
|
|
|
|
1,063
|
|
|
|
826
|
|
Construction loans
|
|
|
44
|
|
|
|
47
|
|
|
|
88
|
|
|
|
96
|
|
Real estate loans
|
|
|
499
|
|
|
|
410
|
|
|
|
1,366
|
|
|
|
706
|
|
Total recoveries
|
|
|
693
|
|
|
|
792
|
|
|
|
2,517
|
|
|
|
1,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
121,899
|
|
|
$
|
115,809
|
|
|
$
|
121,899
|
|
|
$
|
115,809
|
|
Reserve for off-balance sheet credit commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
4,588
|
|
|
$
|
3,424
|
|
|
$
|
4,588
|
|
|
$
|
3,224
|
|
Provision for credit losses
|
|
|
(1,500
|
)
|
|
|
1,089
|
|
|
|
(1,500
|
)
|
|
|
1,289
|
|
Balance at end of period
|
|
$
|
3,088
|
|
|
$
|
4,513
|
|
|
$
|
3,088
|
|
|
$
|
4,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average loans outstanding during the period
(1)
|
|
$
|
13,020,212
|
|
|
$
|
11,388,057
|
|
|
$
|
12,970,484
|
|
|
$
|
11,338,983
|
|
Total gross loans outstanding, at period-end
(1)
|
|
$
|
13,348,737
|
|
|
$
|
11,571,232
|
|
|
$
|
13,348,737
|
|
|
$
|
11,571,232
|
|
Total non-performing loans, at period-end
(2)
|
|
$
|
52,728
|
|
|
$
|
64,539
|
|
|
$
|
52,728
|
|
|
$
|
64,539
|
|
Ratio of net (recoveries)/charge-offs to average loans outstanding during the period
(1)
|
|
|
0.01
|
%
|
|
|
(0.01
|
%)
|
|
|
(0.03
|
%)
|
|
|
0.01
|
%
|
Provision for credit losses to average loans outstanding during the period
(1)
|
|
|
(0.05
|
%)
|
|
|
0.04
|
%
|
|
|
(0.07
|
%)
|
|
|
(0.02
|
%)
|
Allowance for credit losses to non-performing loans, at period-end
(2)
|
|
|
237.04
|
%
|
|
|
186.43
|
%
|
|
|
237.04
|
%
|
|
|
186.43
|
%
|
Allowance for credit losses to gross loans, at period-end
(1)
|
|
|
0.94
|
%
|
|
|
1.04
|
%
|
|
|
0.94
|
%
|
|
|
1.04
|
%
|
(1) Excluding loans held for sale.
|
(2) Excluding non-accrual loans held for sale.
|
Our allowance for loan losses consists of the following:
|
•
|
Specific allowance: For impaired loans, we provide specific allowances for loans that are not collateral dependent based on an evaluation of the present value of the expected future cash flows discounted at the loan’s effective interest rate and for loans that are collateral dependent based on the fair value of the underlying collateral determined by the most recent valuation information received, which may be adjusted based on factors such as changes in market conditions from the time of valuation. If the measure of the impaired loan is less than the recorded investment in the loan, the deficiency will be charged off against the allowance for loan losses or, alternatively, a specific allocation will be established.
|
|
•
|
General allowance: The unclassified portfolio is segmented on a group basis. Segmentation is determined by loan type and common risk characteristics. The non-impaired loans are grouped into 19 segments: two commercial segments, ten commercial real estate segments, one residential construction segment, one non-residential construction segment, one SBA segment, one installment loans segment, one residential mortgage segment, one equity lines of credit segment, and one overdrafts segment. The allowance is provided for each segmented group based on the group’s historical loan loss experience aggregated based on loan risk classifications which take into account the current financial condition of the borrowers and guarantors, the prevailing value of the underlying collateral if collateral dependent, charge-off history, management’s knowledge of the portfolio, general economic conditions, environmental factors including the trends in delinquency and non-accrual, and other significant factors, such as the national and local economy, volume and composition of the portfolio, strength of management and loan staff, underwriting standards, and concentration of credit. In addition, management review reports on past-due loans to ensure appropriate classification.
|
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 average gross loans as of the dates indicated:
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
Percentage of
|
|
|
|
|
|
|
Percentage of
|
|
|
|
|
|
|
|
Loans in Each
|
|
|
|
|
|
|
Loans in Each
|
|
|
|
|
|
|
|
Category
|
|
|
|
|
|
|
Category
|
|
|
|
|
|
|
|
to Average
|
|
|
|
|
|
|
to Average
|
|
|
|
Amount
|
|
|
Gross Loans
|
|
|
Amount
|
|
|
Gross Loans
|
|
|
|
(Dollars in thousands)
|
|
Type of Loan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
$
|
55,179
|
|
|
|
18.6
|
%
|
|
$
|
49,796
|
|
|
|
19.1
|
%
|
Residential mortgage loans
(1)
|
|
|
12,062
|
|
|
|
26.0
|
|
|
|
11,013
|
|
|
|
24.5
|
|
Commercial mortgage loans
|
|
|
33,976
|
|
|
|
50.6
|
|
|
|
37,610
|
|
|
|
51.2
|
|
Real estate construction loans
|
|
|
20,663
|
|
|
|
4.8
|
|
|
|
24,838
|
|
|
|
5.2
|
|
Installment and other loans
|
|
|
19
|
|
|
|
0.0
|
|
|
|
22
|
|
|
|
0.0
|
|
Total
|
|
$
|
121,899
|
|
|
|
100
|
%
|
|
$
|
123,279
|
|
|
|
100
|
%
|
(1) Residential mortgage loans includes equity lines.
|
The allowance allocated to commercial loans increased $5.4 million, or 10.8%, to $55.2 million at June 30, 2018, from $49.8 million at December 31, 2017. The increase is a result of the continued trade instability and pending tariffs between the U.S. and China and an increase in non-accrual and past due commercial loans in the first and second quarter of 2018.
The allowance allocated for residential mortgage loans increased by $1.1 million, or 9.5%, to $12.1 million as of June 30, 2018, from $11.0 million at December 31, 2017 primarily due to the increase in volume.
The allowance allocated to commercial mortgage loans decreased $3.6 million, or 9.7%, to $34.0 million at June 30, 2018, from $37.6 million at December 31, 2017 as a result of the $59.9 million decrease in substandard loans and net recoveries in the first half of 2018.
The allowance allocated to real estate construction loans decreased $4.1 million, or 16.8%, to $20.7 million at June 30, 2018 from $24.8 million at December 31, 2017. The decrease is due primarily to the decrease in loans outstanding during the first half of 2018.
Deposits
Total deposits were $13.1 billion at June 30, 2018, an increase of $415 million, or 3.3%, from $12.7 billion at December 31, 2017. The following table displays the deposit mix as of the dates indicated:
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
|
|
Amount
|
|
|
Percentage
|
|
|
Amount
|
|
|
Percentage
|
|
|
|
(Dollars in thousands)
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing demand deposits
|
|
$
|
2,835,314
|
|
|
|
21.6
|
%
|
|
$
|
2,783,127
|
|
|
|
21.9
|
%
|
Interest bearing demand deposits
|
|
|
1,381,617
|
|
|
|
10.6
|
|
|
|
1,410,519
|
|
|
|
11.1
|
|
Money market deposits
|
|
|
2,263,991
|
|
|
|
17.3
|
|
|
|
2,248,271
|
|
|
|
17.7
|
|
Savings deposits
|
|
|
790,125
|
|
|
|
6.0
|
|
|
|
857,199
|
|
|
|
6.8
|
|
Time deposits
|
|
|
5,833,499
|
|
|
|
44.5
|
|
|
|
5,390,777
|
|
|
|
42.5
|
|
Total deposits
|
|
$
|
13,104,546
|
|
|
|
100.0
|
%
|
|
$
|
12,689,893
|
|
|
|
100.0
|
%
|
The following table shows the maturity distribution of time deposits as of June 30, 2018:
|
|
At June 30, 2018
|
|
|
|
Time Deposits -
under $100,000
|
|
|
Time Deposits -$100,000
and over
|
|
|
Total Time Deposits
|
|
|
|
(In thousands)
|
|
Less than three months
|
|
$
|
224,920
|
|
|
$
|
1,361,845
|
|
|
$
|
1,586,765
|
|
Three to six months
|
|
|
172,024
|
|
|
|
788,904
|
|
|
|
960,928
|
|
Six to twelve months
|
|
|
800,205
|
|
|
|
1,522,724
|
|
|
|
2,322,929
|
|
Over one year
|
|
|
327,145
|
|
|
|
635,732
|
|
|
|
962,877
|
|
Total
|
|
$
|
1,524,294
|
|
|
$
|
4,309,205
|
|
|
$
|
5,833,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of total deposits
|
|
|
11.6
|
%
|
|
|
32.9
|
%
|
|
|
44.5
|
%
|
Borrowings
Borrowings include federal funds purchased, securities sold under agreements to repurchase, funds obtained as advances from the FHLB of San Francisco, and borrowings from other financial institutions.
Securities Sold Under Agreements to Repurchase.
Securities sold under agreements to repurchase were $50 million with a weighted average rate of 2.98% at June 30, 2018, compared to $100 million with a weighted average rate of 2.86% at December 31, 2017. Final maturity for the fixed rate non-callable securities sold under agreements to repurchase was $50.0 million in July 2018.
These transactions are accounted for as collateralized financing transactions and recorded at the amounts at which the securities were sold. The Company may have to provide additional collateral for the repurchase agreements, as necessary. The underlying collateral pledged for the repurchase agreements consists of U.S. Treasury securities and mortgage-backed securities with a fair value of $55.4 million as of June 30, 2018, and $108.4 million as of December 31, 2017.
Borrowing from the FHLB.
As of June 30, 2018, over-night borrowings from the FHLB were $160 million at a rate of 2.08% compared to $325 million at a rate of 1.41% as of December 31, 2017. As of June 30, 2018, the advances from the FHLB were $320 million at a rate of 1.78% compared to $105 million at a rate of 1.41% as of December 31, 2017. As of June 30, 2018, FHLB advances of $245 million will mature in July 2018, $5 million in October 2018, $50 million in December 2019, and $20 million in May 2023.
Other Borrowing.
Pursuant to the Stock Purchase Agreement with Bank SinoPac Co. Ltd, $35.2 million of the purchase price was held back at a floating rate of three-month LIBOR rate plus 150 basis points and 50%, 30%, and 20% will be disbursed annually over three years on the anniversary dates, respectively. As of June 30, 2018, the outstanding balance was $36.0 million with a rate of 2.8% compared to $35.2 million at December 31, 2017.
Long-term Debt
.
On October 12, 2017, the Bank entered into a term loan agreement of $75.0 million with U.S. Bank. The loan has a floating rate of one-month LIBOR plus 175 basis points. As of June 30, 2018, the term loan has an interest rate of 3.750% compared to 3.125% at December 31, 2017. The principal amount of the long-term debt from U.S. Bank is due and payable in consecutive quarterly installments of $4.7 million each on the last day of each calendar quarter commencing December 31, 2018, with the final installment due and payable on October 12, 2020. We used the U.S. Bank loan proceeds to fund a portion of our acquisition of SinoPac Bancorp.
At June 30, 2018, Junior Subordinated Notes totaled $119.1 million with a weighted average interest rate of 4.51%, compared to $119.1 million with a weighted average rate of 3.78% at December 31, 2017. The Junior Subordinated Notes have a stated maturity term of 30 years. As of June 30, 2018, and December 31, 2017, the Company’s assets exceeded the $15 billion threshold and, as a result, the Junior Subordinated Notes no longer qualify as Tier 1 capital for regulatory reporting purposes. The trusts are not consolidated with the Company in accordance with an accounting pronouncement that took effect in December 2003.
Off-Balance-Sheet Arrangements and Contractual Obligations
The following table summarizes the Company’s contractual obligations to make future payments as of June 30, 2018. Payments for deposits and borrowings do not include interest. Payments related to leases are based on actual payments specified in the underlying contracts.
|
|
Payment Due by Period
|
|
|
|
|
|
|
|
More than
|
|
|
3 years or
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 year but
|
|
|
more but
|
|
|
|
|
|
|
|
|
|
|
|
1 year
|
|
|
less than
|
|
|
less than
|
|
|
5 years
|
|
|
|
|
|
|
|
or less
|
|
|
3 years
|
|
|
5 years
|
|
|
or more
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits with stated maturity dates
|
|
$
|
4,870,623
|
|
|
$
|
924,908
|
|
|
$
|
37,954
|
|
|
$
|
14
|
|
|
$
|
5,833,499
|
|
Non-callable securities sold under agreements to repurchase
|
|
|
50,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
50,000
|
|
Advances from the Federal Home Loan Bank
|
|
|
410,000
|
|
|
|
50,000
|
|
|
|
20,000
|
|
|
|
-
|
|
|
|
480,000
|
|
Other borrowings
|
|
|
18,007
|
|
|
|
18,008
|
|
|
|
-
|
|
|
|
17,382
|
|
|
|
53,397
|
|
Long-term debt
|
|
|
4,688
|
|
|
|
70,312
|
|
|
|
-
|
|
|
|
119,136
|
|
|
|
194,136
|
|
Operating leases
|
|
|
10,094
|
|
|
|
13,617
|
|
|
|
9,394
|
|
|
|
6,792
|
|
|
|
39,897
|
|
Total contractual obligations and other commitments
|
|
$
|
5,363,412
|
|
|
$
|
1,076,845
|
|
|
$
|
67,348
|
|
|
$
|
143,324
|
|
|
$
|
6,650,929
|
|
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 condensed consolidated balance sheets. We enter into these transactions to meet the financing needs of our customers. These transactions include commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the condensed consolidated balance sheets.
Loan Commitments
. We enter into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Substantially all of our commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of loan funding. We minimize our exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures. Management assesses the credit risk associated with certain commitments to extend credit in determining the level of the allowance for credit losses.
Standby Letters of Credit
. Standby letters of credit are written conditional commitments issued by us to secure the obligations of a customer to a third party. In the event the customer does not perform in accordance with the terms of an agreement with the third party, we would be required to fund the commitment. The maximum potential amount of future payments we could be required to make is represented by the contractual amount of the commitment. If the commitment is funded, we would be entitled to seek reimbursement from the customer. Our policies generally require that standby letter of credit arrangements contain security and debt covenants similar to those contained in loan agreements.
Capital Resources
Total equity was $2.1 billion as of June 30, 2018, an increase of $91.5 million, from $1.97 billion as of December 31, 2017, primarily due to net income of $137.5 million offset by common stock cash dividends of $39.0 million and decreases of other comprehensive income of $20.4 million due in part to the adoption of new accounting pronouncements in the first quarter of 2018.
The following table summarizes changes in total equity for the six months ended June 30, 2018:
|
|
Six months ended
|
|
(In thousands)
|
|
June 30, 2018
|
|
Net income
|
|
$
|
137,480
|
|
Stock issued to directors
|
|
|
650
|
|
Stock options exercised and RSUs distributed
|
|
|
838
|
|
Proceeds from shares issued through the Dividend Reinvestment Plan
|
|
|
1,325
|
|
Shares withheld related to net share settlement of RSUs
|
|
|
(1,865
|
)
|
Share-based compensation
|
|
|
3,404
|
|
Other comprehensive income
|
|
|
(20,408
|
)
|
Retained earnings adjustments upon initial adoption of new pronouncements
(1)
|
|
|
9,073
|
|
Cash dividends paid to common stockholders
|
|
|
(38,966
|
)
|
Net increase in total equity
|
|
$
|
91,531
|
|
(1)
These adjustments are a result of the adoption of ASU 2016-01 and 2018-2, effective as of January 1, 2018.
|
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 Bancorp’s and the Bank’s regulatory capital continued to exceed the regulatory minimum requirements under Basel III rules that became effective January 1, 2015, with transitional provisions as of June 30, 2018. In addition, the capital ratios of the Bank place it in the “well capitalized” category, which is defined as institutions with a common equity tier 1 capital ratio equal to or greater than 6.5%, a Tier 1 risk-based capital ratio equal to or greater than 8%, a total risk-based capital ratio equal to or greater than 10%, and a Tier 1 leverage capital ratio equal to or greater than 5%.
The following table presents Bancorp’s and the Bank’s capital and leverage ratios as of June 30, 2018, and December 31, 2017:
|
|
Cathay General Bancorp
|
|
|
Cathay Bank
|
|
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
(Dollars in thousands)
|
|
Balance
|
|
|
%
|
|
|
Balance
|
|
|
%
|
|
|
Balance
|
|
|
%
|
|
|
Balance
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common equity Tier 1 capital (to risk-weighted assets)
|
|
$
|
1,683,777
|
|
|
|
12.59
|
|
|
$
|
1,572,025
|
|
|
|
12.19
|
|
|
$
|
1,817,923
|
|
|
|
13.61
|
|
|
$
|
1,734,719
|
|
|
|
13.46
|
|
Common equity Tier 1 capital minimum requirement
|
|
|
602,059
|
|
|
|
4.50
|
|
|
|
580,552
|
|
|
|
4.50
|
|
|
|
601,119
|
|
|
|
4.50
|
|
|
|
579,921
|
|
|
|
4.50
|
|
Excess
|
|
$
|
1,081,718
|
|
|
|
8.09
|
|
|
$
|
991,473
|
|
|
|
7.69
|
|
|
$
|
1,216,804
|
|
|
|
9.11
|
|
|
$
|
1,154,798
|
|
|
|
8.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 capital (to risk-weighted assets)
|
|
$
|
1,683,777
|
|
|
|
12.59
|
|
|
$
|
1,572,025
|
|
|
|
12.19
|
|
|
$
|
1,817,923
|
|
|
|
13.61
|
|
|
$
|
1,734,719
|
|
|
|
13.46
|
|
Tier 1 capital minimum requirement
|
|
|
802,745
|
|
|
|
6.00
|
|
|
|
774,070
|
|
|
|
6.00
|
|
|
|
801,492
|
|
|
|
6.00
|
|
|
|
773,229
|
|
|
|
6.00
|
|
Excess
|
|
$
|
881,032
|
|
|
|
6.59
|
|
|
$
|
797,955
|
|
|
|
6.19
|
|
|
$
|
1,016,431
|
|
|
|
7.61
|
|
|
$
|
961,490
|
|
|
|
7.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk-weighted assets)
|
|
$
|
1,924,264
|
|
|
|
14.38
|
|
|
$
|
1,820,860
|
|
|
|
14.11
|
|
|
$
|
1,942,910
|
|
|
|
14.54
|
|
|
$
|
1,862,806
|
|
|
|
14.45
|
|
Total capital minimum requirement
|
|
|
1,070,327
|
|
|
|
8.00
|
|
|
|
1,032,093
|
|
|
|
8.00
|
|
|
|
1,068,656
|
|
|
|
8.00
|
|
|
|
1,030,971
|
|
|
|
8.00
|
|
Excess
|
|
$
|
853,937
|
|
|
|
6.38
|
|
|
$
|
788,767
|
|
|
|
6.11
|
|
|
$
|
874,254
|
|
|
|
6.54
|
|
|
$
|
831,835
|
|
|
|
6.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 capital (to average assets) – Leverage ratio
|
|
$
|
1,683,777
|
|
|
|
10.96
|
|
|
$
|
1,572,025
|
|
|
|
10.35
|
|
|
$
|
1,817,923
|
|
|
|
11.85
|
|
|
$
|
1,734,719
|
|
|
|
11.82
|
|
Minimum leverage requirement
|
|
|
614,706
|
|
|
|
4.00
|
|
|
|
607,349
|
|
|
|
4.00
|
|
|
|
613,831
|
|
|
|
4.00
|
|
|
|
586,959
|
|
|
|
4.00
|
|
Excess
|
|
$
|
1,069,071
|
|
|
|
6.96
|
|
|
$
|
964,676
|
|
|
|
6.35
|
|
|
$
|
1,204,092
|
|
|
|
7.85
|
|
|
$
|
1,147,760
|
|
|
|
7.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-weighted assets
|
|
$
|
13,379,087
|
|
|
|
|
|
|
$
|
12,901,161
|
|
|
|
|
|
|
$
|
13,358,204
|
|
|
|
|
|
|
$
|
12,887,142
|
|
|
|
|
|
Total average assets
(1)
|
|
$
|
15,367,647
|
|
|
|
|
|
|
$
|
15,183,720
|
|
|
|
|
|
|
$
|
15,345,772
|
|
|
|
|
|
|
$
|
14,673,981
|
|
|
|
|
|
(1)
|
The quarterly total average assets reflect all debt securities at amortized cost, equity securities with readily determinable fair values at the lower of cost or fair value, and equity securities without readily determinable fair values at historical cost.
|
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. The terms of our Junior Subordinated Notes also limit our ability to pay dividends. We increased the common stock dividend from $0.21 per share in the fourth quarter of 2016, to $0.24 per share in the fourth quarter of 2017.
The Company declared a cash dividend of $0.24 per share on 81,240,446 shares outstanding on June 1, 2018, for distribution to holders of our common stock on June 11, 2018, and $0.24 per share on 81,126,888 shares outstanding on March 1, 2018, for distribution to holders of our common stock on March 12, 2018. The Company paid total cash dividends of $39.0 million during the first six months of 2018.
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 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 the three-month LIBOR at a weighted average rate of 2.33%. As of June 30, 2018, the notional amount of cash flow interest rate swaps was $119.1 million and their unrealized gain of $1.2 million, net of taxes, was included in other comprehensive income compared to unrealized loss of $2.4 million at June 30, 2017. The amount of periodic net settlement of interest rate swaps included in interest expense was $123,000 for the three months ended June 30, 2018, compared to $439,000 for the same quarter a year ago. For the six months ended June 30, 2018, the periodic net settlement of interest rate swaps included in interest expense was $396,000 compared to $0.9 million for the same period in 2017. As of June 30, 2018, and 2017, the ineffective portion of these interest rates swaps was not significant.
As of June 30, 2018, the Bank’s outstanding interest rate swap contracts had a notional amount of $631.4 million for various terms from two to ten years. The Bank entered into these interest rate swap contracts that are matched to individual fixed-rate commercial real estate loans in the Bank’s loan portfolio. These contracts have been designated as hedging instruments to hedge the risk of changes in the fair value of the underlying commercial real estate loans due to changes in interest rates. The swap contracts are structured so that the notional amounts reduce over time to match the contractual amortization of the underlying loan and allow prepayments with the same pre-payment penalty amounts as the related loan. The Bank pays a weighted average fixed rate of 4.7% and receives a variable rate of the one-month LIBOR rate plus a weighted average spread of 271 basis points, or at a weighted average rate of 4.7%. As of June 30, 2018, and June 30, 2017, the notional amount of fair value interest rate swaps was $631.4 million and $446.1 million with net unrealized gains of $13.0 million and $1.0 million, respectively, included in other non-interest income. The amount of periodic net settlement of interest rate swaps reducing interest income was zero for the three months ended June 30, 2018, compared to $651,000 for the same quarter a year ago. The amount of periodic net settlement of interest rate swaps reducing interest income was $229,000 for the six months ended June 30, 2018, compared to $1.4 million for the same period a year ago. As of June 30, 2018, and 2017, the ineffective portion of these interest rate swaps was not significant.
Interest rate swap contracts involve the risk of dealing with institutional derivative counterparties and their ability to meet contractual terms. Institutional counterparties must have a strong credit profile and be approved by the Company’s Board of Directors. The Company’s credit exposure on interest rate swaps is limited to the net favorable value and interest payments of all swaps by each counterparty. Credit exposure may be reduced by the amount of collateral pledged by the counterparty. 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 $361,000 as of June 30, 2018 and $4.5 million as of December 31, 2017.
The Company enters into foreign exchange forward contracts with various counterparties to mitigate the risk of fluctuations in foreign currency exchange rates for foreign exchange certificates of deposit or foreign exchange contracts entered into with our clients. These contracts are not designated as hedging instruments and are recorded at fair value in our Consolidated Balance Sheet. Changes in the fair value of these contracts as well as the related foreign exchange certificates of deposit and foreign exchange contracts are recognized immediately in net income as a component of non-interest income. Period end gross positive fair values are recorded in other assets and gross negative fair values are recorded in other liabilities. At June 30, 2018, the notional amount of option contracts totaled $1.7 million with a net negative fair value of $9,000. At June 30, 2018, spot, forward, and swap contracts in the total notional amount of $62.7 million had a positive fair value of $389,000. Spot, forward, and swap contracts in the total notional amount of $92.7 million had a negative fair value of $2.1 million at June 30, 2018. At December 31, 2017, the notional amount of option contracts totaled $1.0 million with a net negative fair value of $9,000. At December 31, 2017, spot, forward, and swap contracts in the total notional amount of $108.5 million had a positive fair value of $1.8 million. Spot, forward, and swap contracts in the total notional amount of $32.1 million had a negative fair value of $453,000 at December 31, 2017.
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. As of June 30, 2018, our average monthly liquidity ratio (defined as net cash plus short-term and marketable securities to net deposits and short-term liabilities) was 12.6% compared to 12.1% as of December 31, 2017.
The Bank is a shareholder of the FHLB, which enables the Bank to have access to lower-cost FHLB financing when necessary. At June 30, 2018, the Bank had an approved credit line with the FHLB of San Francisco totaling $4.0 billion. Total advances from the FHLB of San Francisco were $480.0 million and standby letter of credits issued by FHLB on the Company’s behalf were $161.2 million as of June 30, 2018. These borrowings bear fixed rates and are secured by loans. See Note 9 to the Consolidated Financial Statements. At June 30, 2018, the Bank pledged $19.9 million of its commercial loans to the Federal Reserve Bank’s Discount Window under the Borrower-in-Custody program. The Bank had borrowing capacity of $16.5 million from the Federal Reserve Bank Discount Window at June 30, 2018.
Liquidity can also be provided through the sale of liquid assets, which consist of federal funds sold, securities purchased under agreements to resell, and securities available-for-sale. At June 30, 2018, investment securities totaled $1.5 billion, with $158.1 million pledged as collateral for borrowings and other commitments. The remaining $1.3 billion was available as additional liquidity or to be pledged as collateral for additional borrowings.
Approximately 83% of our time deposits mature within one year or less as of June 30, 2018. Management anticipates that there may be some outflow of these deposits upon maturity due to the keen competition in the Bank’s marketplace. However, based on our historical runoff experience, we expect the outflow will not be significant and can be replenished through our normal growth in deposits. Management believes all the above-mentioned sources will provide adequate liquidity during the next twelve months for the Bank to meet its 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 $72.4 million during the first six months of 2018 and $208.2 million during 2017.