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
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 inthe 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 the Condensed Consolidated Financial Statements. Actual results may differ from these estimates under different assumptions or conditions.
Critical accounting policies involve significant judgments, assumptions and uncertainties and are essential to understanding the Company's results of operations and financial condition. 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, among other things, 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 endedDecember 31, 2019 .
Recent Developments: Impact of and Response to COVID-19 Pandemic
The ongoing COVID-19 pandemic has caused significant disruption inthe United States and international economies and financial markets. The spread of COVID-19 inthe United States has caused illness, quarantines, cancellation of events and travel, business and school shutdowns, reduction in commercial activity and financial transactions, supply chain interruptions, increased unemployment, and overall economic and financial market instability. Many states, includingCalifornia ,New York ,Washington ,Illinois ,Texas ,Massachusetts ,Nevada and other states in which we have significant operations, have declared states of emergency.
The onset of the COVID-19 pandemic has significantly heightened the level of challenges, risks and uncertainties facing our Company and its operations, including the following:
? Market interest rates have declined significantly and these reductions,
especially if prolonged, could adversely affect our net interest income, net
interest margin and earnings.
? We anticipate a potential slowdown in demand for our products and services,
including the demand for traditional loans, although we believe the decline
may be partially offset due to the new volume of PPP loans under the CARES Act
and other governmental programs established in response to the pandemic.
? The inability of our customers to meet their loan commitments and could result
in increased risk of delinquencies, defaults, foreclosures, declining
collateral values and ability of our borrowers to repay their loans resulting
in losses to our Company.
? The COVID-19 pandemic restrictions have created significant volatility and
disruption in the financial markets, and these conditions may require us to
recognize an elevated level of other than temporary impairments on investment
securities in our portfolio as issues of these securities are negatively
impacted by the economic slowdown. Declines in fair value of investment
securities in our portfolio could also reduce the unrealized gains reported as
part of our consolidated comprehensive income (loss). 40
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Additional potential impacts arising from, and our anticipated responses to, the COVID-19 pandemic are set forth below:
Financial position and results of operations
Our financial position and results of operations as of and for the three months endedMarch 31, 2020 have been significantly impacted by the COVID-19 pandemic. The economic environment and uncertainty related to the pandemic contributed to a$25.0 million provision for credit losses recognized during the three months endedMarch 31, 2020 . While we have not yet experienced significant write-offs related to the COVID-19 pandemic as ofMarch 31, 2020 , the continued uncertainty regarding the severity and duration of the pandemic and related economic effects will continue to affect our estimate of our allowance for credit losses and resulting provision for credit losses. To the extent the impact of the pandemic is prolonged and economic conditions worsen or persist longer than forecast, such estimates may be insufficient and change significantly in the future. Our interest income may also be negatively impacted in future periods as we continue to work with our affected borrowers to defer payments, interest, and fees. Additionally, net interest margin may be reduced generally as a result of the low rate environment. These uncertainties and the economic environment will continue to affect earnings, slow growth, and may result in deterioration of asset quality in our loan and investment portfolios.
The below table details our exposure to borrowers in industries generally considered to be the most impacted by the COVID-19 pandemic:
March 31, 2020 Percent of Total Industry (1) Loan Balance Loan Portfolio ($ in millions) Restaurants$ 171.7 1 % Hotels/motels 297.0 2 Retail businesses/properties 1,757.9 11$ 2,226.6 14 %
(1)- Balances capture credit exposures in the business segments that manage the
significant majority of industry relationships. Balances consist of commercial
real estate secured loans where the collateral consist of restaurants, hotels/motels or have a retail dependency. While the Company has not experienced disproportionate impacts among its business segments as ofMarch 31, 2020 , borrowers in the industries detailed in the table above (and potentially other industries) could have greater sensitivity to the economic downturn resulting from COVID-19 with potentially longer recovery periods than other business lines. 41
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Table of Contents Loan and lease modifications We began receiving requests from our borrowers for loan and lease deferrals in March. Modifications include the deferral of principal payments or the deferral of principal and interest payments for terms generally 90 - 180 days. Requests are evaluated individually, and approved modifications are based on the unique circumstances of each borrower. We are committed to working with our clients to allow time to work through the challenges of this pandemic. At this time, it is uncertain what future impact loan and lease modifications related to COVID-19 difficulties will have on our financial condition, results of operations and reserve for loan and lease losses. As ofMay 1, 2020 , COVID-19 modification applications approved include 1,094, or$477.7 million , in residential mortgage loans, with a weighted average loan to value of 53.2% that represented 11.5% of the total mortgage portfolio and 46, or$123.2 million , in commercial loan balances that represented 4.1% of total commercial loans. The CARES Act permits financial institutions to suspend requirements under GAAP for loan modifications to borrowers affected by COVID-19 and is intended to provide interpretive guidance as to conditions that would constitute a short-term modification that would not meet the definition of a TDR. This includes the following (i) the loan modification is made betweenMarch 1, 2020 and the earlier ofDecember 31, 2020 or 60 days after the end of the coronavirus emergency declaration and (ii) the applicable loan was not more than 30 days past due as ofDecember 31, 2019 . The Company is applying this guidance to qualifying loan modifications and anticipates that it will continue to experience an increase in short-term modifications.
The following table shows COVID-19 CRE loan and lease modifications by property
type approved as of
# of Loans Total Deferrals Balance as of Category Weighted Property Type Approved March 31, 2020 Balance Avg LTV ($ in millions) Hotel/Motel 23 $ 190.8$ 297.0 48.5% Retail 92 381.4 1,757.9 52.4% Residential 219 142.4 1,929.8 51.8% Warehouse 24 50.2 935.4 50.1% Office & Comm'l Condo 94 109.9 1,375.5 51.3% Theater 3 24.5 24.5 73.6% Special Use & HK Portfolio 25 44.5 397.8 55.8% Industrial and Multi-Use 11 24.2 410.5 50.2% Restaurant 13 10.2 171.7 45.1% Other - - 122.5 - Total CRE 504 $ 978.1$ 7,422.6 51.8%
Paycheck Protection Program (PPP)
As part of the CARES Act, theSmall Business Administration (SBA) has been authorized to guarantee loans under the PPP throughJune 30, 2020 for small businesses who meet the necessary eligibility requirements in order to keep their workers on the payroll. One of the notable features of the PPP is that borrowers are eligible for loan forgiveness if borrowers maintain their staff and payroll and if loan amounts are used to cover payroll, mortgage interest, rents and utilities payments. These loans will have a two-year term and will earn interest at a rate of 1%. We began accepting applications onApril 3, 2020 . As ofMay 1, 2020 , we had processed 964 PPP loans totaling$242.7 million . PPP loans are guaranteed by the SBA and therefore we believe PPP loans generally do not represent a material credit risk. 42
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Table of Contents Capital and liquidity While we believe we have sufficient capital and do not anticipate any need for additional liquidity as ofMarch 31, 2020 , in response to the uncertainty regarding the severity and duration of the COVID-19 pandemic, we have taken additional actions to ensure the strength of our liquidity position. These actions include suspending our share repurchase program at this time to moderate the impact of COVID-19 by maintaining strong capital levels and liquidity to support customers and other stakeholders. In addition, we are also in a position to pledge additional collateral to increase our borrowing capacity with the FRB, if necessary. Our Board of Directors also will continue to evaluate the impacts of the COVID-19 pandemic and the appropriateness of declaring future dividends and the rate of any future dividends, in light of our capital and liquidity needs. Asset impairment At this time, as ofMarch 31, 2020 , we do not believe there exists any impairment to our goodwill and intangible assets, long-lived assets, right of use assets, or available-for-sale investment securities due to the COVID-19 pandemic. It is uncertain whether prolonged effects of the COVID-19 pandemic will result in future impairment charges related to any of the aforementioned assets. Continued and sustained declines in Bancorp's stock price and/or other credit related impacts could give rise to triggering events in the future that could result in a write-down in the value of our goodwill, which could have a material adverse impact on our results of operations.
Our processes, controls and business continuity plan
As a financial institution, we are considered an essential business and therefore continue to operate on a modified basis to comply with governmental restrictions and public health authority guidelines. Our bank lobbies are closed to the general public, although business is still being transacted through drive-up facilities, online, telephone or by appointment. Although we believe these arrangements will remain in effect until the restrictions are lifted by governmental authorities, we continue to operate and maintain our customer relationships. The health and safety of our employees and customers is a major concern to our management and every effort is being made to have employees work from home or, if working from one of our locations is required, to maintain appropriate social distancing and observe other health precautions. Through this time of disruption, we have remained open for business supporting our customers while implementing our business continuity plan to mitigate the risks of the spread of COVID-19 to our employees and customers. We have also taken such other actions as social distancing, restrictions on in-person meetings and conferences, Company travel restrictions and increased sanitary protocols. We believe these actions offer the best protection for our employees and customers, an enhance our ability to continue providing our banking services. We believe that we are positioned to continue these business continuity measures for the foreseeable future, however, no assurances can be provided as these circumstances may change depending on the duration of the pandemic. 43
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Table of Contents Highlights
? Total loans increased for the quarter by
billion from
? Total deposits increased for the quarter by
billion from$14.7 billion in 2019.
Quarterly Statement of Operations Review
Net Income Net income for the quarter endedMarch 31, 2020 , was$46.9 million , a decrease of$19.8 million , or 29.7%, compared to net income of$66.7 million for the same quarter a year ago. Diluted earnings per share for the quarter endedMarch 31, 2020 was$0.59 compared to$0.83 for the same quarter a year ago. Return on average stockholders' equity was 8.12% and return on average assets was 1.05% for the quarter endedMarch 31, 2020 , compared to a return on average stockholders' equity of 12.57% and a return on average assets of 1.61% for the same quarter a year ago. Financial Performance Three months ended March 31, 2020 March 31, 2019 Net income (in millions) $ 46.9 $ 66.7 Basic earnings per common share $ 0.59 $
0.83
Diluted earnings per common share $ 0.59 $
0.83
Return on average assets 1.05 % 1.61 % Return on average total stockholders' equity 8.12 % 12.57 % Efficiency ratio 44.60 % 45.42 %
Net Interest Income Before Provision for Credit Losses
Net interest income before provision for credit losses decreased$3.0 million , or 2.1%, to$140.3 million during the first quarter of 2020, compared to$143.3 million during the same quarter a year ago. The decrease was due primarily to an increase in interest expense from time deposits, and a decrease in interest income from loans and securities.
The net interest margin was 3.34% for the first quarter of 2020 compared to 3.70% for the first quarter of 2019 and 3.34% for the fourth quarter of 2019.
For the first quarter of 2020, the yield on average interest-earning assets was 4.44%, the cost of funds on average interest-bearing liabilities was 1.49%, and the cost of interest-bearing deposits was 1.44%. In comparison, for the first quarter of 2019, the yield on average interest-earning assets was 4.85%, the cost of funds on average interest-bearing liabilities was 1.55%, and the cost of interest-bearing deposits was 1.46%. The decrease in the yield on average interest-earning assets resulted mainly from lower rates on loans. The net interest spread, defined as the difference between the yield on average interest-earning assets and the cost of funds on average interest-bearing liabilities, was 2.95% for the quarter endedMarch 31, 2020 , compared to 3.30% for the same quarter a year ago. 44
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The following table sets forth information concerning average interest-earning assets, average interest-bearing liabilities, and the average yields and rates paid on those assets and liabilities for the three months endedMarch 31, 2020 , and 2019. Average outstanding amounts included in the table are daily averages. Interest-Earning Assets and
Interest-Bearing Liabilities
Three months ended March 31, 2020 2019 Interest Average Interest Average Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate (1)(2) Balance Expense Rate (1)(2) (Dollars in thousands) Interest-earning assets: Total loans and leases (1)$ 15,213,440 $ 177,870 4.70 %$ 14,088,488 $ 178,277 5.13 % Investment securities 1,379,365 7,610 2.22 1,270,053 7,290 2.33 Federal Home Loan Bank stock 17,268 305 7.09 17,304 304 7.13 Interest-bearing deposits 311,024 951 1.23 312,779 1,890 2.45 Total interest-earning assets 16,921,097 186,736 4.44 15,688,624 187,761 4.85 Non-interest earning assets: Cash and due from banks 175,827 211,792 Other non-earning assets 1,030,634 1,035,208 Total non-interest earning assets 1,206,461 1,247,000 Less: Allowance for loan losses (123,886 ) (122,907 ) Deferred loan fees (631 ) (1,468 ) Total assets$ 18,003,041 $ 16,811,249 Interest-bearing liabilities: Interest-bearing demand accounts$ 1,388,597 $ 709 0.21 %$ 1,309,109 $ 609 0.19 % Money market accounts 2,437,997 6,959 1.15 1,915,030 4,428 0.94 Savings accounts 733,372 323 0.18 717,393 340 0.19 Time deposits 7,495,619 35,155 1.89 7,064,254 34,123 1.96
Total
interest-bearing
deposits 12,055,585 43,146 1.44 11,005,786 39,500 1.46 Other borrowings 392,029 1,839 1.89 462,043 2,813 2.47 Long-term debt 119,136 1,440 4.86 183,115 2,132 4.72 Total interest-bearing liabilities 12,566,750 46,425 1.49 11,650,944 44,445 1.55 Non-interest bearing liabilities: Demand deposits 2,863,889 2,775,545 Other liabilities 252,119 233,568 Total equity 2,320,283 2,151,192 Total liabilities and equity$ 18,003,041 $ 16,811,249 Net interest spread 2.95 % 3.31 % Net interest income$ 140,311 $ 143,316 Net interest margin 3.34 % 3.70 %
(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.
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The following table summarizes the changes in interest income and interest
expense attributable to changes in volume and changes in interest rates for the
three months ended
Taxable-Equivalent Net Interest Income - Changes Due to Volume and Rate(1) Three months ended March 31, 2020-2019 Increase/(Decrease) in Net Interest Income Due to: Changes in Changes in Total Volume Rate Change (In thousands) Interest-earning assets: Loans and leases$ 14,575 $ (14,981 ) $ (406 ) Investment securities 655 (335 ) 320 Deposits with other banks (10 ) (929 ) (939 ) Total changes in interest income 15,220 (16,245
) (1,025 )
Interest-bearing liabilities: Interest-bearing demand accounts 41 60 101 Money market accounts 1,390 1,141 2,531 Savings accounts 8 (26 ) (18 ) Time deposits 2,239 (1,207 ) 1,032 Other borrowed funds (381 ) (592 ) (973 ) Long-term debt (756 ) 63 (693 ) Total changes in interest expense 2,541 (561 ) 1,980 Changes in net interest income$ 12,679 $ (15,684 ) $ (3,005 )
(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
Based on a review of the appropriateness of the allowance for loan losses atMarch 31, 2020 , the Company recorded a provision for credit losses of$25.0 million in first quarter of 2020 compared to no provision for credit losses in the first quarter of 2019. The provision for credit losses is primarily a result of the economic deterioration of the global economy resulting from the COVID-19 pandemic. While we took steps to incorporate the impact of the COVID-19 pandemic on the economic forecast and other factors utilized to determine our allowance for credit losses, if the economic forecast or other factors worsen relative to the assumptions we utilized, our allowance for credit losses will increase accordingly in future periods. 46
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The following table summarizes the charge-offs and recoveries for the periods indicated: Three months ended March 31, 2020 2019 (In thousands) Charge-offs: Commercial loans$ 1,321 $ 1,231 Total charge-offs 1,321 1,231 Recoveries: Commercial loans 1,208 41 Construction loans - 1,044 Real estate loans (1) 162 310 Total recoveries 1,370 1,395 Net recoveries $ (49 )$ (164 )
(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, equity securities gains (losses), wire transfer fees, and other sources of fee income, was$5.8 million for the first quarter of 2020, a decrease of$7.1 million , or 55.0%, compared to$12.9 million for the first quarter of 2019. The decrease was primarily due to a$10.3 million decrease in net losses from equity securities, offset by a$1.4 million increase in wealth management fees and an increase of$1.3 million in the valuation of interest rate swap contracts, when compared to the same quarter a year ago. Non-Interest Expense Non-interest expense decreased$5.8 million , or 8.2%, to$65.2 million in the first quarter of 2020, compared to$71.0 million in the same quarter a year ago. The decrease was primarily due to a$4.5 million gain recognized on sale of a foreclosed property, a decrease of$1.2 million in salaries and employee benefits and a decrease of$2.4 million in provision for unfunded commitments offset by an increase of$3.1 million in amortization expense of investments in low income housing and alternative energy partnerships, when compared to the same quarter a year ago. The efficiency ratio was 44.6% in the first quarter of 2020 compared to 45.4% for the same quarter a year ago. Income Taxes The effective tax rate for the first quarter of 2020 was 16.3% compared to 21.8% for the first quarter of 2019. The effective tax rate for both quarters includes the impact of low-income housing and alternative energy investment tax credits. 47
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Table of Contents Balance Sheet Review Assets Total assets were$18.3 billion as ofMarch 31, 2020 , an increase of$202.3 million , or 1.1%, from$18.1 billion as ofDecember 31, 2019 , primarily due to loan growth offset in part by decreases in investment securities and short-term investments.
Securities Available for Sale
Securities available-for-sale represented 7.4% of total assets as of
The following tables set forth the amortized cost, gross unrealized gains, gross unrealized losses, and fair value of securities available-for-sale as ofMarch 31, 2020 , andDecember 31, 2019 : March 31, 2020 Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value (In thousands) Securities Available-for-Sale U.S. government agency entities$ 110,650 $ 151 $ 391 $ 110,410 U.S. government sponsored entities 175,000 45 - 175,045 Mortgage-backed securities 883,097 27,570 663 910,004 Collateralized mortgage obligations 459 - 11 448 Corporate debt securities 161,026 10 1,770 159,266 Total$ 1,330,232 $ 27,776 $ 2,835 $ 1,355,173 December 31, 2019 Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value (In thousands) Securities Available-for-Sale U.S. treasury securities$ 74,926 $ 10 $ -$ 74,936 U.S. government agency entities 90,452 663 319 90,796 U.S. government sponsored entities 225,000 - 557 224,443 Mortgage-backed securities 880,040 8,574 824 887,790 Collateralized mortgage obligations 569 - 17 552 Corporate debt securities 172,743 605 23 173,325 Total$ 1,443,730 $ 9,852 $ 1,740 $ 1,451,842
For additional information, see Note 7 to the Company's unaudited Condensed Consolidated Financial Statements.
Securities available-for-sale having a carrying value of
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Table of ContentsEquity Securities The Company recognized a net loss of$6.1 million for the three months endedMarch 31, 2020 , due to the decrease in fair value of equity investments with readily determinable fair values compared to a net gain of$4.2 million for the three months endedMarch 31, 2019 . Equity securities were$18.8 million and$28.0 million as ofMarch 31, 2020 andDecember 31, 2019 , respectively. Loans Gross loans were$15.5 billion atMarch 31, 2020 , an increase of$458.7 million , or 3.0%, from$15.1 billion atDecember 31, 2019 . The increase was primarily due to increases of$194.3 million , or 7.0%, in commercial loans,$147.3 million , or 2.0%, in commercial mortgage loans,$85.3 million , or 2.1%, in residential mortgage loans, and$37.3 million , or 10.7%, in equity lines. The loan balances and composition atMarch 31, 2020 , compared toDecember 31, 2019 are set forth below: % of Gross December 31, % of Gross % March 31, 2020 Loans 2019 Loans Change (Dollars in thousands) Commercial loans$ 2,973,078 19.1 %$ 2,778,744 18.4 % 7.0 % Residential mortgage loans 4,173,876 26.9 4,088,586 27.1 2.1 Commercial mortgage loans 7,422,585 47.8 7,275,262 48.3 2.0 Real estate construction loans 577,240 3.7 579,864 3.9 (0.5 ) Equity lines 385,317 2.5 347,975 2.3 10.7 Installment and other loans 2,116 0.0 5,050 0.0 (58.1 ) Gross loans$ 15,534,212 100 %$ 15,075,481 100 % 3.0 % Allowance for loan losses (148,273 ) (123,224 ) 20.3 Unamortized deferred loan fees (277 ) (626 ) (55.8 ) Total loans, net$ 15,385,662 $ 14,951,631 2.9 % 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 ("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 to seek to identify problem loans. From time to time during the ordinary course of business, management may become aware of borrowers that may not be able to meet the contractual requirements of their loan agreements. Such loans generally 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. 49
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The ratio of non-performing assets to total assets was 0.4% atMarch 31, 2020 , compared to 0.3% atDecember 31, 2019 . Total non-performing assets increased$10.1 million , or 17.7%, to$67.3 million atMarch 31, 2020 , compared to$57.2 million atDecember 31, 2019 , primarily due to a$12.1 million commercial loan that is in the process of being restructured, offset in part by a decrease of$1.9 million , or 29.3%, in accruing loans past due 90 days or more and a decrease of$1.2 million , or 11.7%, in other real estate owned. As a percentage of gross loans plus OREO, our non-performing assets was 0.43% as ofMarch 31, 2020 , compared to 0.38% as ofDecember 31, 2019 . The non-performing loan portfolio coverage ratio, defined as the allowance for credit losses to non-performing loans, decreased to 259.7% as ofMarch 31, 2020 , from 270.8% as ofDecember 31, 2019 . The following table sets forth the changes in non-performing assets and troubled debt restructurings ("TDRs") as ofMarch 31, 2020 , compared toDecember 31, 2019 , and toMarch 31, 2019 : December 31, March 31, 2020 2019 % Change March 31, 2019 % Change (Dollars in thousands) Non-performing assets Accruing loans past due 90 days or more $ 4,531$ 6,409 (29 ) $ - 100 Non-accrual loans: Construction loans 4,482 4,580 (2 ) 4,801 (7 ) Commercial mortgage loans 11,859 9,928 19 17,940 (34 ) Commercial loans 30,443 19,381 57 26,499 15 Residential mortgage loans 6,949 6,634 5 7,443 (7 ) Total non-accrual loans $ 53,733$ 40,523 33 $ 56,683 (5 ) Total non-performing loans 58,264 46,932 24 56,683 3 Other real estate owned 9,048 10,244 (12 ) 12,522 (28 )
Total non-performing assets $ 67,312
18 $ 69,205 (3 ) Accruing troubled debt restructurings $ 34,364$ 35,336 (3 ) $ 62,948 (45 ) Allowance for loan losses$ 148,273 $ 123,224 20$ 122,555 21 Total gross loans outstanding, at period-end$ 15,534,212 $ 15,075,481 3$ 14,277,422 9 Allowance for loan losses to non-performing loans, at period-end 254.48 % 262.56 % 216.21 % Allowance for loan losses to gross loans, at period-end 0.95 % 0.82 % 0.86 % Non-accrual Loans AtMarch 31, 2020 , total non-accrual loans were$53.7 million , an increase of$13.2 million , or 32.6%, from$40.5 million atDecember 31, 2019 , and a decrease of$3.0 million , or 5.3%, from$56.7 million atMarch 31, 2019 . The allowance for the collateral-dependent loans is calculated based on the difference between the outstanding loan balance and the value of the collateral as determined by recent appraisals, sales contracts, or other available market price information, less cost to sell. The allowance for collateral-dependent loans varies from loan to loan based on the collateral coverage of the loan at the time of designation as non-performing. We continue to monitor the collateral coverage of these loans, based on recent appraisals, on a quarterly basis and adjust the allowance accordingly. Non-accrual loans also include those TDRs that do not qualify for accrual status. 50
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The following tables set forth the type of properties securing the non-accrual portfolio loans and the type of businesses the borrowers engaged in as of the dates indicated: March 31, 2020 December 31, 2019 Real Real Estate (1) Commercial Estate (1) Commercial (In
thousands)
Type of Collateral Single/multi-family residence$ 9,340 $ 10,321 $ 6,874 $ 9,475 Commercial real estate 13,950 13,655 14,268 1,603 Personal property (UCC) - 6,467 - 8,303 Total$ 23,290 $ 30,443 $ 21,142 $ 19,381
(1) Real estate includes commercial mortgage loans, real estate construction loans, residential mortgage loans and equity lines.
March 31, 2020 December 31, 2019 Real Real Estate (1) Commercial Estate (1) Commercial (In thousands) Type of Business Real estate development$ 16,142 $ -$ 14,305 $ - Wholesale/Retail 621 8,617 637 9,684 Import/Export - 16,826 - 4,697 Other 6,527 5,000 6,200 5,000 Total$ 23,290 $ 30,443 $ 21,142 $ 19,381
(1) Real estate includes commercial mortgage loans, real estate construction loans, residential mortgage loans and equity lines.
Impaired Loans We consider a loan to be impaired when it is probable that we 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 our receipt of information otherwise indicating that full collection of principal is doubtful, or when the loan has been restructured in a TDRs. Those loans with a balance less than our defined selection criteria, generally a loan amount less than$500 thousand , 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 generally obtain an appraisal to determine the amount of impairment at the date that the loan becomes impaired. The appraisals are generally 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 generally 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. 51
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As ofMarch 31, 2020 , recorded investment in impaired loans totaled$88.1 million and was comprised of non-accrual loans of$53.7 million and accruing TDRs of$34.4 million . As ofDecember 31, 2019 , recorded investment in impaired loans totaled$75.9 million and was comprised of non-accrual loans of$40.5 million and accruing TDRs of$35.4 million . For impaired loans, the amounts previously charged off represent 0.3% as ofMarch 31, 2020 , and 2.1% as ofDecember 31, 2019 , of the contractual balances for impaired loans. As ofMarch 31, 2020 ,$23.3 million , or 43.3%, of the$53.7 million of non-accrual loans were secured by real estate compared to$21.1 million , or 52.2%, of the$40.5 million of non-accrual loans that were secured by real estate as ofDecember 31, 2019 . The Bank generally seeks to obtain current appraisals, sales contracts, or other available market price information intended to provide updated factors in evaluating potential loss. As ofMarch 31, 2020 ,$3.5 million of the$148.3 million allowance for loan losses was allocated for impaired loans and$144.8 million was allocated to the general allowance. As ofDecember 31, 2019 ,$3.2 million of the$123.2 million allowance for loan losses was allocated for impaired loans and$120.0 million was allocated to the general allowance. The allowance for loan losses to non-performing loans was 254.5% as ofMarch 31, 2020 , compared to 262.6% as ofDecember 31, 2019 , primarily due to an increase in the non-accrual loans. Non-accrual loans also include those TDRs that do not qualify for accrual status. The following table sets forth impaired loans and the related allowance as of the dates indicated: March 31, 2020 December 31, 2019 Unpaid Unpaid Principal Recorded Principal Recorded Balance Investment Allowance Balance Investment Allowance (In thousands) With no allocated allowance Commercial loans$ 28,685 $ 25,991 $ -$ 20,134 $ 15,857 $ - Real estate construction loans 5,776 4,482 - 5,776 4,580 - Commercial mortgage loans 16,559 16,223 - 9,234 9,030 - Residential mortgage loans and equity lines 6,046 6,024 - 6,171 6,073 - Subtotal$ 57,066 $ 52,720 $ -$ 41,315 $ 35,540 $ - With allocated allowance Commercial loans$ 9,223 $ 9,152 $ 2,827 $ 8,769 $ 8,739 $ 2,543 Commercial mortgage loans 20,513 20,420 405 26,117 26,040 473 Residential mortgage loans and equity lines 7,018 5,805 219 6,740 5,540 220 Subtotal$ 36,754 $ 35,377 $ 3,451 $ 41,626 $ 40,319 $ 3,236 Total impaired loans$ 93,820 $ 88,097 $ 3,451 $ 82,941 $ 75,859 $ 3,236 52
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Table of Contents Loan Interest Reserves In accordance with customary banking practice, we originate construction loans and land development loans where interest on the loan is disbursed from pre-established interest reserves included in the total original loan commitment. Our construction loans and land development loans generally include optional renewal terms after the maturity of the initial loan term. New appraisals are obtained prior to extension or renewal of these loans in part to determine the appropriate interest reserve to be established for the new loan term. Loans with interest reserves are generally underwritten to the same criteria, including loan to value and, if applicable, pro forma debt service coverage ratios, as loans without interest reserves. Construction loans with interest reserves are monitored on a periodic basis to gauge progress towards completion. Interest reserves are frozen if it is determined that additional draws would result in a loan to value ratio that exceeds policy maximums based on collateral property type. Our policy limits in this regard are consistent with supervisory limits and range from 50% in the case of land to 85% in the case of one to four family residential construction projects. As ofMarch 31, 2020 , construction loans of$549.4 million were disbursed with pre-established interest reserves of$71.5 million , compared to$550.0 million with pre-established interest reserves of$73.4 million atDecember 31, 2019 . The balance for construction loans with interest reserves that have been extended was$106.8 million with pre-established interest reserves of$3.1 million atMarch 31, 2020 , compared to$129.2 million with pre-established interest reserves of$4.7 million atDecember 31, 2019 . Land loans of$57.2 million were disbursed with pre-established interest reserves of$1.0 million atMarch 31, 2020 , compared to$45.5 million of land loans disbursed with pre-established interest reserves of$1.9 million atDecember 31, 2019 . The balance for land loans with interest reserves that have been extended was$942 thousand atMarch 31, 2020 with pre-established interest reserves of$58 thousand , compared to$1.7 million in land loans with pre-established interest reserves of$2 thousand atDecember 31, 2019 . AtMarch 31, 2020 andDecember 31, 2019 , the Bank had no loans on non-accrual status with available interest reserves. AtMarch 31, 2020 andDecember 31, 2019 ,$4.5 million and$4.6 million of non-accrual non-residential construction loans had been originated with pre-established interest reserves, respectively. While we typically expect loans with interest reserves to be repaid in full according to the original contractual terms, some loans may require one or more extensions beyond the original maturity before full repayment. Typically, these extensions are required due to construction delays, delays in the sale or lease of the 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 andNorthern California ;New York City ,New York ;Dallas andHouston, Texas ;Seattle, Washington ;Boston, Massachusetts ;Chicago, Illinois ;Edison, New Jersey ;Rockville, Maryland ; andLas Vegas, Nevada . The Company also has loan customers inHong 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 ofMarch 31, 2020 , or as ofDecember 31, 2019 . 53
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The federal banking regulatory agencies issued final guidance onDecember 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 ofMarch 31, 2020 , and 34% as ofDecember 31, 2019 . Total CRE loans represented 275% of total risk-based capital as ofMarch 31, 2020 , and 277% as ofDecember 31, 2019 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 it believes 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 business judgment based on the information available, the ultimate appropriateness of the allowance is dependent upon a variety of factors, many of which are beyond the Bank's control, including but not limited to the performance of the Bank's loan portfolio, the economy and market conditions, changes in interest rates, and the view of the regulatory authorities toward loan classifications. Identified credit exposures that are determined to be uncollectible are charged against the allowance for credit losses. Recoveries of previously charged off amounts, if any, are credited to the allowance for credit losses. A weakening of the economy or other factors that adversely affect asset quality could result in an increase in the number of delinquencies, bankruptcies, or defaults, and a higher level of non-performing assets, net charge-offs, and provision for credit losses in future periods. The allowance for loan losses was$148.3 million and the allowance for off-balance sheet unfunded credit commitments was$3.0 million atMarch 31, 2020 , which represented the amount believed by management to be appropriate to absorb credit losses inherent in the loan portfolio, including unfunded credit commitments. The$148.3 million allowance for loan losses atMarch 31, 2020 , increased$25.1 million , or 20.4%, from$123.2 million atDecember 31, 2019 . This increase included$22.0 million of additional allowance for loan losses due to deterioration in economic conditions in the closing weeks of the quarter related to COVID-19. This deterioration is reflected in unprecedented increases in new unemployment claims inthe United States and deterioration in global economic measures during this period. While we took steps to incorporate the impact of the COVID-19 pandemic on the economic forecast and other factors utilized to determine our allowance for loan losses, if the economic forecast or other factors worsen relative to the assumptions we utilized, our allowance for loan losses will increase accordingly in future periods. The allowance for loan losses represented 0.95% of period-end gross loans and 254.5% of non-performing loans atMarch 31, 2020 . The comparable ratios were 0.82% of period-end gross loans and 262.6% of non-performing loans atDecember 31, 2019 . 54
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The following table sets forth information relating to the allowance for loan losses, charge-offs, recoveries, and the reserve for off-balance sheet credit commitments for the periods indicated: Three months ended March 31, 2020 2019 (In thousands) Allowance for loan losses Balance at beginning of period$ 123,224 $ 122,391 Provision for credit losses 25,000 - Charge-offs: Commercial loans (1,321 ) (1,231 ) Total charge-offs (1,321 ) (1,231 ) Recoveries: Commercial loans 1,208 41 Construction loans - 1,044 Real estate loans 162 310 Total recoveries 1,370 1,395 Balance at end of period$ 148,273 $ 122,555 Reserve for off-balance sheet credit commitments Balance at beginning of period $ 3,855$ 2,250 (Reversal)/Provision for credit losses (842 ) 1,600 Balance at end of period $ 3,013
Average loans outstanding during the period$ 15,213,440 $ 14,088,488 Total gross loans outstanding, at period-end$ 15,534,212 $ 14,277,422 Total non-performing loans, at period-end$ 58,264
(0.00)
% (0.00) % Provision for credit losses to average loans outstanding during the period
0.64 % 0.05 %
Allowance for credit losses to non-performing loans, at period-end
259.66 % 223.00 % Allowance for credit losses to gross loans, at period-end 0.97 % 0.89 % 55
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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, among other things, 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, 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 check for 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: March 31, 2020 December 31, 2019 Percentage of Percentage of Loans in Each Loans in Each Category Category to Average to Average Amount Gross Loans Amount Gross Loans (In thousands) Type of Loan: Commercial loans$ 67,799 18.7 %$ 57,021 18.9 % Real estate construction loans 23,222 3.7 19,474 4.0 Commercial mortgage loans 39,886 48.1 33,602 48.0 Residential mortgage loans and equity lines 17,366 29.5 13,108 29.1 Installment and other loans - - 19 - Total loans$ 148,273 100 %$ 123,224 100 % The allowance allocated to commercial loans increased$10.8 million , or 18.9%, to$67.8 million atMarch 31, 2020 , from$57.0 million atDecember 31, 2019 . The increase is due primarily to an increase in the allowance due to deterioration in economic conditions in the closing weeks of the quarter related to COVID-19 and increases in commercial loan growth and non-accrual loans in the first quarter. 56
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The allowance allocated to real estate construction loans increased$3.7 million , or 19.0%, to$23.2 million atMarch 31, 2020 from$19.5 million atDecember 31, 2019 . The increase is due primarily to an increase in the allowance due to deterioration in economic conditions in the closing weeks of the quarter related to COVID-19. The allowance allocated to commercial mortgage loans increased$6.3 million , or 18.8%, to$39.9 million atMarch 31, 2020 , from$33.6 million atDecember 31, 2019 . The increase is due primarily to an increase in the allowance due to deterioration in economic conditions in the closing weeks of the quarter related to COVID-19 and an increase in commercial mortgage loan growth in the first quarter. The allowance allocated for residential mortgage loans increased by$4.3 million , or 32.8%, to$17.4 million as ofMarch 31, 2020 , from$13.1 million atDecember 31, 2019 . The increase is due primarily to an increase in the allowance due to deterioration in economic conditions in the closing weeks of the quarter related to COVID-19 and increases in substandard and special mention loans in the first quarter. Deposits
Total deposits were
March 31, 2020 December 31, 2019 Amount Percentage Amount Percentage Deposits (Dollars in
thousands)
Non-interest-bearing demand deposits$ 2,860,580 19.0 %$ 2,871,444 19.5 % Interest bearing demand deposits 1,514,434 10.0 1,358,152 9.2 Money market deposits 2,482,950 16.5 2,260,764 15.4 Savings deposits 710,602 4.7 758,903 5.2 Time deposits 7,521,584 49.8 7,443,045 50.7 Total deposits$ 15,090,150 100.0 %$ 14,692,308 100.0 % The following table sets forth the maturity distribution of time deposits atMarch 31, 2020 : At March 31, 2020 Time Deposits - Time Deposits - Total Time under$100,000 $100,000 and over Deposits (Dollars in thousands) Less than three months $ 463,745 $ 951,279$ 1,415,024 Three to six months 443,358 1,364,939 1,808,297 Six to twelve months 932,769 2,784,517 3,717,286 Over one year 194,168 386,809 580,977 Total$ 2,034,040 $ 5,487,544$ 7,521,584 Percent of total deposits 13.5 % 36.3 % 49.8 % 57
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Table of Contents Borrowings
Borrowings include federal funds purchased, funds obtained as advances from the
Short-term borrowings - The Company had$12.9 million of short-term borrowings outstanding with an interest rate of 2.4% as ofMarch 31, 2020 . This funding was entered into by the Company'sHong Kong office, and will mature inApril 2020 . Borrowings from the FHLB - As ofMarch 31, 2020 , over-night borrowings from the FHLB were zero, compared to$450 million at an average rate of 1.66% as ofDecember 31, 2019 . Advances from the FHLB were$495 million at an average rate of 1.13% as ofMarch 31, 2020 and$220 million at an average rate of 2.26% as ofDecember 31, 2019 . As ofMarch 31, 2020 , FHLB advances of$275 million will mature inApril 2020 ,$75 million inMay 2021 ,$50 million inJune 2021 ,$75 million inJuly 2021 , and$20 million inMay 2023 . Other Borrowings - The Company owes a residual payable balance of$7.7 million to Bank SinoPac Co. related to the Company's acquisition ofSinoPac Bancorp , the parent ofFar East National Bank , completed inOctober 2017 . The remaining balance of$7.0 million , due inJuly 2020 , has an interest rate of 2.95% (three-month LIBOR rate plus 150 basis points) as ofMarch 31, 2020 . AtMarch 31, 2020 , Junior Subordinated Notes totaled$119.1 million with a weighted average interest rate of 3.15%, compared to$119.1 million with a weighted average rate of 4.09% atDecember 31, 2019 . The Junior Subordinated Notes have a stated maturity term of 30 years. The trusts are not consolidated with the Company in accordance with an accounting pronouncement that took effect inDecember 2003 .
Off-Balance-Sheet Arrangements and Contractual Obligations
The following table summarizes the Company's contractual obligations to make future payments as ofMarch 31, 2020 . Payments for deposits and borrowings do not include interest. Payments related to leases are based on actual payments specified in the underlying contracts. Payment Due by Period More than 3 years or 1 year but more but 1 year less than less than 5 years or less 3 years 5 years or more Total (In thousands) Contractual obligations: Deposits with stated maturity dates$ 6,940,607 $ 565,641 $ 15,297 $ 39 $ 7,521,584 Advances from the Federal Home Loan Bank 275,000 200,000 20,000 - 495,000 Other borrowings 7,031 - - 28,981 36,012 Long-term debt - - - 119,136 119,136 Operating leases 6,714 15,106 9,862 6,241 37,923 Total contractual obligations and other commitments$ 7,229,352 $ 780,747 $ 45,159 $ 154,397 $ 8,209,655 In the normal course of business, we enter into various transactions, which, in accordance withU.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. 58
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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 seek to 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$2.31 billion as ofMarch 31, 2020 , an increase of$18.8 million , from$2.29 billion as ofDecember 31, 2019 , primarily due to net income of$46.9 million , increases in other comprehensive income of$7.6 million , and proceeds from dividend reinvestment of$846 thousand , and partially offset by common stock cash dividends of$24.7 million and repurchases of the Company's common stock of$12.9 million . The following table summarizes changes in total equity for the three months endedMarch 31, 2020 : Three months ended March 31, 2020 (In thousands) Net income$ 46,852
Proceeds from shares issued through the Dividend Reinvestment Plan
846
RSUs distributed
1
Shares withheld related to net share settlement of RSUs (523 ) Purchase of treasury stock (12,880 ) Share-based compensation 1,543 Cash dividends paid to common stockholders (24,660 ) Other comprehensive income
7,575
Net increase in total equity$ 18,754 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.
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The following tables set forth actual and required capital ratios as ofMarch 31, 2020 andDecember 31, 2019 for Bancorp and the Bank under the Basel III Capital Rules. The Basel III Capital Rules became fully phased-in onJanuary 1, 2019 . Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules. See the 2019 Form 10-K for a more detailed discussion of the Basel III Capital Rules. Minimum Capital Required to be Considered Well Actual Required - Basel III Capitalized Capital Capital Amount Ratio Capital Amount Ratio Amount Ratio March 31, 2020 (Dollars in thousands) Common Equity Tier 1 to Risk-Weighted Assets Cathay General Bancorp$ 1,904,483 12.38$ 1,076,711 7.00$ 999,803 6.50 Cathay Bank 1,978,085 12.88 1,075,416 7.00 998,601 6.50 Tier 1 Capital to Risk-Weighted Assets Cathay General Bancorp 1,904,483 12.38 1,307,435 8.50 1,230,527 8.00 Cathay Bank 1,978,085 12.88 1,305,862 8.50 1,229,047 8.00 Total Capital to Risk-Weighted Assets Cathay General Bancorp 2,171,269 14.12 1,615,066 10.50 1,538,158 10.00 Cathay Bank 2,129,371 13.86 1,613,124 10.50 1,536,309 10.00 Leverage Ratio Cathay General Bancorp 1,904,483 10.82 703,798 4.00 879,748 5.00 Cathay Bank 1,978,085 11.26 702,740 4.00 878,425 5.00 Minimum Capital Required to be Considered Well Actual Required - Basel III Capitalized Capital Capital Amount Ratio Capital Amount Ratio Amount Ratio December 31, 2019 (Dollars in
thousands)
Common Equity Tier 1 to Risk-Weighted Assets Cathay General Bancorp$ 1,892,321 12.51$ 1,059,259 7.00$ 983,597 6.50 Cathay Bank 1,959,832 12.97 1,057,880 7.00 982,318 6.50 Tier 1 Capital to Risk-Weighted Assets Cathay General Bancorp 1,892,321 12.51 1,286,243 8.50 1,210,581 8.00 Cathay Bank 1,959,832 12.97 1,284,569 8.50 1,209,006 8.00 Total Capital to Risk-Weighted Assets Cathay General Bancorp 2,134,900 14.11 1,588,888 10.50 1,513,227 10.00 Cathay Bank 2,086,911 13.81 1,586,821 10.50 1,511,258 10.00 Leverage Ratio Cathay General Bancorp 1,892,321 10.83 699,173 4.00 873,966 5.00 Cathay Bank 1,959,832 11.23 697,976 4.00 872,470 5.00 As ofMarch 31, 2020 , capital levels at Bancorp and the Bank exceed all capital adequacy requirements under the fully phased-in Basel III Capital Rules. Based on the ratios presented above, capital levels as ofMarch 31, 2020 at Bancorp and the Bank exceed the minimum levels necessary to be considered "well capitalized." 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, if any, 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, and to$0.31 per share in the fourth quarter of 2018 and 2019. The Company declared a cash dividend of$0.31 per share on 79,546,735 shares outstanding onMarch 2, 2020 , for distribution to holders of our common stock onMarch 12, 2020 . The Company paid total cash dividends of$24.7 million in the first quarter of 2020. 60
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Table of Contents Financial Derivatives It is our policy not to speculate on the future direction of interest rates. However, from time to time, we may enter 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 our assets or liabilities and against risk in specific transactions. In such instances, we 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 Condensed Consolidated Balance Sheets 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. The Company offers various interest rate derivative contracts to its customers. When derivative transactions are executed with its customers, the derivative contracts are offset by paired trades with third-party financial institutions including with central counterparties ("CCP"). Certain derivative contracts entered with CCPs are settled-to-market daily to the extent the CCP's rulebooks legally characterize the variation margin as settlement. Derivative contracts are intended to allow borrowers to lock in attractive intermediate and long-term fixed rate financing while not increasing the interest rate risk to the Company. These transactions are generally not linked to specific Company assets or liabilities on the Condensed Consolidated Balance Sheets or to forecasted transactions in a hedging relationship and, therefore, are economic hedges. The contracts are marked to market at each reporting period. The changes in fair values of the derivative contracts traded with third-party financial institutions are expected to be largely comparable to the changes in fair values of the derivative transactions executed with customers throughout the terms of these contracts, except for the credit valuation adjustment component. The Company records credit valuation adjustments on derivatives to properly reflect the variances of credit worthiness between the Company and the counterparties, considering the effects of enforceable master netting agreements and collateral arrangements. 61
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InMay 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$119.1 million of Junior Subordinated Debentures that had been issued to five trusts, throughout the ten-year period beginning inJune 2014 and ending inJune 2024 , from the risk of variability of these payments resulting from changes in the three-month LIBOR interest rate. As ofMarch 31, 2020 , and 2019, the ineffective portion of these interest rate swaps was not significant. The notional amount and net unrealized loss of the Company's cash flow derivative financial instruments as ofMarch 31, 2020 , andDecember 31, 2019 , were as follows: March 31, 2020 December 31, 2019 Cash flow swap hedges: ($ in thousands) Notional$ 119,136 $ 119,136 Weighted average fixed rate-pay 2.61 % 2.61 % Weighted average variable rate-receive 0.98 %
2.26 %
Unrealized loss, net of taxes (1) $ (7,691 ) $ (3,412 ) Three months ended March 31, 2020 March 31, 2019 Periodic net settlement of swaps (2) $ 255 $ (45 ) (1)-Included in other comprehensive income. (2)-the amount of periodic net settlement of interest rate swaps was included in interest expense. As ofMarch 31, 2020 , the Bank's outstanding interest rate swap contracts had a notional amount of$561.9 million for various terms from three to ten years. The Bank entered into these interest rate swap contracts that are matched to individual fixed-rate commercial real estate loans in the Bank's loan portfolio. These contracts have been designated as hedging instruments to hedge the risk of changes in the fair value of the underlying commercial real estate loans due to changes in interest rates. The swap contracts are structured so that the notional amounts reduce over time to match the contractual amortization of the underlying loan and allow prepayments with the same pre-payment penalty amounts as the related loan. As ofMarch 31, 2020 , and 2019, the ineffective portion of these interest rate swaps was not significant. The notional amount and net unrealized loss of the Company's fair value derivative financial instruments as ofMarch 31, 2020 , andDecember 31, 2019 , were as follows: March 31, 2020 December 31, 2019 Fair value swap hedges: ($ in thousands) Notional$ 561,854 $ 579,584 Weighted average fixed rate-pay 4.65 % 4.71 % Weighted average variable rate spread 2.58 % 2.62 % Weighted average variable rate-receive 4.16 % 4.87 % Net unrealized loss (1)$ (18,176 ) $ (7,205 ) Three months ended March 31, 2020 March 31, 2019 Periodic net settlement of SWAPs (2) $ (643 ) $ 613
(1)-the amount is included in other non-interest income. (2)-the amount of periodic net settlement of interest rate swaps was included in interest income.
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The Company has designated as a partial-term hedging election$25.0 million of a pool of loans with a notational value of$45.2 million as ofMarch 31, 2020 . The loans are not expected to be affected by prepayment, defaults, or other factors affecting the timing and amount of cash flows under the last-of-layer method. The Company has entered into a pay-fixed and receive 1-Month LIBOR interest rate swap to convert the last-of-layer$25.0 million portion of a$45.2 million fixed rate loan tranche in order to reduce the Company's exposure to higher interest rates for the last-of-layer tranche. As ofMarch 31, 2020 , the last-of-layer loan tranche had a fair value basis adjustment of$245 thousand . The interest rate swap converts this last-of-layer tranche into a floating rate instrument. The Company's risk management objective with respect to this last-of-layer interest rate swap is to reduce interest rate exposure as to the last-of-layer tranche. 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 derivative clearing organization and daily margin is indirectly maintained with the derivative clearing organization. Cash posted as collateral by the Bancorp related to derivative contracts totaled$13.4 million as ofMarch 31, 2020 and$7.1 million as ofDecember 31, 2019 . The Company from time to time enters into foreign exchange forward contracts with various counterparties to mitigate the risk of fluctuations in foreign currency exchange rates for foreign exchange certificates of deposit or foreign exchange contracts entered into with our clients. These contracts are not designated as hedging instruments and are recorded at fair value in our Condensed Consolidated Balance Sheets. Changes in the fair value of these contracts as well as the related foreign exchange certificates of deposit and foreign exchange contracts are recognized immediately in net income as a component of non-interest income. Period end gross positive fair values are recorded in other assets and gross negative fair values are recorded in other liabilities. The notional amount and fair value of the Company's derivative financial instruments not designated as hedging instruments as ofMarch 31, 2020 , andDecember 31, 2019 , were as follows: March 31, 2020 December 31, 2019 Derivative financial instruments not designated as hedging instruments: ($ in thousands) Notional amounts: Option contracts $ 2,496 $ 908
Spot, forward, and swap contracts with positive fair value
$ 110,465 $ 146,397 Spot, forward, and swap contracts with negative fair value$ 216,401 $ 127,003 Fair value: Option contracts $ (14 ) $ (7 )
Spot, forward, and swap contracts with positive fair value
$ 1,157 $ 2,411 Spot, forward, and swap contracts with negative fair value $ (4,211 ) $ (1,415 ) 63
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Table of Contents 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 ofMarch 31, 2020 , our average monthly liquidity ratio (defined as net cash plus short-term and marketable securities to net deposits and short-term liabilities) was 12.1% compared to 12.9% as ofDecember 31, 2019 . The Bank is a shareholder of the FHLB, which enables the Bank to have access to lower-cost FHLB financing when necessary. AtMarch 31, 2020 , the Bank had an approved credit line with the FHLB ofSan Francisco totaling$4.5 billion . Total advances from the FHLB ofSan Francisco were$495.0 million and standby letter of credits issued by the FHLB on the Company's behalf were$489.1 million as ofMarch 31, 2020 . These borrowings bear fixed rates and are secured by the Bank's loans. See Note 11 to the Condensed Consolidated Financial Statements. AtMarch 31, 2020 , the Bank pledged$10.0 million of its commercial loans to theFederal Reserve Bank's Discount Window under the Borrower-in-Custody program. The Bank had borrowing capacity of$10.0 million from the Federal Reserve Bank Discount Window atMarch 31, 2020 . 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. AtMarch 31, 2020 , investment securities totaled$1.4 billion , with$21.3 million pledged as collateral for borrowings and other commitments. The remaining$1.4 billion was available as additional liquidity or to be pledged as collateral for additional borrowings. Approximately 92% of our time deposits mature within one year or less as ofMarch 31, 2020 . 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. As ofMarch 31, 2020 , management believes all the above-mentioned sources will provide adequate liquidity during the next twelve months for the Bank to meet its operating needs. Deposits and other sources of liquidity, however, may be adversely impacted by COVID-19 pandemic. 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$36.0 million and$55.0 million during the first quarter of 2020 and 2019, respectively. 64
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